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Comment by xbmcuser | Hacker News Reader

Current market prices for a lot of commercial real estate seems to be a ponzi scheme especially in the US. It is not in the interest of any of the players to decrease prices only the renters.

Local government need higher prices as without the high property prices their property tax receipt will tank making them unable to meet their budgets. Banks need higher prices as they are highly leveraged and will be on the hook for billions. Same for most landlords they cant decrease the rent too much as that would decrease the value of the property and make the bank come after them to top up as they are also leveraged. Then we have got black money parked in real estate of western countries where such owners do not care much about rental income they are okay with their money being safe so dont care about renting. Then we got the countries themselves they turn a blind eye to this black money parked in their countries as it helps their economies. Plus if the black money/corruption money is from a politically exposed person they are able to be controlled/blackmailed by the 3 letter agencies of these countries.

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> Current market prices for a lot of commercial real estate seems to be a ponzi scheme especially in the US

A ponzi scheme is fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

Where is the nonexistent enterprise? How is money from later investors used to hoodwink the first investors by pretending there's quick returns?

I think you are looking for a different characterization of commercial real estate for it isn't a ponzi scheme.

> A ponzi scheme is fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

If you’re going to copy/paste a dictionary definition, you should probably cite the dictionary you are using (Oxford, it looks like).

I think the correct term here is “speculative bubble”, but there are deep similarities between a speculative bubble and a Ponzi scheme. The similarities run deep enough that I do not think it is worth fighting over the difference between a Ponzi scheme and a speculative bubble. In both a speculative bubble and a Ponzi scheme, early investors are paid out with funds taken from later investors, for an asset which does not have enough utility to justify those payouts.

In a Ponzi scheme, it’s one person or entity running it, and in a speculative bubble, it’s just “the market”. But the market is just a bunch of people. And I don’t think the bad faith component of Ponzi schemes should be considered a necessary component.

> I think the correct term here is “speculative bubble”, but there are deep similarities between a speculative bubble and a Ponzi scheme.

There are deep differences, too, most obviously the one highlighted by the “scheme” in ponzi scheme.

> In both a speculative bubble and a Ponzi scheme, early investors are paid out with funds taken from later investors, for an asset which does not have enough utility to justify those payouts.

In a ponzi scheme, money is deliberately directed to early entrants to cover the conscious absence of any mechanism to produce actual value.

That's not true of speculative bubble; yes, the usual market mechanisms involve movers out of market get money from those moving in, but outside of fraud (which can make usual market action ponzi-like) its not conscious cover for an absence of a return-generating mechanism. Yes, a ponzi-operator produces deliberately a conditions similar to that which is retrospectively observed when the market misperceives value for a time, but that's the same as saying fatal accidents produce the same results as murder plots. We call them different things for good reason, and it is worth distinguishing them.

> And I don’t think the bad faith component of Ponzi schemes should be considered a necessary component.

Someone having advance and certain knowledge of the absence of return mechanism is quite relevant and distinct from a market misperception, especially when looking at a prospective bubble that hasn’t popped (so its the differences between “there is specific concrete evidence someone engineered this fraudulently” and “my perception of the future differs from the consensus”.)

Redefining terms so you can use terms that communicate greater certainty and have higher emotional valence than is warranted by what you are actually describing is bad, in much the same way as an (actual, proper definition) ponzi is bad. Its an attempt to mislead and motivate action based on misleading people.

> In a ponzi scheme, money is deliberately directed to early entrants to cover the conscious absence of any mechanism to produce actual value.

I don’t think the “deliberate” part is particularly important. It sounds like you disagree. There’s a whole discussion to be had here about mens rea, and that discussion is important in the context of criminal justice, but I think it’s less important when discussing systemic problems because you need a different toolset (besides intent) to discuss problems with economic systems.

> it’s less important when discussing systemic problems

It’s unimportant whether commercial property owners are fraudulently or not inflating their property values? That seems incredibly important to what kind of solution is appropriate.

Everything is worth what the market will bear. If you can achieve a price, it's a fair price - some relator, probably.

It’s just not true that every market price is fair. There are all sorts of sources of market inefficiencies, and this is one of the reasons why governments spontaneously arise or form.

Its...not.

Though it is one of the retroactive justifications for government from non-minarchist market ideologues.

It is a ponzi scheme in the sense where the last person to buy in will be left with something that is worth a lot less than what they bought it for. In practical terms they lose all their money as most people would buy real estate with financing now. You pay $10million for $50million property. The property value drops to $35-40 now the bank owns the property you have $0.

How is it a ponzi scheme? There is actual real estate being bought, sold and rented.

What has happened is that demand for office space has dropped dramatically.

The proper market reaction is to spend the money to convert these office spaces to some other use, perhaps residential.

Then these properties will more likely find tenants.

> How is it a ponzi scheme?

Because it’s credit built on credit. It’s not an intentional Ponzi scheme (maybe).

> The proper market reaction is to spend the money to convert these office spaces to some other use, perhaps residential.

It’ll be prohibitively expensive for most properties to convert them to residential. They might as well be demolished for their land value.

That still doesn’t make it a Ponzi scheme. Don’t just throw the word around.

Ponzi scheme is when the price collapses for something that I don't like, and the more that I don't like it the Ponzi-er it is

That is not what a ponzi scheme is

high demand, limited inventory, fifteen years of near zero interest rates mean prices have been set in a market environment of extreme distortion

Sure, but the word to describe it may be "bubble", not "ponzi scheme".

E.g. you can't say a failed startup is a ponzi scheme because it loses a bunch of money. A ponzi scheme is a very specific type of fraud.

There is an element of ponzi because none of the actors have an interest to break the cycle. Mutual hallucination might be a better term though.

Like you would think the asset buyers would have an incentive to stop holding the loans and the whole thing would collapse, but because the buyer are investing with other peoples money they are also incentivized to keep the cycle going. The people whose money is eventually going to be lost have no way to stop this because the money is either in a pension fund or they aren’t knowledgeable enough to understand the issue

> none of the actors have an interest to break the cycle

This is collective behaviour. If you discover you’re in a Ponzi scheme, it’s in your interest to get your money out first.

Yeah but here it’s never actually your money and if the cycle breaks you are screwed anyway. If you fail with everyone else then you can say that nobody could have ever predicted this.

> If you discover you’re in a Ponzi scheme, it’s in your interest to get your money out first.

You can either cut your losses and not get your money back (if you're an ethical operator), of you can actively or passively allow other people topit in their money so you can get yours out first. There are similarities where rational vested actors want the charade to continue for a little while longer - the more money you put in, the longer your commitment to the mirage is.

Can we call it ponzi pyramid? Or speculative pyramid?

I agree this isn't a scheme, as it wasn't done out of maliciousness, but it share so much property with it (including who will have to hold the bag) that I kinda like the image.

maybe the latter?

the Ponzi in Ponzi scheme refers to a specific person, and the scheme in Ponzi scheme refers to the specific scheme that specific person executed

The transaction volume is near zero. So price discovery can’t happen. Similar to how during the the last crisis there was almost no market for cdo and all sorts of other shit paper so holders could pretend the asset was worth more dispite not being able to sell it.

> The proper market reaction is to spend the money to convert these office spaces to some other use, perhaps residential.

That would be very expensive. To be able to afford that, the prices need to crash seriously hard.

It would be expensive but so would a banking and general financial crisis caused by empty office buildings and CMBS turning into toilet paper. The government will pay for it either way and the currency will be inflated either way. God forbid the money be used for housing instead of never ending wars.

I mean I agree, but I can also predict the screaming at politicians if the government starts giving handouts to developers (particularly from the people with vested interest in keeping residential real estate inflated).

Who benefits from lack of inventory vs conversion condos? I can't think of anyone but residential REITs and home builders. The average SFH owner in some neighborhood doesn't see new condos downtown as a threat.

But every other vested interest is aligned with the developer handouts. Eg, construction, government for more taxes, unions, office REITs that want less competition, big finance who want the CMBS problem to go away. Even the mortgage industry would profit more from selling tons of new condos vs fewer more expensive resales.

Ponzi scheme? Yes.

Lots of major players who really don't want the Ponzi pyramid to collapse? Yes.

But, long-term, no Ponzi pyramid can avoid collapse. Black money is not infinite, and can get skittish when the music starts fading. A central bank printing money can prop the pyramid up...for a while. But that only makes the collapse bigger, and takes more of the central bank's economy down with it when it finally does go.

>But, long-term, no Ponzi pyramid can avoid collapse.

Both politicians and industry leaders know it will inevitably pop at some point, but since they have short terms while they're in charge and won't be accountable for long term consequences of their actions, they just want to make sure it doesn't collapse while they're in power, so they keep kicking the can down the road as long as their short tenure last, then it becomes the next guy's problem, rinse and repeat. They're hopeful they can make the problem big enough that the government will have to bail them out when it crashes.

It's a result of chasing maximized short term returns at the expense of long term consequences in a zero accountability system. Basically, it's what our system rewards.

>> Current market prices for a lot of commercial real estate seems to be a ponzi scheme

> Ponzi scheme? Yes.

How in the world are these the top comment and top reply? Commercial real estate isn't a ponzi scheme. Like, at all. In any way, shape, or form.

There are disparate actors making separate, uncoordinated decisions. There are single transactions being made delivering real value. There's no long term holdings falsely being promised under the guise of stealing short term value by adding more customers.

The commercial real estate market changed. Money is going to be lost. There are bad contracts on the books. Correlated markets are going to suffer. Leveraged losses are going to exponentiate. None of this has anything to do with a ponzi scheme.

In common parlance, an asset bubble is called a Ponzi scheme. Actual Ponzi schemes should be referred to as “rob peter to pay Paul” scams to prevent confusion.

Or we could just use the actual definitions of words rather than make everything worse and harder to follow along with.

Or we could just be flexible and evolve with any reasonable colloquialisms of the time.

In a ponzi scheme, some actors go to jail for the rest of their lives and in a speculative bubble they do not. There are good reasons to have separate words for these separate concepts.

Dishonest people will always use hyperbole when describing the world. That hyperbole is not justification for honest people to abandon technical definitions. And that is what you are proposing. Having everyone "evolve" on the definition of 'ponzi scheme' means that the current definition is erased. But the current definition is still in use!

If a speculative bubble was later found to be a victim of pump and dump, then people also can go to jail.

At that point did it stop being a speculative bubble?

The reality is, reality doesn't have such distinct boundaries as you are trying to enforce.

At the end of the day, what is the point of a word's definition? To help communicate an idea to other people and society. The US financial and legal systems are intentionally designed to segregate the less educated. Confusion is their primary strategy to make more money! You can either choose to help them continue the segregation, or you can chose to liberate financial and legal concepts to everyone.

How can you help? By understanding what parts of the concept were easy to understand, what colloquial language is most used to describe it, and then realizing the gaps between the coloquial and technical definitions.

Trying to resolve those gaps with "you're using ponzi wrong" continues the segregation and confusion. Trying to resolve the gaps with "Oh.. you think a ponzi scheme is any scam using obfuscated financial instruments. Ok fair enough lets start the conversation there." you would then continue and say "A typical ponzi schema has a single power structure with a single voice and name e.g. Bernie Madoff. However, in this case it is a ponzi scheme with a distributed set of actors i.e. no one is working together, but still there is large scale issue occurring - we typically call this a speculative bubble / coordinated pump and dump - its not always easy to know what exactly is going on".

You could even continue "Realestate in general has actually been a generational pump and dump scheme. Its not that grandma's everywhere meant to harm anyone, but the common advise to 'buy a hose at any cost' is in favor of the realestate owning elderly (i.e. most of them) and as such is difficult for them to say anything else. Additionally, because its been generational, it seems to have been working for quite some time giving it even more credence. At the end of the day tho, it is a distributed ponzi scheme - if you go to withdraw your money and no one is willing to add even more money (i.e. how much you want, and the "processing fees" around it) - you will not get your money."

If your goals is to communicate an idea to other people or society and you are the one talking, you can and should choose to not use incorrect language. Even if the other person sometimes uses incorrect language. You insistence on using incorrect language as a means of "resolving" segregation and confusion is absurd. There is no such thing as "a distributed ponzi scheme" and telling people that will increase, not decrease, "segregation and confusion".

> reality doesn't have such distinct boundaries as you are trying to enforce.

It really does, as defined by law and consequences. A ponzi scheme necessarily involves fraud and a speculative bubble does not necessarily involve fraud. The fact that some speculative bubbles do involve dishonesty and manipulation (a pump and dump, like you mentioned) does not change that!

> In common parlance, an asset bubble is called a Ponzi scheme

This is a crypto phenomenon. Porting crypto’s corruptions of financial and economic terms, from Ponzi to inflation and market cap, given the benefit of hindsight, doesn’t make sense.

Here’s, mechanically, why it’s not a Ponzi scheme: there is no incentive to get your money out first.

>There are disparate actors making separate, uncoordinated decisions.

You sure about that?

https://www.propublica.org/article/yieldstar-rent-increase-r...

Would not completely write out the possibility of collusion, even if non-Ponzi in nature. DoJ has been sniffing around various actors that have been increasingly found to be acting in a cartel-like manner to keep rents high.

Tell that to Seattle and Amazon. I have little doubt that Amazon's back to work is about real estate and tax revenue for the city.

I doubt it: Amazon isn’t on good terms with Seattle’s city government. They wouldn’t mandate RTO if it wasn’t in their self interest, Amazon isn’t one for needless charity.

> Local government need higher prices as without the high property prices their property tax receipt will tank making them unable to meet their budgets.

California is the only state facing this due to Prop 13. Most jurisdictions are able to adjust real estate tax rates in response to the drop in valuations and many did so when property values dropped in the Great Recession.

A lot of jurisdictions work on a budget: they need X dollars from property taxes, and use your assessed value to determine the rate they need to get X dollars. So if a recession hits, your property taxes don’t go down even if your home falls in value (your rate simply goes up). In a housing boom, your property value goes up, but so does everyone else’s, since X is fixed your rate goes down.

It’s the opposite in California. Even if prices drop 30%, if a property wasn’t traded in the last few (5-7?) years, it’s probably worth more than the assessed value.

Property taxes won’t change if these values collapse. A city may reassess values in the future but that just means some people go up and some go down with the final receipts the same.

An owner may walk away from a Mortage and the bank will pay the taxes. If taxes are not paid you move into tax liens that trade and may be able to get the property just for the taxes on it. In the end property taxes get paid.

How do receipts stay the same?

Property taxes are usually set as a fixed amount to be collected, and the tax % is back calculated. In practice, this means that the only thing that matters is the value of a property relative to the rest of the city.

Does the US use the same rates for all property types? At least in Canada (and in Sim City 2000…), the tax % is different for residential, commercial, industrial and often subcategorized further.

In my state it varies by town so nothing that covers the entire US.

That may be what “usually” happens but in california, which is a major commercial real estate market, we have this thing called proposition 13 which screws up everything.

Taxes don’t change on the day to day swings of the properly value of the house. There is a set value and a set rate regardless of the worth of the house. Now it could be every 10 years a city needs to re-assess. So they go and value all the houses then they make a tax rate that gets to what the tax amount will be. So some go up and some go down based on the new value. There are some outliers - your taxes may change if you expand your house under a permit or so some upgrades. If you buy a house and believe its value is too high you can try to argue the total amount to lower the taxes. But nothing automatically is happening that is lowering anyone’s price except a total reassessment of the area. This is how gentrified areas may push people out with high taxes because a reassess changed the total tax amount and then your house may suddenly need to pay substantially more taxes * except in California as they have different laws.

Those are all reasons why I hope the crash is as big as possible. Let's enjoy the show.

This is a stupid response. Remember 2009 when the housing bubble popped and it effected the entire economy? With billions tied up in commercial real estate, it will have a wider impact then just office buildings and retail locations

some people just want to watch the world burn

Almost nobody does. A lot of immature people think they do, because they’re not aware that it can get much, much worse for them without getting too bad for the people they hate.

Some people are suicidal.

And the opposite of suicidal, the “carpe diem” idea, rather hedonist, is equivalent in that they believe in “no tomorrow”.

A lot of people suffer dissociation since Trump, which was crystallized in The Joker movie. Or perhaps it was due to social media. In any case, wanting to “see the world burn” is a recurrent idea, I’d like a study on how many people seriously adopt this attitude.

> This is a stupid response. Remember 2009 when the housing bubble popped and it effected the entire economy? With billions tied up in commercial real estate, it will have a wider impact then just office buildings and retail locations

A lot of people are so disenfranchised from the wealth that the world could crash and they could care less. They are already at the bottom with nothing to lose.

Such is the inequality in America these days.

And they are posting on HN? More likely they are posting on behalf of the oppressed person from their imagination. An economic crisis hits those at the bottom the worst, even if in absolute numbers the losses at the top may be greater. Rich people did not put all their money in commercial real estate anyway. If anything, they are reducing real estate exposure and are piling into treasuries right now.

> They are already at the bottom with nothing to lose.

If they have access to running water and a roof over their head, this is a wildly misinformed perspective. The people at the bottom typically feel the most pain during economic wipeouts.

You mean "affected", as in it "had an effect". Unlike "effected" which, as in the saying "cause and effect", means "caused".

Dear God, English is the stupidest language ever.

Except that the saying "cause and effect" is using the other (noun) meaning of "effect": it's drawing a line of causality, from a prior occurrence (the cause) to the later occurrence that is a consequence of that cause (the effect).

No one uses "cause and effect" like "cease and desist".

So we should keep prices inflated and piss our money away on artificially-large mortgages so the people at the bottom don't starve?

You are right that that there are too many incentives for trusted players to delay acknowledging reality (even if people are quibbling with the word “ponzi”). I am reminded of the scenes in Big Short when the banks for some time refuse to acknowledge reality and write down their mortgage bond positions.

Usually this sort of soft corruption is dealt with in real estate by incentives. For example the developer offers to pay your HOA fees for a year or two, or throw in some appliances, or whatever. The goal is always to artificially support a higher price through a back door discount that won’t devalue the whole building. There are commercial real estate equivalents to this like the developer paying for more customizations and improvements to the office space which are typically borne by tenants.

But my reckoning is this downturn is way too big and fundamental for those stunts to be enough. If it’s true office real estate values have not been written down then I suspect we are in for a shit show when everyone is forced to acknowledge reality.

(I am not in real estate but spoke regularly to industry folks and wrote reports during the last boom 2002-2008)

> It is not in the interest of any of the players to decrease prices only the renters.

They don't have to increase rents as long as values kept increasing.

If office values go up x% per year, even if you're steeply cash-flow negative, as long as you're adequately leveraged and have low interest rates, you're still probably printing money.

It's almost as if artificially low interest rates manipulated the economy.

I don't disagree, but on the other hand, so is the fiat money. Precious metals market is somewhat complicated and prone to manipulation. So real estate provides solid value that won't go away (simplifying). Groceries and such production keeps getting optimized with quality decreasing, I think the real inflation is not that easy to estimate.

It's price gouging and they are trying to hold out as long as possible, but eventually they will have to give in and accept that they need to use the space for something different and/or drop the rent.

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