We're all Ponzi borrowers

[malcomb]

An article in today's Age by Michael Pascoe reports on the poor opportunities that now exist in the investment property market. His report has been prompted by comments in a scathing Morgan Stanley report about the Australian property bubble.
http://www.theage.com.au/business/housing-bubble-trouble-for-the-middle-class-20100817-127lv.html
The article finishes with a quote from the report's author:

'Over the past decade property has been an excellent investment. But it is, in my view, extremely unwise to expect such gains to continue given current valuations. The investment fundamentals of housing have sharply deteriorated.''

(A Ponzi borrower is one who borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat. Because of the unlikelihood of most investments' capital gains being enough to pay interest and principal, much of this type of finance is fraudulent.)

 

[AlmostBob]

google, you can find that same article dozens of times for years, just written by different people in different places

If you write, "the old dead tree fell over, told you so" every day from the day someone else (doom sayers seldom DO anything) plants a seed, eventually you will be right, might take a long while, but eventually.
The five or six generations of kids who climbed the tree, swung on the tire swing, built tree forts; the romantic couples who carved their initials, had shady picnics, while you prophesised the tree falling over,
didnt notice you exist,
they just enjoyed the tree, and somebody has already planted a new tree in the same spot

 

[malcomb]

Interesting response AlmostBob. Isn't this what sound investing is all about - judging when the tree is going to fall and a)insuring against that and/or b) investing in healthier trees?.... just by way of keeping the metaphor going!

 

[Rolf Latham]

Ponzi is an illegal Scheme akin to Pyramid ??

ta
rolf

 

[Trogdor]

An article in today's Age by Michael Pascoe reports on the poor opportunities that now exist in the investment property market. His report has been prompted by comments in a scathing Morgan Stanley report about the Australian property bubble.
http://www.theage.com.au/business/housing-bubble-trouble-for-the-middle-class-20100817-127lv.html
The article finishes with a quote from the report's author:

'Over the past decade property has been an excellent investment. But it is, in my view, extremely unwise to expect such gains to continue given current valuations. The investment fundamentals of housing have sharply deteriorated.''

(A Ponzi borrower is one who borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat. Because of the unlikelihood of most investments' capital gains being enough to pay interest and principal, much of this type of finance is fraudulent.)

Good article actually.

For Melb property it really rings true.

Looks like a bubble, smells like a bubble, acts like a bubble, its probably a bubble

As yields are a couple of % lower than a decade ago, you actually need a couple of % higher GC to get the same all in returns. Not likely!!

 

[AlmostBob]

Interesting response AlmostBob. Isn't this what sound investing is all about - judging when the tree is going to fall and a)insuring against that and/or b) investing in healthier trees?.... just by way of keeping the metaphor going!

indeed it is, but the naysayers, of any stamp, property shares trees etc, always say the bad is going to happen today, and never notice the tree is still there
Nays
property nay
shares nay
tree nay
seldom have any stake of their own in what they are naying about, the article in The Age was written by a waged worker,
if they were good at the what they write about, they'd be Warren Buffet, not 9-5 what a way to make a livin

the older the tree, the more good wood there

 

[Trogdor]

indeed it is, but the naysayers, of any stamp, property shares trees etc, always say the bad is going to happen today, and never notice the tree is still there
Nays
property nay
shares nay
tree nay
seldom have any stake of their own in what they are naying about, the article in The Age was written by a waged worker,
if they were good at the what they write about, they'd be Warren Buffet, not 9-5 what a way to make a livin

the older the tree, the more good wood there

Wow, thats some critical thought!!

There is a reason I am directing future moneys towards direct CIP investment and, to a lesser degree, shares. Its not because I am negative, naysayer, or any other similar label.

Its because I dont want to borrow at c. 7% to get < 3% net yield, when in this environment I'd be lucky best case to get 4 - 5% capital growth medium term, with a massive downside risk of lower or negative growth.

I dont have that scenario for other investment classes.

Pascoe is spot on.

 

[Rolf Latham]

Trog

many would argue that any passive investment is a Ponzi.......

Unless your capital goes directky into a small to medium unlisted business you cant have much assurance thats its not ponzi based

A commercial propery investment where the tennant actually produces something or adds value ( eg food retail etc) might not be

ta
rolf

 

[Trogdor]

Trog

many would argue that any passive investment is a Ponzi.......

Unless your capital goes directky into a small to medium unlisted business you cant have much assurance thats its not ponzi based

A commercial propery investment where the tennant actually produces something or adds value ( eg food retail etc) might not be

ta
rolf

Sure, Im not arguing anything is a Ponzi. A "ponzi" is an illegal scheme with traits we all are familiar with. Property is just an open and relatively transparent market for a commodity / asset. No arguments there.

I'm just saying the article made a lot of sense when you read it regarding the current state of play, and I agree vis-a-vis the Melbourne market being in a bubble. At some points in time things make a good investment, and at other points same things not, just from a valuation perspective. Now for Melb is a not.

That's all

 

[AlmostBob]

Wow, thats some critical thought!!

There is a reason I am directing future moneys towards direct CIP investment and, to a lesser degree, shares. Its not because I am negative, naysayer, or any other similar label.

Its because I dont want to borrow at c. 7% to get < 3% net yield, when in this environment I'd be lucky best case to get 4 - 5% capital growth medium term, with a massive downside risk of lower or negative growth.

I dont have that scenario for other investment classes.

Pascoe is spot on.

thats not a negative,
thats choosing the positive

very much not "dont invest in xxxxx its going to yyyy"

 

[Trogdor]

very much not "dont invest in xxxxx its going to yyyy"

But you need to do the analysis on xxx to determine it will likely / potentially do yyyy, before you can rule it out (and revisit periodically to see if its changed).

Repeat for all categories of "xxxx" and invest in the winner.

 

[AlmostBob]

But you need to do the analysis on xxx to determine it will likely / potentially do yyyy, before you can rule it out (and revisit periodically to see if its changed).

Repeat for all categories of "xxxx" and invest in the winner.

analysis of
and Dont, particularly without analysis options alternatives
are different in intent

 

[WinstonWolfe]

Consider that it is more like a Ponzi Government....

It is a government failure when money and credit supply are allowed to expand faster than the goods, services, and assets it can buy.

When government intentionally or unintentionally restricts supply of housing moreso than supply of credit, then an asset bubble will surely form.

 

[Thesnowyforest]

Ponzi shmonzi.

The rich will get richer, the middle class will start to fade and the poor will get poorer.

These articles are for the financially illiterate who do not understand debt. The people who freak out and agree with these articles probably live on credit cards, buy all the sh$t possible they can, expect everything on a silver platter etc etc


There are many markets within markets driving real estate purchases.

IMO the next phase has not even started.
Once all this doom and gloom is up and business and consumer confidence returns and credit becomes easier to get we will see more solid growth.

If your time frame is less than 10 years then perhaps look elsewhere.



What pascoe doesn't cover is how with inflation , supply/demand and tax benefits IP 's get cheaper to hold every year and eventually will hold their own.

 

[landlubber]

Your definition of a PONZI is wrong.

Your definition of a Ponzi scheme is wrong. Bernie Madoff was running a "true-blue you beauty motza" of a Ponzi. It's where the funds of the NEW entrants to the scheme are used/needed to pay (cash flow) the (ridiculously high) returns promised to the EARLIER entrants. Therefore, the scheme HAS to attract more and more NEW entrants in order to perpetuate itself. When either (a) the number of new entrants is insufficient OR (b) any client says "Hey, I want my money (i.e. capital) back" ... the faeces hit's the fan. In Bernies case, this is exactly what happened.

I cannot see any parallel to the resi IP business. If no new investors came along, life goes on, the rent comes in etc. If somebody wants their capital back, there's always sufficient assets that can be liquidated to do that. THE BANKS LVR MAKE SURE OF THAT POINT...and all Oz loans are FULL RECOURSE. There's no escape baby.
LL

 

[landlubber]

..and now to the spin ...

Pascoe and Morgan Stanley BOTH make their money from the share market. So, this type of spin ALWAYS appears after property has had a good run and shares not so (GFC effect). Are you following the markets? Lot's of IP loans/ activity ATM. Also, in the case of the US, lot's of investors are looking for opportunites OUTSIDE the US. So MS writes the article, with no comment or understanding that our property markets are totally different to the US. WE don't have liars loans. All our loans are full recourse. We DON'T have Freddie & Fannie to "catch the crap" (currently $1trill total crap on their balance sheets.) etc etc
Pascoe is paid to stop the investors deserting shares for IPs.
It's all spin BS.
LL

 

[VYBerlinaV8]

What pascoe doesn't cover is how with inflation , supply/demand and tax benefits IP 's get cheaper to hold every year and eventually will hold their own.

Nail, head, good shot. This is the exact point that noone wants to hear when they ask me about property investment - it's all just motherhood statements about "the market has to drop" and "it won't work without negative gearing".

 

[Piston Broke]

A Ponzi borrower is

You and the author of that article dont even know what a Ponzi scheme is.
What is described here is the "bigger sucker" theory.
A "Ponzi" is what Maddoff and the banks do, which is basically insolvency.

 

[Neophyte]

Landlubber,

I disagree with you. For a negatively geared investment to be success it requires someone in the future to buy at a higher price. If the number of properties sold every year is constant then the amount of dollars entering the market has to increase every year so that prices keep rising so that those 1-2% cash flow negative IPs are not a waste of money.

We've seen what happens in the US when the buyers stop buying. All of a sudden you have an illiquid asset that can only be shifted for half its previous price.

Capital city IP investment relies strongly on assumed future land demand pressures. e.g. in 10 years time even more people will want my inner city dirt than do now.

 

[wylie]

For a negatively geared investment to be success it requires someone in the future to buy at a higher price.

What about buying a place which is negative, with not much growth in price over several years, but with rents slowly rising? Loan gets smaller, rent gets bigger and it turns positive whether or not you sell it for more than you bought it for.