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USA Real Estate Blog

Can blockchain fix the inherent problems of the property market?

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Real estate is the largest asset class in the world. It registered a total value of US$228 trillion in 2016. This figure makes it more valuable than all stocks, shares, and bonds combined. It has continued to climb since the global financial crisis over ten years ago. Despite this, the market is still riddled with inefficiencies and is crying out for technological innovation. The decentralised and transparent nature of blockchain seemingly makes it the perfect match for the property market. But can it solve some of property’s most significant problems?

Liquidity

Cash flow has always been an issue for the property market. Unlike stock or bond investments, it can take years for property investors to realise returns. Large amounts of finance are locked into a single asset which can take time to list and sell. This is a stark contrast to the liquid nature of purchasing stocks or bonds.

The illiquid nature of property shows its true colours during crises. When fear is rampant and times are uncertain, property funds close their doors to investors wanting to withdraw money. During the 2008 financial crisis, German property funds froze client withdrawals as investors tried to withdraw money. When people woke up to the news that the UK had voted to leave the EU, a similar problem occurred. Major property funds froze withdrawals to counter fears of panic selling.

To tackle liquidity in the property market, blockchain has two primary applications. The first is to reduce transaction times and frictions. This will become apparent as more of the legal process becomes paperless and decentralised. The second is the tokenisation of property — potentially opening a new door to investment opportunity.

Property no longer needs to be a single asset

Property tokenisation has the potential to change property from a single, solid asset to one you can split into tokens and shared. Buyers will be able to trade parts of a property rather than the entire asset. The investor would pay for a finite reserve of tradable tokens on top of the value of the property itself. This acts as a liquidity premium. Though the technology determines the pricing of a transaction, this happens within the framework of quarterly valuations by a chartered surveyor.

Blockchain, therefore, has the potential to shake up the property market by providing 100% liquidity for the investor — whenever they want it. People all over the world would like to invest in property, but there are inherent problems. Mainly, they need to put up a huge lump sum of cash. And unless you sell the property, you have no access to this massive amount of money.

With the tokenisation of property on the blockchain, the barrier of entry is removed. A single asset can be split between many owners. You can enter and exit whenever you want by selling your tokens. The property market has a new level of accessibility and opens up the gates to even more investment.

Property ownership problems

Considering that property is the most valuable asset many people own, the current system of property ownership has room to improve. It’s ancient by today’s digital standards, with many land registries around the world still operating by paper. It’s also fragmented and disorganised — each county in the US retains its own record of title information. This can be difficult to search for or blocked from other registries.

With this system, there are two worst case scenarios. The first involves the mismanagement of centralised registries and failure to back information up — ownership titles can be lost forever. The second involves someone filing a fraudulent title transfer. Criminals prey on vulnerable homeowners and those desperate for a home by forging a signature to appear they own a property. Before the victim has realised, the criminal has sold ownership to them and pocketed the cash.

Putting land registries on blockchain has some significant advantages:

  • Data is decentralised and distributed among many parties — it can’t be lost.
  • The buyer, seller, recorder, attorneys, banks, and all parties involved would have to authenticate ownership with a multi-signature transaction. This makes filing fraudulent title changes that much harder.

Real world property ownership trials

Cook County, Illinois stepped into unknown territory when they trialled blockchain to track and transfer real-estate property titles and other public records. All thanks to a pilot program led by John Mirkovic.

Sweden wanted to reduce irregularities and counterfeits and increase transparency in property ownership, so they conducted an experiment. From June 2016, they trialled and tested blockchain to record and keep property ownership records. Sweden is expected to have their blockchain land registry system in place by 2019.

Other countries were quick to follow suit, including India and Estonia. With property disputes accounting for a 66% of all civil cases and a 0.5% drag on GDP, the Indian state Andhra Pradesh has successfully recorded more than 100,000 land records using the blockchain technology. Estonia is not far behind with similar efforts.

Mortgage inefficiency and lack of accessibility

The process of receiving a mortgage typically requires a lot of money. It is also filled with inherent inefficiencies. Intermediaries and third parties need underwriting fees, legal fees, levies, and more expenses as part of the process. Administering this process can take a long time.

With the aid of distributed-ledgers and smart contracts, these intermediaries are replaced by blockchain technology. At each stage of the process, ledgers are updated immediately, automatically, transparently, and can be traced. Costs are reduced and time is saved.

Mortgages also have limited access. It seems that people who need to take out a loan often don’t get the terms they want or need. To lower the barrier of entry, a blockchain peer-to-peer mortgage lending platform offers borrowers an alternative to traditional bank rates. It allows lenders to invest small amounts into a large number of mortgages. The platform is decentralised and removes the need for a third party that brings down interest rates for those looking to buy a home.

Looking forward

Concerning security and efficiency, property ownership and mortgages are desperate for innovation. Blockchain applications are being trialled and applied to help solve some of the property market’s most significant problems: liquidity, fraud, and inaccessibility.

But applications don’t stop there. Utilising blockchain is being explored for future credit scores, anti-money laundering property purchases, proof of affordability, and improving the valuation of houses. With the future being trialled and tested today, blockchain’s potential in the property market seems endless.

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