Is Property Investing a Ponzi Scheme?

[Oynas]

I have been reading about Bernard Madoff and his Ponzi scheme, which ran for decades before anyone realized what was happening. Investors were lured by his high returns, but in fact he was just paying old investors with the money he received from new investors.

Wikipedia's article on the Ponzi scheme says the following: "The Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going."

When I read this, I immediately think about the Australian property market. Many investors were enticed to invest in property by abnormally high short-term returns (mainly double-digit returns after 9/11).

In a Ponzi scheme, the fund manager pays off old investors with the money from new investors. In the property market, this transfer of wealth from the new investors to the old investors occurs through the price system. When new investors come in, demand for houses increase, raising the price of houses. As house prices rise, old investors see capital gains and increase their net worth.

In order for house prices to keep going up, new investors are needed to add demand to houses so that prices rise even more so that these new investors become old investors.

A Ponzi scheme collapses when no new investors can be found. If in Australia no new buyers can be found, then demand falls, prices fall, and the property Ponzi scheme collapses.

 

[Bill.L]

Hi all,

A couple of points...

1 The same question can be asked about the stockmarket.

2 Property as an investment has a yield, the thing called rent, which makes it different to a ponzi scheme.

bye

 

[Novar]

A ponzi doesn't have a basis in anything. It is just a stream of money continually building with the scammer skimming the top until the investors dry up and there is nothing left to pay out to entice new money.

Property is bricks and mortar. Has a purpose and demand for what it is, offers accomodation and shelter, a basic need in life, which many cannot afford.

 

[Mary-Sue]

From the attached article, it appears Ponzi dreamt his scheme up in 1903.

I gather the property market has been going a while longer.

If the property market was a Ponzi scheme, what do you think they would have called it prior to 1903 ?

 

[Y33]

Would be very difficult for no new buyers to be found.

Immigration intake and population growth is higher than what is being built. There is more demand than supply but sometimes factors make the demand slow down.

 

[sphinx]

I would say a speculative bubble has a large component of ponzi scheme inside.
Madoff could claim that his hedge fund is not a ponzi scheme because, say, the money is actually in money market earning risk-free small interests. He was just returning more than the underlying growth. So is for the property market. The underlying growth is actually small, the speculative bubble (fueled entirely by new money through easy credit), like a ponzi scheme, is returning more.

So no matter whether there is an "underlying" or "yield" (usually with moderate return) , an fake excessive return simply based on unsustainable new money (new easy credit or new investor) is a variant of ponzi scheme.

 

[topcropper]

Property is not a ponzi scheme 99.9% of the time. There is the odd occasion when it is, and two I could think of would be in Japan in 1990, and Sydney in 2003. These were two massive bubbles that went beyond reason.

Normally, since civilization began, growing expendable income, and growing population means that property is naturally an asset increasing in value. Add normal inflation levels that increase the value of the building and lead to growing rental yields, and property has a real and growing value and income.

Nope, property is not a ponzi scheme.



Shares aren't a ponzi scheme either 99% of the time. A few times shares were a ponzi scheme would have been 1927, and 1987 globally, and in Japan in 1990, and the tech bubble. Business's grow income, grow assets, grow dividends.

See ya's.

 

[BayView]

The other thing with a Ponzi scheme is it is purely an investment that people are putting their money into.

With property, a very large number of participants are buying their houses because they want to live in them.

 

[keithj]

Another difference is that a ponzi scheme has a single promoter who skims off $$$. Property is a free market, with no one central controller skimming of txn fees (ignoring the state govts, REAs, and a few others ).

A Ponzi scheme fails eventually when enough participants realise that there are no underlying assets of value in the scheme. When the participants stop valuing real property 'the scheme' will fail...... ya reckon that will happen any time soon ?

 

[GreatPig]

From the attached article, it appears Ponzi dreamt his scheme up in 1903.

I gather the property market has been going a while longer.

Ponzi schemes have been going longer too, but they didn't have a name until he did his (also according to that article).

GP

 

[GreatPig]

Reading further into that article:

What is and is not a Ponzi scheme

A bubble. A bubble relies on suspension of disbelief and an expectation of large profits, but it is not the same as a Ponzi scheme. A bubble involves ever-rising (and unsustainable) prices in an open market (be that shares of a stock, housing prices, the price of tulip bulbs, or anything else). As long as buyers are willing to pay ever-increasing prices, sellers can get out with a profit. And there doesn't need to be a schemer behind a bubble.

I think that answers the title question.

GP

 

[atti]

NO, but what u really wanted to know is if properties prices are going to drop right ?

i am pretty sure it wont as many different class of people around the world have demonstrated over the centuraries they wont sell less then what they payed for.

 

[topcropper]

i am pretty sure it wont as many different class of people around the world have demonstrated over the centuraries they wont sell less then what they payed for.

OK, maybe. But how come then Australia is one of the few places around the world where property is not dropping by a large amount? People probably don't want to sell at a loss, but generally they have no choice. Currently in Australia, people are selling everything else bar property at a loss, as in shares, toys etc. I still think cheap property will be one think that won't drop by much, if at all.

See ya's.

 

[nonrecourse]

OK, maybe. But how come then Australia is one of the few places around the world where property is not dropping by a large amount? People probably don't want to sell at a loss, but generally they have no choice. Currently in Australia, people are selling everything else bar property at a loss, as in shares, toys etc. I still think cheap property will be one think that won't drop by much, if at all.

See ya's.

Property prices have not yet collapsed but the proof in the pudding will be 2009 and 2010. As for the Ponzi scheme with property the scheme is run by state governments its called land tax, and limiting supply of land aided and abetted by councils called rates and silliy building codes and of course the Federal government through First home owner middle class charity that is really a card trick as they take more than they give via capital gains tax and the claw back of depreciation when you sell.

The best way to limit the government Ponzi scheme is to never sell, limit your loan exposure and challenge council valuations.

 

[yieldmatters]

maybe half a ponzi

There is a yield on the asset (rental return) so in that sense it isn't a ponzi scheme - the asset is delivering a service (shelter) and getting money for it.

The rent though typically falls short of the financing cost so you need capital gain for the whole thing to work. That capital gain comes from a new entrant so in that sense the whole system starts to smell very ponzi like. But only a partial ponzi as there is still some rent there.

New entrants are a bit thin these days (finance availability and general affordability issues). However the government has kindly decided to rob the wider public (tax) and funnel this cash into the ponzi scheme in the form of first home buyer grants, shared equity schemes and the like. So a government supported ponzi scheme could go for a very long time - but not forever - eventually the government will go broke also.

 

[Bill.L]

Hi all,

In a Ponzi scheme, when it collapses all interests in it are worth zero.

Anyone really want to claim that all property will go to zero???

Hence it is not a Ponzi.

bye

 

[VYBerlinaV8]

It is not a ponzi scheme. Occasionally you get a market cycle that exceeds the normal expected range. The market needs to correct itself and move on.

I don't think we'll get a massive short term drop in most places, rather a sustained stagnation as everything else catches up. The real test, I think, will come when interest rates head north again.

 

[black dragon]

My thoughts as well - the real estate market isnt a ponzi scheme as there are a number of underlying fundamentals such as demand for accomodation. However, as the previous poster has written here, that doesnt mean the market cant get ahead of it self..it can..and over the course of history, frequently has.

Personally I think the greater question of the day is how much has the market been supported by loose credit?..and what are the ramifications from a current world wide tightening of credit?

And, are the central bankers going to be successful in engineering higher inflation in order to devalue debt and stimulate demand?

Cheers all.

 

[yorke]

In order for house prices to keep going up, new investors are needed to add demand to houses so that prices rise even more so that these new investors become old investors.

A Ponzi scheme collapses when no new investors can be found. If in Australia no new buyers can be found, then demand falls, prices fall, and the property Ponzi scheme collapses.

Lets say you are right and no new investors can be found, were are the non investors going to sleep ? Because short of population decline the demand for rentals and new properties are always going to be there at ever increasing numbers.
Even if now renting is cheaper then buying if no new investors can be found to buy and build new houses a shortage of available rentals will eventually occur and make buying/building cheaper then renting. Then property prices would start moving up and a new cycle would begin.

But if you think its a Ponzi scheme then the smart thing for you to do is stay away from properties. Keep renting and do not buy, no matter how cheap it looks do not ever get involved in a Ponzi scheme.

 

[Francesco]

...
But if you think its a Ponzi scheme then the smart thing for you to do is stay away from properties. Keep renting and do not buy, no matter how cheap it looks do not ever get involved in a Ponzi scheme.

Too right, I agree with you there!

I am trying to help my son start up in life with a property (PPOR/IP) for the long term not a quick flip to another sucker as if it were a hot and tainted item.

Unfortunately, it is not easy to find the right property even in this supposedly buyer's market, a property that you would live in or invest in and avoid being suckered in by a Ponzi scheme (such as the one-time sale of Gold Coast free fly-in to inspect apartment).