How NFTs Could Help Bring Accessibility and Equal Opportunity Back to a Derailing Housing Market

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 incomes and salaries lagging behind, we can no longer call this market "accessible for everyone." If anything, it has widened the gap between "old money," baby boomers, homeowners 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 central banks having the money presses running at 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 homeowner 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 riding the trend of decentralisation that has gained momentum since the introduction of blockchain and smart contracts, and even more so since the start of the pandemic. NFTs have the potential to change the way we think about real estate valuation, transactions and ownership. They have the potential to redistribute wealth and offer fair opportunities and equality. They 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 above, so let's first take a step back and explain 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 financial and other valuable information." — 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 on 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 directly written into lines of code. This is important because it lays the foundation for 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 cannot be copied. Bitcoin, by contrast, is a fungible item — 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, were translated into 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 tokenisation. While it is mostly digital assets (art, videos, recordings, etc.) being tokenised 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 would be able to engage in digital transactions 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 links in the chain of value transfer would become obsolete. This is one of the benefits, because it would speed up the process and lower the costs.

There is, however, a less obvious benefit — one that would increase the accessibility of the housing market. Tokenisation allows us to fractionalise what before could only be seen as complete. Think of a home as an asset. Then imagine dividing that asset into 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 Accessibility Problem

The problem with the current housing market is that it is not accessible to 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-to-medium income earners will be able to catch up, unless they get a significant pay rise or the market sees a major 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.

Tokenising real estate can change this, because it allows for two things:

• People currently locked out of the real estate market would be able to enter by buying a fraction of a home, rather than 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 its growth (or downfall).
• A smart contract linked to specific tokens could grant the right to live in the home, alongside owning a fraction of it. This would be a big step up for a lot of people currently renting.

A Real-World Example

Tom and Jalila are currently renting their home for €1,000. All their money, however, is currently going to their landlord — they're not building any equity, and they're not benefiting from any value increase on the property. With their salary being on the low-to-mid end, and with current market conditions, they wouldn't be able to borrow enough to buy their own home.

With NFTs, they could invest some of their savings in real estate without having to buy a home outright. 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 €1,000 in rent per month, they would start paying €500 per month, plus a mortgage on the side, which allows them to build up equity. If the housing price were to go up, they would also be able to benefit from the upside.

Other Possibilities This Opens Up

This makes way for 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 fractionalised pieces of a property to mid- and low-income households, and reinvest part of the earnings in new builds.

Local governments could also demand that contractual rules be added to newly built tokens — meaning they could only be available to a specific group, have a resale cap, or stipulate 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 still to overcome when it comes to NFTs and blockchain in general. Whether it's governments allowing decentralisation, energy consumption, data storage, or security matters, we're still in the early stages of tokenising 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 lags behind, simply because governments are 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 already experimenting with real estate in combination with blockchain, and even tokenising 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 will see the potential, because it's time for an equal housing market. It's time for NFTs.