Housing market likened to Ponzi scheme

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A new report from the company founded by the economists who predicted a “bloodbath” for Australian real estate has likened parts of the industry to a Ponzi scheme.
The report was released by LF Economics, founded by Lindsay David and Philip Soos, who in July said oversupply and inflated prices made a “bloodbath in the housing market… a near certainty”. The report claims some aspects of lending to those looking to buy property mirror Ponzi Schemes.
According to a report in the Sydney Morning Herald, the report raises concerns that parents, spurred on by a sudden increase in the equity contained in their own homes, are potentially overleveraging their children by using that as a means to guarantee loans.
"Unfortunately, this loan guarantee strategy in a rising housing market for securing ever-larger amounts of debt is essentially pyramid or Ponzi finance,” the report said. 
“This leaves many parents in a dangerous predicament should their children experience difficulties making loan payments, let alone defaulting and suffering foreclosure.”
LF Economics is concerned that many parents may be asset rich but cash poor, and would be unable to meet any guarantor obligations without selling their home if their children were to default.
The report is also critical of regulators, who it believes have been lax in enforcing responsible lending practices.
“Financial regulators have ignored the Ponzi lending practices by lenders, believing the RBA will have the adequate ability to bail them out at taxpayers' expense the day this classic Ponzi lending scheme breaks down.”
The report also doubles down on David and Soos’ fears of overinflated prices, claiming buyers in the current market are at an increased risk as they are forced to put aside an increasingly large amount of money as a deposit for property purchases.
“As deposits and loan sizes are bigger today, first home buyers will have to commit an increasingly large proportion of their incomes to mortgage costs regardless of dwelling price trends.”
“Purchasing property in the midst of a bubble carries significant risks via negative equity and unemployment.”

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