For many people, the UK is becoming an unaffordable place to live. It’s not just that the cost of food, heating and lighting will skyrocket due to a combination of floods, drought, broken supply lines and the impact of war in Ukraine. At the fundamental level of a roof over their heads, a significant number of young people find that owning an apartment or a small house is beyond their reach. That leaves the rental market. It is accessible because there is no loan to take out, but it is also more and more expensive.
There are many reasons why housing is unaffordable, especially for young people. A mismatch between supply and demand is the most often cited cause and it is certainly true that the UK is not building – or even renovating – enough homes. Some pundits will also point to low interest rates, saying that when repayment costs are low, borrowers actually have more purchasing power, driving up prices in a market with limited supply.
Added to this is the fact that revenues have not followed prices. Even those with above-average salaries find they cannot borrow enough to buy property. Like a recent article in the Observer newspaper, when it comes to finding decent housing, Gen Z faces a lifelong struggle.
An opportunity, perhaps, for a new generation of propertytech entrepreneurs. According to industry investor PI Labs, UK property technology has attracted £1.6 billion in venture capital cash in 2021, up from £347m a year earlier. But can entrepreneurial ventures really make a big difference to homebuyers?
It’s time to ask a contractor. Luckily, I had just finished reading the Observer article when I was contacted by Proportunity, a company that offers first and second home buyers “equity loans” to cover the cost of deposits. The purpose of the service is to allow buyers to offer sellers larger deposits which, in turn, reduce the amount they will need to borrow through a conventional mortgage.
It’s another example of a “fintech” or “propertytech” – pick your favorite terminology – startup offering aspiring buyers a product designed to help them get on the property ladder. But given the underlying forces that seem to be driving up property prices inexorably, what impact can this really have? And does any solution that increases the purchasing power of a subset of buyers simply drive up prices across the entire market?
When I spoke to CEO and Founder of Proportunity, Vadim Toader, I wanted to hear his thoughts on what real estate technology in general and his service in particular can bring to the market.
Based in Britain, Toader studied engineering at Oxford before interning at FTI Consulting. From there, he moved into a consulting role at Bain & Company. His interest in the real estate market was sparked – perhaps unsurprisingly – by his own experience of attempting to buy a home. Despite a good salary, he found that it was not so easy. “I created a spreadsheet and entered the details for about 100 apartments,” he says. I couldn’t afford any of them. It was very frustrating. I was making £39,000 a year, more than the national average.
He later bought a house with his wife, but he retained an interest in the issues faced by property buyers.
In 2016, Toader launched Proportion. The company will lend up to 20% of the value of a real estate purchase in the form of an equity loan which will be repaid when the house is sold or mortgaged. This additional loan – serving as a deposit to the primary mortgage lender – increases the amount a borrower can spend without increasing the cost of monthly mortgage payments. Proportunity estimates that its service increases purchasing power by up to £150,000.
The secret sauce is data. The company clearly wants to make money. For this to work, he must lend on properties that will increase in value. Based on data analysis techniques he learned at Bain, Toader developed a platform that takes all available information about neighborhoods, streets, and properties and projects likely growth. This data is shared with potential buyers and is used to support lending decisions. “The analysis we do,” he says. “Is very granular.”
The metrics are quite varied, covering everything from transport links and property price trends in nearby areas to the number of trendy cafes and sports facilities. If a particular property is likely to appreciate in value, it is eligible for a proportional loan.
But is this a good thing? The idea of giving buyers a boost is certainly not new and the UK government itself has sought to increase options for first-time buyers by introducing a ‘purchase assistance scheme’, also backed by an equity loan covering 20% of the value of the property. It has certainly helped buyers, but it has also been criticized for helping to drive up prices.
Will proportionality have a similar inflationary effect? Good for own customers but maybe drive prices up further for others. Toader doesn’t think so. The government program was limited to new homes put directly on the market by construction companies. As he points out, in these situations builders control the assets and can simply raise prices across the board, knowing that early buyers have more money to play with.
Toader says his company’s service is unlikely to fuel inflation. This is partly because of the numbers – it currently provides financing to a relatively small number of people compared to government help to buy – but also because the focus is not on ‘new build’ . Toader argues that prices will be negotiated by individual buyers and sellers rather than set by builders selling multiple properties.
To date, Proportunity has helped 200 buyers and with $175 million in funding raised, that number will grow.
Propertytech is a growing field and you will often hear claims of new companies fixing a broken mortgage, real estate agency or rental market. But there are limits. High house prices overall will mean that home ownership will remain out of reach for many people for a long time to come, while rental costs are also expected to remain high. So, in general terms, there is no silver bullet. However, what entrepreneurs can do is design solutions that help individuals overcome some very real obstacles. The demand for such solutions is likely to increase.