The Ponzi Scheme

NYC Commercial Real Estate Sales Plunge Over 50% As Owners Lever Up In The Absence Of Buyers

Zero Hedge,

6 September, 2017

So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years?  Well, you lever up, of course. 

As Bloomberg notes this morning, the 'smart money' at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while 'dumb money' buyers have completely dried up.

A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.

At the same time, the market for debt on commercial properties is booming. Investors of all stripes -- from banks and insurance companies to hedge funds and private equity firms -- are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.

“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.

But don't concern yourself with talk of bubbles because Scott Rechler of RXR would like for you to rest assured that the lack of buyers is not at all concerning...they've just "hit the pause button" while they wander out in search of the ever elusive "price discovery."  

At 237 Park Ave., Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-story building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.

“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” said Scott Rechler, chief executive officer of RXR.

The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he said.

Of course, this isn't just a NYC phenomenon as sales of office towers, apartment buildings, hotels and shopping centers across the U.S. have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 percent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.

The tough sales market has put some property owners in a bind -- most notably Kushner Cos., which has struggled to find partners for 666 Fifth Ave., the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.

Thankfully, at least someone interviewed by Bloomberg seemed to be grounded in reality with Jeff Nicholson of CreditFi saying that it just might be a "red flag" that buyers have completely abandoned the commercial real estate market at the same time that owners are massively levering up to take cash out of projects.

Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyzes data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.

But, it's probably nothing...

Australia Mortgage Market Is Now A $1.7 Trillion "House Of Cards"

Zero Hedge,

6 September, 2017

Over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be 'flipped' before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt.

But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a 'creative' little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a 'cash substitute' for down payments on other investment properties.  Of course, we're not experts at 'the mathematics,' but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn't that mean the entire system is built on debt and no actual equity at all?

As LF Economics points out, just like the American mortgage bubble, the current ponzi scheme in Australia is also completely dependent on constantly rising prices.

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

And, just like the American bubble, much of the madness is being funded by unsuspecting foreign investors.

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

Meanwhile, there is no shortage of 'success stories' from people who make next to no money doing their 'day jobs' but have been able to acquire dozens of investment properties with nothing but debt.

Last month, a young Sydney couple revealed how they had racked up $1.2 million in debt on a portfolio of five properties in just two years.

Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of $135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.

Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.

Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. “Anytime you withdraw equity, you need to show income to service that new loan,” he said. “Sadly, the banks don’t value rental income as highly as they once did.”

Eddie Dilleen, a young investor with 10 properties worth about $2 million, last month said he was not fazed by tightening lending environment or talks of a housing bubble.

Mr Dilleen said the majority of his portfolio was positively geared, largely because he avoided borrowing against existing properties, instead saving up for each new deposit by working several jobs.

Conclusion: "Short everything that guy has touched."

Is It All Coming To An End, What Else Does The Cabal Have Up Their Sleeve