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Housing market a “classic Ponzi scheme”

By Staff Reporter
20

A new report has depicted Australian real estate as being significantly overvalued, warning baby boomers against putting up the family home as security for their children’s property purchases.

A report from the same economists who predicted Australian property was due for a ‘bloodbath’ earlier this year has raised significant concerns over property affordability and the financial behaviours it has spawned.

Parental Guidance Not Recommended, from LF Economics, describes the practice of parents informally lending their children money for deposits or signing mortgage guarantees as a “classic Ponzi lending scheme”. 

“Parents are assuming large and open-ended liabilities by assisting their children to enter the housing market by providing informal loans for a deposit and signing mortgage guarantees. This spreads the risks but does not reduce it; which extends the links in the chain of Ponzi finance.

“If first home buyers experience difficulty in maintaining mortgage costs and eventually face foreclosure, asset-rich but income-poor parents will suffer financially,” the report states.

LF Economics was founded by Lindsay David and Philip Soos, the two economists who, in a submission to a parliamentary Inquiry into Home Ownership in June stated: “A bloodbath in the housing market […] appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals.”

The report reiterates those claims, stating: “The data overwhelmingly demonstrates Australia is in the midst of the largest housing bubble on record, both in terms of prices to rents and household incomes.”

The report also found that the extent of house price growth in comparison to the average annual salary has been significant enough to render the influence of historically low interest rates non-effective.

“The rise in dwelling prices has offset the fall in the interest rate, resulting in large and rising deposits and mortgages relative to income. It is clear there will be no future period in which interest rates can be significantly cut further to assist first home buyers in maintaining mortgage payments, especially given lower interest rates provide incentive to increase leverage to facilitate more debt-financed speculation.”

The report criticises the Federal Government and financial regulators, saying they have “neglected the welfare” of first home buyers and ignored the Ponzi lending practices.

Listen in to The Smart Property Investment Show discuss this and more in the latest podcast.

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