"Minsky developed a theory called the ‘financial instability hypothesis,’ theorising that financial markets are not very efficient and continually misallocate substantial amounts of credit into asset markets, creating pyramid schemes or bubbles (Minsky called them Ponzi schemes, named after the fraudster Charles Ponzi).
He defined three types of finance: hedge, speculative and Ponzi. Hedge finance: income flows from an asset are sufficient to pay down both principal and interest on the debt used to finance the asset purchase, and asset prices are based upon fundamental or intrinsic value. Speculative finance: income flows cover only interest repayments, not loan principal, requiring debt to be continually rolled over from the current time period to the next. Businesses or individuals may experience financial stress, but it is not widespread and fundamentals valuations are kept largely in check. Ponzi finance: income flows cover neither principal nor interest repayments. This leaves asset owners completely reliant upon escalating capital values in order to realize substantial capital gains at sale to meet the cost of principal and interest. Prices are completely delinked from fundamental valuations at this stage, resulting in an asset bubble.
Simply put, if gross rental income pays down neither interest nor principal repayments of mortgage debt on aggregate (including other property-related costs) and is sustained over a number of years, a housing bubble exists by this definition. Even better, there is plenty of evidence to show that the residential property market is currently experiencing said bubble."
Have you really never heard anyone compare the Australian housing bubble to a Ponzi scheme?
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12-05-2016 11:16 #131Senior Member
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12-05-2016 11:24 #132
12-05-2016 11:53 #133
12-05-2016 12:10 #134
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12-05-2016 13:45 #135
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12-05-2016 14:10 #136
I most certainly have
but mostly in reference to those "you dont need cash, use the equity in your own home" schemes.
they have snake-oil salesmen who convince Mum-and-Dad type investors that they dont need extra cash flow, that if they have equity int heir own home, they can use that equity to borrow 110% (or usually more) and buy an investment property.
the rent, and the additional borrowings, pay the interest (interest only loan) and they rely on the property price increasing before the additional borrowings are used up.
BUT if anything goes wrong (damage, vacancies, rising interest rate, lower rental rates etc) the people can lose not only the investment but their home that they used as security.
It basically is a ponzi scheme - and they still get advertised from time to time
12-05-2016 14:40 #137
The whole point of Ponzi is to scam investors out of their money but promising them certain returns and never paying them back their capital investment. Many investors have lost their livelihoods and their lives because of these schemes (scams) and I just think it's inappropriate to call "property a Ponzi scheme", particularly as neither the article you posted or the extract from the "financial instability hypothesis" say that property is a Ponzi scheme - they only refer to a certain type of finance in both cases.
Maybe in USA before the GFC you could say that this theory was true, but not in Australia where our banking system is tightly regulated and lending criteria is stringent, with LVRs limited to 80%.
12-05-2016 16:50 #138Senior Member
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Very interesting thread though.
So surprised so many people are supportive of NG and generally seem happy with the property market in Aus. I thought labor a shoe in considering some of the Libs comments but probably me that's out of touch
12-05-2016 18:23 #139
Comparing a house purchase to a car is very odd. Cars deappreciate in value very quickly. Houses/land appreciate value slowly, as in generationally.
Most people are supportive of NG for 1-3 properties. Not for multiples. This is because most house investors are mum/dad or people preparing for retirement. They aren't quick income earners but rather slow and steady assets.
Yes- if you purchase a property with minimal deposit and if the market tanks then you are stuffed. But if you are sensible and plan ahead for the ups& downs then property is a good long term investment. This is not in any way a ponzi scheme.
If people choose to over extend themselves or risk 'flipping' houses then that is risky. You can win or lose large amounts very quickly.
I honestly don't see how long term property investment is anything like a ponzi scheme.
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12-05-2016 18:26 #140
Also properly prices don't change because of nothing. They change because of increased people, new train lines or infrastructure, mining booms/busts, big companies moving in or out etc. But slowly OVER long periods of time land values generally always increase even if they suddenly drop in between.
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