It’s been a long time in the making, but the developments of the last 12 months appear to have increased its momentum; the Dutch housing market is derailing quickly.
With housing prices skyrocketing and general income/salaries lagging behind, we can no longer call this market “accessible for everyone”. If anything it has widened the gap between the ‘old money’, baby boomers, home owners and high income households; and those who are entering the job market, mid to low income households and renters.
The current government regulations and mortgage conditions furthermore benefit the already wealthy. Whether it’s the tax rebate, low interest rates, or lack of capital gains tax. They all put more money in the pockets of those who already own real estate or are lucky enough to be able to afford it. With the central banks having the money presses running on full steam (which adds longevity to low interest rates), the government consistently not building enough homes, and politicians being too afraid of frustrating their electorate by touching home owner benefits, it seems like change will not come from the established institutions; also known as the old order.
Now it’s time to introduce the new order. It’s time to introduce NFTs (non-fungible tokens), a utility that’s riding the trend of decentralization which has gained momentum since the introduction of blockchain and smart contracts, and even more so since the start of the pandemic. NFT has the potential to change the way we think about real estate valuation, transactions and ownership. It has the potential of redistributing wealth and offering fair opportunities and equality. It could do so many things...
But first off… What exactly is blockchain?
Your mind must be swimming if you’re not familiar with any of the aforementioned. So let’s first take a step back by explaining what blockchain is. Blockchain is the name of a whole new technology. As the name implies, it is a sequence of blocks or groups of transactions that are chained together and distributed among its users.
In the end, it works as an immutable record of transactions that do not rely on an external authority to validate the authenticity and integrity of the data. Transactions are typically economic, but we can store any kind of information in the blocks.
"The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” - Don & Alex Tapscott
Most people have heard of blockchain in combination with Bitcoin. They are however not the same. Blockchain is the underlying technology and Bitcoin is one of its first mainstream manifestations. Bitcoin, in short, is a digital currency that sits on top of the blockchain and is therefore part of that incorruptible ledger system.
What are smart contracts and non-fungible tokens (NFTs)?
Now that the concept of blockchain is clear and we have the underlying technology, the next stop of the new order train is the smart contract. A smart contract is a self-executing contract with the terms of the agreement between the buyer and seller being directly written into lines of code. This is important because it lays the foundation of NFTs.
For those unfamiliar with NFTs, an NFT is a non-fungible token, or a unique cryptographic asset on top of the blockchain. It’s non-fungible because it can not be copied. Whereas bitcoin is a fungible item because if you trade one bitcoin for another bitcoin, you end up with the exact same thing. With a non-fungible token, you have a unique piece that is the only one in the world.
It’s like the Mona Lisa; the real one. There are replicas of the Mona Lisa, but there’s only one true Mona Lisa. If the Mona Lisa or the ownership of it would be translated to a digital asset that sits on the blockchain, it could be an NFT. The blockchain would allow the NFT to be identified as the true Mona Lisa or the proof of ownership of the piece of art, and it would prevent the NFT from being recreated. The same concept could be applied to things less tangible - such as music rights or personal data. If you are able to capture ownership of an asset in a smart contract and link it to a token, you would have an NFT. The implications of that would be enormous.
OK, so what does any of this have to do with real estate?
The process of creating an NFT is called tokenization. While it is mostly digital assets (art, videos, recordings etc.) being tokenized to date, the same process can be applied to real life assets, such as real estate. Rather than dealing in real estate in an outdated manner with paper documents, purchasers and sellers are now able to engage in digital transactions by using tokens.
What are the benefits of this? Wouldn’t it just mean that instead of signing a deed at the notary and having a physical document, you’d be able to do all of this online? Yes you would - but even more than that. Most middlemen would no longer be relevant because the transaction no longer takes place through them. There’s still room for legal support interpreting the smart contracts, but most traditional chains in the process of value transfer would become obsolete. This is one of the benefits because it will speed up the process and lower the costs. There is however a less obvious benefit - the benefit that would increase the accessibility of the housing market. Tokenization allows us to fractionalize what before could only be seen as complete. Think of a home as an asset. Then imagine dividing that asset into a 100 small pieces and creating a unique token for each piece with a smart contract stating that the token represents 1/100 ownership of that home. Now hold that thought.
The problem with the current housing market is that it is not accessible for people who don’t earn enough money to buy into it. Housing prices are historically known to go up so chances are slim that this group of low-medium income earners will be able to catch up, unless they get a big, big pay raise or the market sees a big correction. The first seems unlikely for a lot of people and the latter is in the hands of the central banks and national governments, which makes it even more unlikely. This large segment of the population (also known as most people) will therefore not be able to build up any equity, with all their hard-earned money going to a landlord.
Tokenizing real estate can change this because it allows for two things. One is that people currently being locked out of the real estate market will be able to enter by buying a fraction of a home vs. having to buy the whole property. It’s like buying a share in a company. You wouldn’t have to buy the whole company to benefit from it’s growth (or downfall). Second is that with a smart contract linked to specific tokens you could buy a fraction of the home but with it the right to live in it. This would be a big step up for a lot of people currently renting. I’ll try to explain in a real world example.
Tom and Jalila are currently renting their home for €1000. All their money however is currently going to their landlord, they’re not building any equity and they’re not benefitting from any value accretion on the property. With their salary being on the low to mid end and with the current market conditions they wouldn’t be able to borrow enough to buy their own home. With NFTs they could however invest some of their savings in real estate without having to buy a home. Their landlord could also decide to sell them 50% of the property including the right to live there. By owning 50% of the property, instead of paying €1000 in rent per month, they would start paying €500 per month and have a mortgage on the side which allows them to build up equity. In case the housing price would go up, they would furthermore be able to benefit from the upside.
This makes way to all kinds of interesting set-ups. Housing Corporations who have the responsibility to be both social and progressive could sell part of their real estate to their social housing tenants. They could offer fractionalized pieces of a property to mid and low income households and reinvest part of the earnings in newbuilds. But (local) governments could also demand that contractual rules are added to new built Tokens, meaning they could only be available to a specific group, have a resale cap or that the right to live in the property is only transferable to people with a maximum income. The possibilities are endless.
This all sounds great. What now?
Besides the benefits, there are plenty of challenges to still overcome when it comes to NFTs and blockchain in general. Whether it’s governments allowing decentralization, energy consumption, data storage, or security matters, we’re still in the early stages of tokenizing and fractionating pieces of a greater whole. Nevertheless, it is not too early to start thinking about and experimenting with these matters, especially for governments. It’s no trade secret that regulation on all matters digital always lag behind due to governments being governments. Regulation preventing abuse of the system and a further divide between rich and poor will be key to a successful start. But before regulation comes, there must be understanding and a vision.
The latter is here. Now we ‘only’ need to figure out how to make it work. There are several companies experimenting with real estate in combination with blockchain and even tokenizing it. It’s a start, but we will most likely see this number increase in the next few years and slowly see institutional parties show more interest. Hopefully governments and regulators will not miss the train and see the potential, because it’s time for an equal housing market. It’s time for NFTs.
Real Talks with Founder Kimo Paula is a series of commentary style posts addressing the people-focused elements of the housing sector in the Netherlands. Curious for more?
- Follow Kimo on LinkedIn
- Learn from Kimo at our weekly Lunch & Learn: How to win in the current housing market
- Join EHN's team of expat housing specialists at our free housing events