Home Equity Investment

Investors are no strangers to the historically consistent capital growth and rental returns provided by Australian residential property. This is of no surprise, given the average annual growth rates of houses and units over the 30 years to July 2022, ranging from 4.8% p.a. in Perth to 5.9% p.a. in Melbourne (Source: Core Logic).

Private investor access to residential homes has traditionally been limited to direct ownership,(i.e., buying a rental property), and credit products, such as first mortgages and syndicated P2P/portfolio loans. Similarly, homeowners and buyers have been locked in by this narrow and inflexible set of options to accessing equity in their home or purchasing a new one.

The commercial and industrial property sub-segments have long had numerous vehicles for accessible, flexible, and diversified equity investment (e.g. Real Estate Investment Trusts - REITs).

To fill this gap in the residential context, Shared Equity or Home Equity Investment (HEI), as it is known in the US, has emerged to the benefit of homeowners, home buyers and investors.

In this article, we unpack how HEI works from an investor point of view. We also discuss its history in the US and how it is arrival in the Australian residential property market is a win-win for investors and homeowners alike.

What is Home Equity Investment?

A Home Equity Investment (HEI) contract offers the homeowner an upfront cash payment in exchange for giving an investor a share in their property.

The homeowner retains the right to live in the property and pays all upkeep and expenses during the term of the HEI contract. The investor receives a return on their initial investment when the contract is exited by the homeowner.

Every HEI product is constructed differently, but exit generally occurs in one of three ways:

The homeowner ‘buys out’ the HEI contract at a time of their choosing using an agreed valuation methodology
The homeowner chooses to sell their home
By property sale at an agreed date in the contract (if the contract requires this – many do not)

Depending on the exit trigger, the investor receives their original principle and incremental returns based on the increased value of the property and the share of property they acquired.

HEIs are typically structured as contract between the homeowner and investor, with accompanying security against default through a mortgage instrument.

Essentially, the HEI contract links investor returns to the capital growth of the home, aligning thier returns with the returns experienced by the HomeOwner. You can read more about LongView’s HomeFlex and Buying Boost HEI products in the links provided.

When HEI contracts are pooled together, they can create a diversified investment product with returns linked to equity or capital growth for Investors. You can learn about LongView’s Homes Investment Fund here.

How has HEI evolved in the US residential property investment market?

LongView’s Home Investment Fund, and the HomeFlex and Buying Boost products for homeowners are novel in the Australian market. However, there is strong precedent for HEI in the United States.

According to Morningstar's Home Equity Investments—A Primer report, Unison (see table below) created the first first HEI agreements in the US in 2007. Today, there are approximately a dozen companies and programs operating across 30 US states.

Key HEI players in the US


Website	www.unison.com	www.point.com	www.easyknock.com	www.hometap.com
Founded	2007	2015	2016	2017
HEI contracts	>10k	>11K	>7k	>11k
Assets under management (USD)	$1.7 billion	$1 billion	Undisclosed	$1 billion
HEI Product term	30 years	10 & 30 years	15 years	10 years

The unprecedented demand for HEI products in the US has been attributed to the greater flexibility provided to homeowners when there are no regular repayments or interest repayments. This allows homeowners to more easily ride the ups and downs of life or investing in their business.

Similarly, investors are attracted to both the potential capital growth and reduced fragility of HEI products when compared to debt investments. Put simply, equity bends while debt breaks.

While no single US HEI agreement will have reached its 30 year term at this stage, Morningstar’s analysis of Point’s over 11,000 HEI contracts has shown that about 1 in 4 have been exited. Further, a deep dive on contracts originated in 2018 showed that after 5 years about two thirds have been exited. Close to 90% of Point’s 2015 originated contracts had been exited at the time of writing.

Looking more deeply at the exited contract cohort, Morningstar indicated that the average time to exit has been 1.6 years with 58.0% being triggered by an owner refinance with 40.4% being triggered by a homeowner selling their property.

Why is Home Equity Investment only arriving in Australia now?

The US has always been the innovation engine of global financial markets, so it is of no surprise that HEI has taken some time to arrive in Australia. Being a laggard does come with its advantages, namely adoption of best practice and avoidance of retrospectively obvious risk.

The 2007/08 GFC did not significantly impact Australia’s financial or real economy. This could not be said for the US where housing markets suffered, and unemployment soared.

The collapse of subprime lending, which had residential property at its core, crushed innovation in this sector for some time. Thankfully, subprime lending never achieved scale in Australia. HEI, unlike subprime lending for low credit rated borrowers, focuses on unlocking equity in high quality underlying assets in return for capital growth.

There are other factors have delayed the introduction of HEI in Australia, including Australians fixation with capital gains tax exemptions (for PPoR) and negative gearing (for investment properties). This focus has ignored the other benefits of HEI.

Similarly, Australian property investors have traditionally had a higher appetite than their US counterparts for steadier and juicier cash flows, which has led to significant investment in private credit products. Again, ignoring some of the unique benefits of HEI.