The housing stock exchange

At any given moment how many houses and flats in the world do you think stand unoccupied? It’s almost impossible to estimate. But it is an important question to consider given that the internet is making markets smarter at unlocking and bringing value to this sort of “spare” capacity.

In economic theory, there is something known as utility. The idea represents the degree to which an asset or good is preferred relative to others and the degree to which it satisfies the consumer. The more a good is consumed, the greater its utility becomes. But the more of a good is consumed, the less satisfying each additional unit becomes – a diminishing phenomenon known as marginal utility.

The economic system tries to maximise utility on all fronts – it strives for maximum satisfaction for all, without disadvantaging anyone. This is known as pareto efficiency.

I think something very interesting is happening in the housing market in terms of these relationships.

I refer to the rise of home exchanges, and in particular their growing popularity among the wealthy – a fact that suggests the trend is about more than just the incentive to save money. Indeed a new type of pareto efficiency could be emerging in the housing market, one built around trust and the smart redemption of existing spare capacity as opposed to ongoing accumulation.

While the idea of swapping your home for another without handing over money is not new, the trend does seem to be accelerating.

HomeLink – a UK-based home exchange company that claims to have been offering the service for more than 60 years – has more than 13,500 members worldwide, offering properties that range from two-bedroom London flats to high-end villas in the south of France. Each membership agreement represents up to two to three swaps a year, though accurate figures for total swaps are hard to come by because the exchanges are informally structured. Since 2009, the company says it has experienced a burst in both membership and competition.

The same is true of rival site Exclusive Exchanges, which specialises in properties valued between $1m and $10m, from chalets in Aspen and Parisian pieds-à-terre to Caribbean retreats and Shanghai apartments. The company’s owner, Margaret Carr, says membership rose more than 38 per cent in the year after the financial crisis.

In Carr’s opinion the motivation for many of her most wealthy clients to engage is linked mostly to experience, hotel fatigue and the desire to expand the reach of a fixed settlement home. The trend, she says, is also very popular among the baby-boomer generation who use the concept as an innovative way to enjoy a holiday-home lifestyle without releasing equity in their homes.

But I would argue there is possibly another driver, one I’d describe as the burden factor.

Consider the old saying which asks, do you really own your house, or does your house own you? It illustrates the diminishing utility that can be associated with property ownership. It explains how at some point, owning more houses – or even one house – doesn’t necessarily make you happier.

Those struggling to get on to the property ladder might think this a preposterous suggestion. How can anyone have too many houses?

Well yes. But that’s why the trend is so interesting economically.

A house that sits empty never reaches its full potential. It is, consequently, economically inefficient. If there are burdens attached – think upkeep and utility costs, security risk, taxes, depreciation exposure and the restrictions associated with being committed to a single location – the incentive to keep buying collapses.

In the case of investment property, the problem of unused capacity is usually overcome by means of rental. Rents not only compensate the owner for the additional burden of managing surplus capacity; they often create a viable income. This cannot be said of properties accumulated for personal utility. Even if rents are gathered, more often than not they fail to compensate for the associated burdens.

But here lies the economic genius of home exchanges. These swaps not only unlock the unused utility of empty properties, they leverage the potential of an existing house against a global inventory of housing stock without the cost or additional burden usually associated with accumulation.

This is important because the desire to accumulate property has been a driving force in economics from the year dot. Not only are property rights deeply entrenched in the capitalistic system, they’ve forever been associated with benefits, not burdens.

The fact that affluent property owners are choosing to collaborate and exchange rather than accumulate represents a notable economic shift. It’s the first hint that the man who has everything desires not more assets but less hassle and more variety.

The trend shows that the market is getting better at redeeming unused spare capacity on voluntary terms because the rich are beginning to appreciate that real wealth lies in unrestricted access to virtual inventory rather than direct ownership.

Izabella Kaminska is an FT Alphaville reporter

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.