I find this question hard to think about. Who exactly should be pricing in the risk of something like this happening? On both sides there are agents who have taken on risk. Some of the agents paying rent overextended themselves even before the crisis. Some of the agents renting space did the same. So who should take the hit? Nobody (i.e., the government)? Even that solution seems wrong -- do we really want to incentivize agents that leverage their property holdings to the hilt?
My naive reaction is that the agents renting space are somehow "more able" to absorb the costs. Maybe it's because I think banks seem to be doing ok, and in my head banks are the people who lend things to people and charge fees, whereas my friendly neighborhood restaurant seems to be scrabbling harder to make ends meet. Or maybe it's because I think people who own resources are just always doing better than the people who rent them. But that's not a very convincing argument.
It's an unprecedented catastrophe, and even if we will weather it, someone (well, many someones) will suffer (we'll all suffer, but some more than others).
Besides solving the crisis (to which most of us cannot meaningfully contribute) the main priority is preserving the rest of the society so that we can go on with as little harm as possible when the immediate crisis (virus) is over.
In this specific situation, it's obviously better to prioritize borrowers/renters over landlords, because the former are actually productive. Restaurant fails => no food; landlord goes bankrupt => house remains, it's just gonna be owned by someone else.
What complicates matters, obviously, is second-order effects; first of all, if some / many landlords are leveraged, them defaulting might impact banks, which is definitely something we don't want; if I were the government, however, I'd be saving banks directly in this situation, not landlords. The other consequence is a crash of the housing market, which IMO isn't that much of a big deal, but it's been politically untenable for a while because too much of ordinary people's wealth is tied in housing. It might be a good opportunity for a reset, though.
I don't see how this is even in question. The landlord should always be taking on the risk, that's literally their only job -- they provide nothing of value, besides that one thing. (They often don't even maintain the property or upkeep, in the US that's usually entirely on the tenants, through a third-party management service priced into the rent).
If landlords aren't willing to take the risk of tenant defaults on, then landlording should just be universally-illegal, and let the government directly cut rent-like mortgages and property-management-like upkeep for those properties. If the general public is going to keep bailing out wealthy deadbeat landlords every decade, we better at least get to keep the property.
The way to be economically successful in modern America is to leverage yourself to the hilt to get massive returns during good times (while cautious savers miss out on getting such massive gains), and then turn around and ask for a bailout if things go south and the heavy leverage and lack of rainy day savings pushes you underwater.
Does it matter that much who is 'more able' to absorb costs? The original question of who takes the rent etc. is more likely relevant.
It's hard to know who is profiting more, but it's a side question.
Normally - the restaurants would declare bankruptcy, the landlords would follow suit, and due to the pervasive nature of this pandemic ... so would the banks who can't absorb that much loss. The dominos would come down and take the entire economy with it.
BUT
'Real Estate' is not a productive game!
This is one of the weirdest things about our economy - so much is based on rent-extraction, not productive investment.
This is why the central bank can take all the 'worthless investments' off of the bank's balance sheets and give them cash at face value and 'poof' the economy can move on.
2008 was not an implosion of productive assets - it's was a major accounting realignment ... which caused productive parts of the economy to suffer as a result of calamity. But at its core, just a big rebalancing of the balancesheet.
Put another way - what if all real-estate were socialized: it's all free, you just have use it, and everyone is 'allocated' some kind of limit or whatever by whatever rules. Those rules may not be perfectly fair but it could be done.
Then nobody has to pay rent. Then, when restaurants 'pause' operations, they don't go out of business.
Because we are not an agrarian society wherein any specific bit of land is really about its industrial value ... this could actually work. We do it in a fancy way today by having people speculate with huge mortgages, only to sell them later.
I'm only making a rhetorical point here, but if we are going to 'socialize the risky parts of the real-estate economy via central banks' because they need to be unfairly bailed out every 10 years, then there is no 'free market' in such things anyhow. The 'unfair socialization' is happening at the central bank.
In Canada, the average home price increased last year more than the average annual wage (before taxes!). This is insane and untenable. It means the real #1 driver of inequality is simply homeownership: the more you can leverage, the more you are leveraging over others. A $200K income becomes a means to buy a $2M home that increases in value as much as your income. While the flat owners and renters are left with no capital gains there.
This aspect of our economy might essentially be the most truly fragile because.
If I buy a house as an individual I'm taking some of the risk, but so is the bank that lends me money. We each have different risks (I can lose the house, the bank can lose the money if they can't make it back by selling it), which is fine.
This is what happens when people drink the deadly cocktail mix of low interest rates and leverage. A landlord who has paid off mortgage can afford his tenant to not pay rent for a couple of months. That's not how the world is running now: REITs, individual landlords, partnerships, etc--all of them are profitable when there is a cash flow. The moment rents stop flowing under a certain limit, deleveraging starts. That's what happening in this market.
What are you advocating for here- an end to mortgages? Buildings are extremely expensive, and most purchasers need bank financing in order to buy one. They typically have a certain amount of skin in the game because lenders require them to put x percent down, I doubt they're 'highly levered'. They're normally levered- that's how the real estate business works.
If you get rid of leverage entirely, the only people who'll be able to buy real estate will be the enormously wealthy who can pay cash. If you're concerned about inequality, I think that this would be a much worse situation....
Government should take a hit, in my opinion. It's inefficient for every individual and entity to prepare themselves against things like this, especially since government action (stay at home orders) is exacerbating it. The business "bailouts", at least the in US, are mostly just loans anyway. Taking a "too bad" stance and letting businesses cascade fail prolongs the pain and leaves the country worse off when the crisis is over.
I'm not sure that's fair. I think it's fine to spend taxes rescuing people (including the business owners if they're in personal trouble), but rescuing businesses feels like a very different story.
We just passed the CARES Act in the US, which gives small businesses a loan about 2.5 X their average monthly payroll. It is fully forgiven if used for payroll, rent, or utilities in the first 8 weeks.
I know plenty of small businesses and their owners. Bars, local cafes, all kinds of little startups, small construction companies, small companies in manufacturing. These businesses had no chance to prepare for a multi-month shutdown with zero income. For those guys, I'm perfectly fine to throw down my tax dollars without interest. This is a sufficient mess, just take it.
That's a situation we need our societies safety net in.
However, I'm concerned that larger corporations will throw more money than all of the small business I know make in a month at legal and siphon that money away. That'd be bullshit.
I hope governments can sort that shit out, at least in europe.
In that argument case, what about average citizens? Businesses seem to get bailouts when they fail because of unforeseen circumstances, but citizens are left to pay the bill. so in the end it is either fair, or someone takes a bigger hit.
If society is to underwrite the risk then society should collect when times are good.
If we taxed land, landlords would long get the rent for the building, which would be far, far less, as most of the rent in prominent locations is due to the location.
If we had land value tax the govt could have reduced LVT for the duration of the crisis, leaving businesses only paying for the far smaller amount of the building.
Whilst I'm sure landlords are in a tight spot too, what good actually comes from evicting any business right now? It's not like there are any new ones to take their place. Having an existing business with known revenue, waiting to restart once lock down ends seems better than hoping a new one will fare any better.
The landlords can probably keep the tenants' deposits if they get evicted or leave before their term is up. This can mean access to quite a bit of money rather quickly. And some tenants will have fixed-term leases with the contract expiring in a few months' time - for the landlord, forcing those tenants out of the contract before that term is up can be a win, because of the deposits.
Also, I don't think most businesses are literally out of cash yet. They're simply prioritizing other expenses, like wages. Landlords stand to benefit by forcing some of that money to go towards rent.
From a business perspective, it would be strange if the landlords did not try to get paid.
I only hope that this won't lead to a situation where people and organizations with deep pockets will take over even more of the housing stock like they did in 2008.
One crisis closer to having a single mega landlord (or a very small class of landlords) who can charge whatever they want for your right to exist on the face of the planet.
It is time to undo this with the LVT like what Singapore does (almost all land is owned by the state and leased out on 99yr leases). The net effect is that the market sets rent prices, but the revenues not due to the landlord’s actions (I.e. revenues due to nearby employment opportunities, education, or public infrastructure) go back to the state and get reinvested in the community.
I think Warren Buffet said "only when the tide goes out do you discover who has been swimming naked". What I can't get over is that we just found out basically everyone is swimming naked.
Businesses lose cash flow for one month and they can't pay workers. Workers miss one paycheck and they can't make rent. Landlords miss one rent payment and can't pay their mortgage. Banks start seeing mortgage defaults and immediately need a bailout. Everyone's broke! It's broke all the way down. If any one of those in that chain kept a little emergency fund, we wouldn't be in this situation. How did we all manage to build an economy such that we're all paying each other just-in-time to avoid catastrophe?
> How did we all manage to build an economy such that we're all paying each other just-in-time to avoid catastrophe?
Stagnate wages. And instead of raising wages, we lowered interest rates to keep the money flowing going.
As we have just discovered, an entire segment of society is being propped up by the borrowing power of the "middle class" in America.
We have been pulling the wrong levers, and as you've said in not so many words, our current economy is a farce. People are being fed the scraps of the economic pie.
We should give the people their money; their due, proper wages. We should stop formulating economic policies on "the rich should get richer no matter what." It might not be too late to return to sound economic policies that benefit the populace and not a select few, and in return we'd have a more robust economy.
Much of brick and mortar retail is just going to be unnecessary after this. Once everyone has online ordering set up, there will be a lot less demand. Really, who wants to go to Safeway? Buy AMZN? Maybe.
Same for office space. Work from home will be the new normal for people who work in offices. People who go to work in person will do something other than use a keyboard and screen. I've been wondering for some time when we'd hit "peak office". It just happened.
It's going to be a year or two before bars, restaurants, nightclubs, and sports get back to normal. Not until there's a vaccine and almost everyone has had it.[1] Or, the hard way, repeated smaller waves of epidemics until about 60% of the population has had it and the disease dies out for lack of new victims. After lockdown, we're still stuck with "social distancing" for many months.
Life will go on fine. There are going to be screams from commercial real estate owners. You want to see entitlement? Talk to a landlord. Manufacturing will be fine. Services will do great. Office space and retail space will hurt. That's OK. We survived the death of malls.
- Major League Baseball. The average age of a baseball viewer is 57, up from 52 in 2006. Just 7% of baseball’s audience is below age 18. The 2020 summer season will almost certainly be cancelled due to the epidemic. The 2021 season may be cancelled due to lack of interest. Once people get out of the habit, it's hard to get interest going again. Horse racing aged out that way. Who goes to a horse track any more?
- It's going to be amusing if NFL football gets replaced this fall by Madden NFL 20. Could happen. Simulated football, played by the real coaches, with Pixar-quality rendering, on national TV? Basketball, with smaller teams, might carry on; everyone gets tested before the game, and there's no audience. "Audience insertion" in video coverage of sports could become a thing. It's often been done in movies, after all.
- Boeing? Will any 737 Max ever need to fly again? People willbe moving around less in large vehicles for several years.
- Cruise lines? Forget it for a few years.
On the way up:
- Biodefense, of course. Nobody ever shut down the whole world before. This was an accident. Somebody might do it on purpose. It's too easy to scale. That DARPA program to generate antibodies for a new virus will be a big deal. Vaccine R&D and manufacturing will be way up, with plenty of funding from many governments. Watch the anti-terrorism lobby pivot to biodefense.
- Anything associated with working from home, of course.
- Delivery. But expect the "gig economy" to be made more like regular employment. Expect the quality of delivery to improve. The delivery industry needs to keep the cold stuff cold and the hot stuff hot. Only Safeway and pizza delivery try to do that now.
Over the past 40 years the West has fallen into a deep capitalist realism which completely erases the contingent nature of our economic system. Debt and property are not basic facts of reality, they require stable, predictable economic relations. Those are all out the window right now.
It may be ideologically impossible for our governments, rentiers and financial institutions to acknowledge that the suspension of daily life means the suspension of business as usual.
I think it would make sense that if businesses are told to close then to tell the landlords that rent payments will also stop. It seems pretty fair. Same for people whole have lost their job. You could also suspend rent payments for them. This may cause pain to the landlords but it seems fair to share the pain.
[+] [-] papeda|6 years ago|reply
My naive reaction is that the agents renting space are somehow "more able" to absorb the costs. Maybe it's because I think banks seem to be doing ok, and in my head banks are the people who lend things to people and charge fees, whereas my friendly neighborhood restaurant seems to be scrabbling harder to make ends meet. Or maybe it's because I think people who own resources are just always doing better than the people who rent them. But that's not a very convincing argument.
[+] [-] tomp|6 years ago|reply
Besides solving the crisis (to which most of us cannot meaningfully contribute) the main priority is preserving the rest of the society so that we can go on with as little harm as possible when the immediate crisis (virus) is over.
In this specific situation, it's obviously better to prioritize borrowers/renters over landlords, because the former are actually productive. Restaurant fails => no food; landlord goes bankrupt => house remains, it's just gonna be owned by someone else.
What complicates matters, obviously, is second-order effects; first of all, if some / many landlords are leveraged, them defaulting might impact banks, which is definitely something we don't want; if I were the government, however, I'd be saving banks directly in this situation, not landlords. The other consequence is a crash of the housing market, which IMO isn't that much of a big deal, but it's been politically untenable for a while because too much of ordinary people's wealth is tied in housing. It might be a good opportunity for a reset, though.
[+] [-] maxsilver|6 years ago|reply
If landlords aren't willing to take the risk of tenant defaults on, then landlording should just be universally-illegal, and let the government directly cut rent-like mortgages and property-management-like upkeep for those properties. If the general public is going to keep bailing out wealthy deadbeat landlords every decade, we better at least get to keep the property.
[+] [-] ummonk|6 years ago|reply
[+] [-] Blackthorn|6 years ago|reply
[+] [-] jariel|6 years ago|reply
It's hard to know who is profiting more, but it's a side question.
Normally - the restaurants would declare bankruptcy, the landlords would follow suit, and due to the pervasive nature of this pandemic ... so would the banks who can't absorb that much loss. The dominos would come down and take the entire economy with it.
BUT
'Real Estate' is not a productive game!
This is one of the weirdest things about our economy - so much is based on rent-extraction, not productive investment.
This is why the central bank can take all the 'worthless investments' off of the bank's balance sheets and give them cash at face value and 'poof' the economy can move on.
2008 was not an implosion of productive assets - it's was a major accounting realignment ... which caused productive parts of the economy to suffer as a result of calamity. But at its core, just a big rebalancing of the balancesheet.
Put another way - what if all real-estate were socialized: it's all free, you just have use it, and everyone is 'allocated' some kind of limit or whatever by whatever rules. Those rules may not be perfectly fair but it could be done.
Then nobody has to pay rent. Then, when restaurants 'pause' operations, they don't go out of business.
Because we are not an agrarian society wherein any specific bit of land is really about its industrial value ... this could actually work. We do it in a fancy way today by having people speculate with huge mortgages, only to sell them later.
I'm only making a rhetorical point here, but if we are going to 'socialize the risky parts of the real-estate economy via central banks' because they need to be unfairly bailed out every 10 years, then there is no 'free market' in such things anyhow. The 'unfair socialization' is happening at the central bank.
In Canada, the average home price increased last year more than the average annual wage (before taxes!). This is insane and untenable. It means the real #1 driver of inequality is simply homeownership: the more you can leverage, the more you are leveraging over others. A $200K income becomes a means to buy a $2M home that increases in value as much as your income. While the flat owners and renters are left with no capital gains there.
This aspect of our economy might essentially be the most truly fragile because.
[+] [-] FartyMcFarter|6 years ago|reply
If I buy a house as an individual I'm taking some of the risk, but so is the bank that lends me money. We each have different risks (I can lose the house, the bank can lose the money if they can't make it back by selling it), which is fine.
[+] [-] ruth9|6 years ago|reply
[deleted]
[+] [-] matz1|6 years ago|reply
[+] [-] raincom|6 years ago|reply
[+] [-] hash872|6 years ago|reply
If you get rid of leverage entirely, the only people who'll be able to buy real estate will be the enormously wealthy who can pay cash. If you're concerned about inequality, I think that this would be a much worse situation....
[+] [-] dahdum|6 years ago|reply
[+] [-] FartyMcFarter|6 years ago|reply
Government means "everyone who pays taxes".
I'm not sure that's fair. I think it's fine to spend taxes rescuing people (including the business owners if they're in personal trouble), but rescuing businesses feels like a very different story.
[+] [-] jasonjei|6 years ago|reply
[+] [-] tetha|6 years ago|reply
I know plenty of small businesses and their owners. Bars, local cafes, all kinds of little startups, small construction companies, small companies in manufacturing. These businesses had no chance to prepare for a multi-month shutdown with zero income. For those guys, I'm perfectly fine to throw down my tax dollars without interest. This is a sufficient mess, just take it.
That's a situation we need our societies safety net in.
However, I'm concerned that larger corporations will throw more money than all of the small business I know make in a month at legal and siphon that money away. That'd be bullshit.
I hope governments can sort that shit out, at least in europe.
[+] [-] Justsignedup|6 years ago|reply
[+] [-] koolba|6 years ago|reply
It’s like extending unemployment benefits to gig workers who never paid any unemployment tax.
[+] [-] amiga_500|6 years ago|reply
If we taxed land, landlords would long get the rent for the building, which would be far, far less, as most of the rent in prominent locations is due to the location.
If we had land value tax the govt could have reduced LVT for the duration of the crisis, leaving businesses only paying for the far smaller amount of the building.
[+] [-] JonoW|6 years ago|reply
[+] [-] rebuilder|6 years ago|reply
Also, I don't think most businesses are literally out of cash yet. They're simply prioritizing other expenses, like wages. Landlords stand to benefit by forcing some of that money to go towards rent.
From a business perspective, it would be strange if the landlords did not try to get paid.
[+] [-] Ididntdothis|6 years ago|reply
[+] [-] ethanbond|6 years ago|reply
One crisis closer to having a single mega landlord (or a very small class of landlords) who can charge whatever they want for your right to exist on the face of the planet.
It is time to undo this with the LVT like what Singapore does (almost all land is owned by the state and leased out on 99yr leases). The net effect is that the market sets rent prices, but the revenues not due to the landlord’s actions (I.e. revenues due to nearby employment opportunities, education, or public infrastructure) go back to the state and get reinvested in the community.
[+] [-] jasonsb|6 years ago|reply
[+] [-] ryandrake|6 years ago|reply
Businesses lose cash flow for one month and they can't pay workers. Workers miss one paycheck and they can't make rent. Landlords miss one rent payment and can't pay their mortgage. Banks start seeing mortgage defaults and immediately need a bailout. Everyone's broke! It's broke all the way down. If any one of those in that chain kept a little emergency fund, we wouldn't be in this situation. How did we all manage to build an economy such that we're all paying each other just-in-time to avoid catastrophe?
[+] [-] pgsbathhouse2|6 years ago|reply
Stagnate wages. And instead of raising wages, we lowered interest rates to keep the money flowing going.
As we have just discovered, an entire segment of society is being propped up by the borrowing power of the "middle class" in America.
We have been pulling the wrong levers, and as you've said in not so many words, our current economy is a farce. People are being fed the scraps of the economic pie.
We should give the people their money; their due, proper wages. We should stop formulating economic policies on "the rich should get richer no matter what." It might not be too late to return to sound economic policies that benefit the populace and not a select few, and in return we'd have a more robust economy.
[+] [-] Animats|6 years ago|reply
Same for office space. Work from home will be the new normal for people who work in offices. People who go to work in person will do something other than use a keyboard and screen. I've been wondering for some time when we'd hit "peak office". It just happened.
It's going to be a year or two before bars, restaurants, nightclubs, and sports get back to normal. Not until there's a vaccine and almost everyone has had it.[1] Or, the hard way, repeated smaller waves of epidemics until about 60% of the population has had it and the disease dies out for lack of new victims. After lockdown, we're still stuck with "social distancing" for many months.
Life will go on fine. There are going to be screams from commercial real estate owners. You want to see entitlement? Talk to a landlord. Manufacturing will be fine. Services will do great. Office space and retail space will hurt. That's OK. We survived the death of malls.
[1] https://www.sfchronicle.com/health/article/What-Bay-Area-res...
[+] [-] Animats|6 years ago|reply
- Major League Baseball. The average age of a baseball viewer is 57, up from 52 in 2006. Just 7% of baseball’s audience is below age 18. The 2020 summer season will almost certainly be cancelled due to the epidemic. The 2021 season may be cancelled due to lack of interest. Once people get out of the habit, it's hard to get interest going again. Horse racing aged out that way. Who goes to a horse track any more?
- It's going to be amusing if NFL football gets replaced this fall by Madden NFL 20. Could happen. Simulated football, played by the real coaches, with Pixar-quality rendering, on national TV? Basketball, with smaller teams, might carry on; everyone gets tested before the game, and there's no audience. "Audience insertion" in video coverage of sports could become a thing. It's often been done in movies, after all.
- Boeing? Will any 737 Max ever need to fly again? People willbe moving around less in large vehicles for several years.
- Cruise lines? Forget it for a few years.
On the way up:
- Biodefense, of course. Nobody ever shut down the whole world before. This was an accident. Somebody might do it on purpose. It's too easy to scale. That DARPA program to generate antibodies for a new virus will be a big deal. Vaccine R&D and manufacturing will be way up, with plenty of funding from many governments. Watch the anti-terrorism lobby pivot to biodefense.
- Anything associated with working from home, of course.
- Delivery. But expect the "gig economy" to be made more like regular employment. Expect the quality of delivery to improve. The delivery industry needs to keep the cold stuff cold and the hot stuff hot. Only Safeway and pizza delivery try to do that now.
[+] [-] rasz|6 years ago|reply
[+] [-] danharaj|6 years ago|reply
It may be ideologically impossible for our governments, rentiers and financial institutions to acknowledge that the suspension of daily life means the suspension of business as usual.
[+] [-] Ididntdothis|6 years ago|reply
[+] [-] onetimemanytime|6 years ago|reply
[+] [-] aurizon|6 years ago|reply
[deleted]
[+] [-] monoclechris|6 years ago|reply
[deleted]
[+] [-] boznz|6 years ago|reply
[+] [-] dang|6 years ago|reply
https://news.ycombinator.com/newsguidelines.html
[+] [-] dahdum|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] zraako|6 years ago|reply