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Islamic finance would not help Australia's housing crisis

It would not increase housing supply, but might increase prices by increasing total housing demand.

Posted 18 December 2023

Islamic finance is often promoted as the solution to real world economic problems allegedly created by conventional finance.

Closer examination usually shows the analysis to be invalid, for the simple reason that Islamic finance in practice has the same economics as conventional finance, thereby resulting in the same real world economic outcomes.

I wrote about another instance of such contentions in my September column for the magazine "Islamic Finance News". You can read it below.

Would Islamic finance solve Australia’s housing crisis?

Some of my contacts shared an Australian article “Australian businessman proposes bold solution to housing crisis” about a TEDxSydney talk by Professor Talal Yassine OAM, Managing Director, Crescent Wealth. Professor Yassine’s talk is not online yet, so I can only comment on the article.

Without claiming to be an expert on Australia, I assume it has similar housing market problems to the UK, San Francisco, Los Angeles, and many other locations.

Very briefly, house prices have risen far faster than incomes. As a 27-year-old, I bought my first house in Manchester for, from memory, three times my then income. Now the average UK house price is a much higher multiple of the average UK income.

The reasons are the same around the world. The supply of housing has not risen at the same rate as demand for housing. When demand increases faster than supply, prices go up. Almost everyone favours more housebuilding, but somewhere else, and “Not in my backyard” – the abbreviation NIMBY is commonplace in the UK.

Would Islamic finance make a difference?

The proposal is a shared ownership model, basically diminishing musharaka, although the article avoids technical terms. The goal is that it will enable more people to obtain home purchase finance – people who would be insufficiently good credit risks for conventional home purchase finance. In addition, it would of course enable the relatively small minority of Australians who are Muslims who won’t use conventional finance to become potential house buyers.

If the proposal is implemented, the logical effect would be to boost housing demand by adding to the pool of potential purchasers. However, as it would have no effect on housing supply, the result would be to increase house prices. That is the problem with all such schemes, which aim to assist individuals by making it easier for them to obtain house purchase finance. We saw the same effect in the UK with the Government’s recent “Help to Buy” scheme.

From the article Professor Yassine’s proposal appears to involve a rental rate that is fixed for the life of the arrangement, unlike the normal practice in the UK where diminishing musharaka rental rates are regularly re-set by reference to market interest rates. Many customers may prefer a fixed rental rate, although the normal shape of the yield curve (upward sloping) means that fixed rates will be higher than floating rates.

There is nothing about conventional finance that requires floating mortgage rates.

While in the UK most mortgage rates are floating, or fixed for relatively short periods such as five years, in the USA it is standard practice to have long-term (e.g. 30 years) fixed rate mortgages. It simply requires the lending bank to either obtain fixed rate funding, or to sell the mortgage on to another entity, such as the Federal National Mortgage Association, which finances the purchases by issuing long-term fixed rate debt.

Finally, the key point is that when analysing any proposal, the economic consequences and the religious implications must be considered separately. The first is an empirical question to be resolved by data gathering; the second is a matter of religious belief where each person has to reach their own conclusion.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.

Postscript — video of Talal Yassine's TEDxSydney talk.

Since Islamic Finance News published the article, the TEDxSydney talk has become available on YouTube. You can watch it below.


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