Renting from Wall Street

Karl FitzgeraldCommentary, Multimedia3 Comments

Renegade Economists podcast 350

As broadcast on 3CR, Wed July 30th

Renting from Wall Street by Renegadeeconomists on Mixcloud

Show Notes

Christine Lagarde, Amartya Sen Lecture, 10/6/2014
Housing: where will we all live? London School of Economics, 10/06/2014
Featuring Wayne Hemmingway, Richard Blakeway, Professor Paul Cheshire, Rachel Fisher, John Stewart

London CrossRail audio – This $24bn hole has london property prices soaring

STUDY: The Income Of ‘Australia’s 1%’ Hasn’t Increased For Nearly A Decade

The income for the top 1% of Australian earners has not increased for nearly a decade, according to tax data analysed by the Melbourne Institute at the University of Melbourne.

In 2011-12 the share of total income was 7.7%, staying relatively stable from 2006 levels where it was 7.8%.

Based on taxation data, the analysis shows the 180,000 Australians in the top 1% earned an average income of just under $400,000 per year.

To be a member of this elite group, an individual required an income of at least $211,000.

Roger Wilkins, Assoc Prof and key author of the quoted report sent this link to the source data.

I often say that $60,000 is the difference between a lifetime of renting and ownership. Would accessing super help?

Nick Xenophon Wants The Rules Changed So Young Home Buyers Can Use Retirement Savings

Independent Senator Nick Xenophon wants the rules changed to allow first home buyers to pull money from their superannuation savings for a house deposit.

The South Australia Senator says a scheme now operating in Canada, allowing up to $25,000 to be accessed, has lead to improved housing affordability. In Canada the amount has to be paid back into the super fund within 15 years.

“With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” he says.

He will introduce legislative changes in the Spring session of federal parliament.

No it will only increase demand, increasing the value of land. Interest rates will also go up, hurting the wider community.

Renting from Wall Street

featuring Blackstone Capital

Read this excellent report – Renting from Wall Street. The copy below is paraphrased from their report, whose PDF is copy blocked.

KF = my commentary.

Blackstone capital has $271 billion in assets. They own SeaWorld, the weather Channel and Extended Stay America.

About 40% of all money spent to acquire properties. They control about 20% of all institutionally rented single family homes = 43,000 single-family homes


While the collapse of 2007 sent financial shockwaves around the globe, our housing market did not collapse on itself. It was pulled down by Wall Street bankers who created complicated and speculative financial instruments designed to feed rapid growth in the mortgage market. The results were disastrous, but not primarily for the bankers and financiers that had created the crisis. Lower- middle income Americans, particularly people of colour, where hit hardest by the collapse of what had been the most reliable means of generating wealth-the single family home.

Approximately 4.4 million families lost their homes to foreclosure between September 2008 in May 2013. In 2012 alone, families lost $192.6 billion in wealth to foreclosure. As families struggled to keep their homes or get back on their feet across the United States, some of the architects of the last experiment of further financial eyes housing were dreaming up new ways to extract wealth from communities-this time from renters instead of homeowners.

A 2011 White Paper by Morgan Stanley had Oliver Chang citing the American dream’s transition to an American nightmare for many homeowners, which when combined with falling home prices, limited mortgage credit, continued mortgage liquidations, and better rental options is moving the country towards becoming a rentership Society instead of a home ownership society.

No mention of the role of the financial industry in that problem.

KF: Nor the lure of ever higher land prices. If we taxed this with Land Value Tax there would be nothing there to speculate upon nor securitise.

A few months later in 2012 the co-inventor and self-proclaimed Godfather of mortgage-backed securities, Lewis Ranieri published a paper taking its cues from Morgan Stanley’s declaration of a shift from home ownership society to rentership society. Sighting the same trends as Chang and his colleagues, Ranieri goes further to suggest that there are great gains to be made with Wall Street capital should large-scale investors use their access to cheap credit to institutionalise and financialize the single-family rental market that has been historically inhabited by mom-and-pop landlords. Likewise ignoring the fact that financialising housing speculation, aided by toxic mortgage-backed securities, caused the collapse of the American housing market. Ranieri concludes that the United States housing market ‘can be fixed if capital flows back into housing’ and financialise renting.

RMBS mkt
Private equity firms and institutional investors have raised and invested upwards of $20,000,000,000 to purchase more than 200,000 single-family homes nationwide. They turn them into rental properties, and create new financial instruments with rental income streams. Many of the cities and neighbourhoods targeted by institutional investors are places that experience some of the highest concentrations of sub-prime mortgages, with the largest drops in home prices, and most wealth extracted from communities to Wall Street, specifically from people of colour.

Starwood Waypoint, Silver Bay, American Homes for Rent, Colony Financial, Hyperion Homes, Sylvan Road Capital have all jumped into the RMBS market.

It is expected the Rental Backed Securities market will be worth one trillion dollars in five years. The market has quadrupled in just eight months since the first sale of Rental Backed Mortgage Securities.

**** Blackstone have undertaken two capital raisings,
Oct 2013 – $471bn
May 2014 – raising over US $1 billion.

They plan to extract $9,513 per property p.a and $13.3 million from Homes in South Los Angeles, and Riverside.

Standard and Poor’s wont give these Rental Backed Mortgage Securities a AAA rating but Moody’s and some junior ratings agencies in Kroll and Morning Star have.

Blackstone Capital has established a number of companies to administer these property structures. Invitation homes is a prominent one. THR is a corporate structure owning some 1,400 identified properties in South Los Angeles and Riverside.

292 of these properties were surveyed in the month long period.

Must pay a bond of up to 157% a month’s rent, some were given three day eviction notices a day before rent was due!

An incident was recorded where the Invitation Home’s website crashed, rental payments could NOT be made over three days, but eviction notices were rushed out during this time frame, eventhough communication channels were down. Some leasing contracts have a $600 fine for breaking a lease, on top of the loss of bond.

Blackstone buying

They bought properties from corporations that own the property for less than a year for 86% of purchases in the market survey area.

KF: Important to note they have only bought single-family homes. That infers a detached home on most likely a large block of land.

KF: Blackstone invested $27bn in South La & $33bn in Riverside. LA property up 16.2% y.o.y = $10m in bounty, as a privilege for owning the earth AKA economic rent.

KF: $13.3m in extortive rents earnt by Blackstone + $10m from the naturally rising value of the earth, the economic rents = a tidy return. Almost a 100% return in 12 months.

Vacancy rates increasing -> rents collected down 7.6% Oct – Jan.

KF: This vacancy trend will continue to worsen as these economic rents (unrealised capital gains) will subsidise any lazy land use, let alone any possible re-zoning (golden pen tick) windfalls.

Property (read land) values expected to increase a further 9% this year = $6m.

13-14 – $23.3m gain
14- 15 – 19.3m gain

KF: $42.6m gain on 1400 properties = almost doubled their $60m investment in 2 years. Nice work if you can get it.

Support the Renegade Economists work by becoming a member. Thanks to NatLuco for joining this week.

Tues August 5th – Karl Fitzgerald on Collaborative California

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