In 2021, Canadian housing prices have increased by 26.6%, and income has increased by 2.7%. Houses make money faster than people, not much, only 10 times. Due to low interest rates, a large amount of loan principal has been repaid at an accelerated pace. While assets have increased, liabilities have decreased. Households with real estate can be regarded as having a double blessing. Homeowners have achieved a one-year fortune on their balance sheets. However, if income cannot keep up with the rise in housing prices, a real estate bubble will appear. Once the bubble bursts, it will trigger unemployment and economic recession, affecting everyone. Housing prices are now rising at an alarming rate. Even if homeowners are secretly happy, they are also worried: What will happen to children buying a house after this increase? Will it trigger policies to suppress housing prices? How can this rate of increase be safely landed?
New technologies usually trigger asset bubbles, but real estate bubbles are always caused by credit leverage. The root cause of the subprime mortgage crisis was that banks issued loans indiscriminately. Poor-quality mortgage assets were securitized by Wall Street and sold all over the world after being groomed by rating companies. In fact, it is difficult to trigger a debt crisis without issuing random loans. Unfortunately, driven by profit, commercial banks often issue low-quality loans and set themselves on fire.
Judging from the proportion of income and housing price increases, the Canadian real estate market is a bubble. Judging from the ratio of housing prices to rents, Canadian housing prices are also in a bubble. We cannot deny the existence of bubbles, but we must also understand the causes and solutions.
Credit expansion itself is the result of the central bank encouraging commercial banks to lend. When there is an economic crisis, it is necessary to use crisis management methods, that is, to encourage banks to lend. Crisis economics talks about the abnormal stimulus policies adopted to encourage consumption and borrowing when the economy may be in crisis, such as when an epidemic breaks out and unemployment rises. The long-term consequence of this short-term stimulus policy is the expansion of corporate and household debt, which drives up asset price inflation. If ordinary families use leverage, they are afraid that the asset bubble will burst and become insolvent; if they don't use leverage, their income will not keep up with the rise in asset prices, leading to relative poverty and class decline for their families. When ordinary people face the contradiction between asset bubbles and whether to use leverage, they will be in a dilemma. Understanding leverage and controlling one's own leverage are compulsory courses in financial management and financial education for middle-class families.
01 See it foam
After the tulip bubble, tulip cultivation in the Netherlands became an important industry; after the South China Sea bubble burst, Britain's maritime hegemony was gradually established; after the Mississippi bubble burst, banknotes were widely accepted; after the railroad stock bubble burst, the railway industry prospered; after the Internet bubble burst, the Internet industry fully emerged... Historically speaking, bubbles have always led human progress. It is foreseeable that the rise and burst of the artificial intelligence bubble will promote artificial intelligence; the rise and burst of the genetic engineering bubble will promote the development of genetic engineering; the bubble of digital currency... the bubble of big data... the bubble of electric vehicles... the bubble of driverless driving... etc.Bubbles are a side effect of people forming a consensus on a certain progress. In essence, the bubble itself is caused by a certain consensus among human beings. It is not terrible, but what is worrying is whether if you rush into the bubble, it will burst.
Real estate bubbles exist in many countries and regions. Hong Kong's real estate bubble burst in 1997 and hit the bottom in 2003. House prices fell by 70%. The current house prices have far exceeded the peak in 1997. As long as they survive those devilish five years, families who hold real estate for a long time will make huge profits. The U.S. real estate bubble burst in 2007 and reached its bottom in 2011. Now housing prices are much higher than the peak in 2007. Families that have held properties for a long time have not only suffered no losses but also made substantial profits. In Japan, the real estate bubble never recovered after it burst; in Panama, housing prices never recovered after the U.S. Southern Command withdrew. So,Real estate bubbles are usually related to credit expansion and demographic changes. The fate of real estate bubbles is different in each country and cannot be compared.
The real estate bubble in Toronto is very interesting. The real estate bubble occurred in 2007, but the increase in house prices was not large, but the transaction volume was huge. The transaction volume of second-hand houses that year was 93,000 units. It was not until 2015 that this transaction volume record was broken; the explosive increase in house prices occurred in 2016, with annual house price increases of 100,000. The transaction volume is huge, 113,000 units. Before 2021, the only time when both volume and price increased was in 2016; since then, house prices have increased by 100,000 in 2020, but the transaction volume is only 95,000 units; the transaction volume in 2021 is the largest in the past 20 years, with 121,000 units transacted, and the increase is also the largest, 166,000. Judging from the historical record, today's concerns about the Greater Toronto real estate bubble are well-founded.
I bought my first house in Canada in August 2007. At that time, the subprime mortgage default problem in the United States had been exposed, but the impact on the financial market was still unclear. The Canadian real estate market was very active at that time, but two completely different views have emerged in the market: 1. House prices can fluctuate, and 2. The house price bubble is about to burst. No matter then or now, I believe thatIf you are buying your own home, whether there is a bubble in the real estate market has nothing to do with the home buyer. Don't worry about the market situation, just take care of yourself. If you can buy early, never later.Until housing prices fully recovered in June 2009, many people said that I bought at a high point, but I didn't think so: I had to live with the housing prices when they rose or fell, and sell the house when the housing prices fell. No one who rented a house ever took advantage of it at all, and usually they would never buy it back again. In 2009, I heard an old man say that "self-owned housing is not just for fun." I would like to add that if you buy your own home early, other factors are not important. People who are still hesitant to buy their own home take buying a house too seriously and cannot do anything more important than buying a house. Maybe they have made the wrong choice to immigrate. Buying a house is a necessity for daily life. If you don't buy a house, you have to rent it, and renting a house means helping the landlord repay the loan. The 2016 bubble was labeled as foreign real estate speculation. Statistics Canada’s 2017 survey results showed that the bubble had nothing to do with foreigners. From the perspective of my work, I believe that the bubble was caused by the bank’s policy on new immigrants’ loans. Federal investment immigration was suspended in 2012, and 2016 was the deadline for a large number of investment immigrants to land. Unfortunately, banks tightened their mortgage policies for new immigrants at that time. Many new immigrants rushed to the last bus, which pushed up housing prices at a rapid pace, but it was foreigners who were shot.For families buying their own homes, in order to avoid lifting dumbbells when the real estate market bubbles, it is best to buy properties with average house prices., for example, buy a property of 380,000 yuan in 2007, 730,000 yuan in 2016, and 1.1 million yuan in 2022.
The bubbles in 2007 and 2016 were related to the large number of new immigrants buying houses. Especially in 2016, when the federal investment immigration program was coming to an end, I remember that from 2016 to 2017, the house prices assessed by banks often failed to reach the purchase price. At that time, new Chinese immigrants were the main force driving the rise in house prices. The real estate bubble in 2021 has nothing to do with new immigrants or non-residents. It is mainly caused by local residents adding mortgages to their original properties, purchasing investment properties or upgrading their own homes. Among the loans I have handled in 2021, there are very few cases where bank valuations are lower than the purchase price, which shows that Chinese are not the main force driving up housing prices. No matter when house prices rise, mortgage loans are the driving force, but the people driving the rise in house prices are different. Throughout the three GTA housing market bubbles I have witnessed, the driving forces behind them were not real estate investors who have held investment properties for a long time.
02 Causes of the real estate bubble
Reviewing these three histories of the bubble, I hope my readers will understand the causes of the real estate bubble so that they can cope with it.
Immediately after the outbreak, CMHC predicted that house prices would fall by 18%. Later facts proved that the wisdom of the masses trumped the opinions of a handful of experts. In response to the epidemic, the central bank adopted large-scale monetary easing, and fiscal policies were too aggressive. These government actions had private reactions. After the currency flood broke out, ordinary families realized a fact: Canadian currency was over-issued and production was stagnant. The result could only be rising asset prices and high inflation. When middle-class families can afford loans, the best lifeboat to deal with the currency flood is real estate. The inflation rate is 4.8%, the mortgage interest rate is 1.5%, and the absolute value of the actual negative interest rate has reached 3.3%, that is,The government's rescue measure is to provide negative interest rates to encourage home buying.In the 13 years since I immigrated, I have never seen such a high consensus in the market - don't sell, buy when you have the opportunity. In the past, I just reminded my readers and viewers of my videos to follow the principle of buying, buying, buying. However, this epidemic has severely proved my consistent proposition.if in the past13If it is right to only buy and not sell during the year, then all decisions to sell a house and get out of the car are all wrong.
I have read a lot of analyzes of the real estate bubble in 2021, and they are all too one-sided. For example, some people think that the proportion of investors buying houses has reached 20%, and investors have created a bubble. However, this is not the case. As early as 2018, the proportion of investors in the GTA second-hand housing market reached 24%. Some people have analyzed that it is caused by the baby boomers living in big houses and refusing to sell their houses. In fact, there is no factual basis. The aging of the population did not only appear in 2021, and the mortality rate of the elderly caused by the epidemic is much higher than that of young people, so the elderly not moving to smaller houses is not the fundamental reason. There are also people who blame speculators, and the phenomenon of short-term buying and selling of real estate has been around for a long time and has nothing to do with the epidemic.
I think2021The real estate market bubble phenomenon of 2008 is a monetary phenomenon.During the epidemic, the central bank released 400 billion yuan in monetary policy and 300 billion yuan in fiscal policy. The over-issuance of these currencies resulted in people having more money, which can be used as down payments. At the same time, commercial banks helped families with stable incomes increase mortgages on real estate and issued new home loans. During the entire epidemic period, the amount of housing loans increased by as much as 200 billion, which was almost half of the amount released by the central bank. House prices are rising across the country, but GTA is not among the top three in the country in terms of transaction volume or house price increases. Within the GTA, the traditional house-buying principle of location, location, location has been overturned. The largest price increases have been in suburban properties, not in the city center. These anomalies all illustrate one problem:People are eager to turn their cash into real estate.Large-scale quantitative easing policy originated in Japan and was used to suppress long-term interest rates as early as 2000. The United States began using this tool in 2009 and has used it again since the outbreak. Different from the subprime mortgage crisis, fiscal policy during the epidemic was forced to purchase vaccines and large-scale bailouts, which also greatly overdrawn the future. Large-scale monetary easing and large-scale government subsidies have resulted in falling long-term interest rates and high inflation. Reflected in the real estate market, it is the real negative interest rate.if you have20Ten thousand, if you put it in a bank savings account, you will have to pay inflation tax and your purchasing power will depreciate. If you use it to buy a house, you will have to pay inflation tax.20If you put 10,000 yuan into real estate, you can maintain and increase its value, but the condition is that you must buy a house as a mortgage.Buy, buy, buy has become the main theme. Families with the ability to borrow can add mortgages to their existing properties and buy more, so the inventory of properties available for sale on the market is dwindling. This process allowed middle-class families to see one fact clearly:Banks can approve you for future overdrafts5With your annual income, you don’t have to pay income tax on the front end. This money is tax-free. What’s even better is that we agree to share it with you.30It is repaid every year. In an inflationary environment, this debt will depreciate every year. The borrower can use the currency after inflation to repay the debt signed now, and this debt will not increase with inflation. Such a good benefit only requires you to buy a house in the market and mortgage it to the bank.When buying a house becomes a tool to resist inflation, obtain ultra-long-term loans, enjoy tax-free early income, and obtain negative interest rates, this tool becomes more and more expensive and scarce.
None of the Canadian government's aid during the epidemic was beneficial to real estate investors, but the actual effect was to maximize the interests of real estate investors. The policies of the Liberal Party always backfire, and this time is no exception. Fortunately, the people who benefit the most are the middle-class families who pay the most taxes. When the opposition parties in Congress criticized the current real estate inflation, they pointedly pointed out that the government should stop issuing money, resume production, and resume housing construction, otherwise the real estate crisis will not be solved. According to my observation, after the average house price in the GTA rose to 750,000, working-class families became the main force in real estate investment. Rich people could no longer make money by buying investment houses with cash, while working-class families with strong borrowing ability became the biggest beneficiaries of rising house prices. The main reason is that they can withstand leverage and negative cash flow. Middle-class families have become the favorites of banks for their mortgage business.
03 The nature and use of leverage
The hallmark of modern man is the use of tools. The gap between rich and poor is caused by the difference in the use of tools.
There is a metaphor in "Small Island Economics": People who can build a net and use it to catch fish are more efficient than those who go into the water to catch fish. Having a net means having capital. You can rent the net and hire people to fish with the net. From then on, the gap between the rich and the poor has widened. Technological progress is actually the progress of tools. Nowadays, very few people cross the Atlantic Ocean by boat, and most people travel across the ocean by airplane. The tools you use determine the amount of wealth you will have in your lifetime. Leverage, as a tool, has two sides. It can double your wealth, and it can also make you lose money faster. The key depends on how you use it.
Hyman Minsky gave a very illuminating academic summary of the nature of leverage. He divided leverage into three categories:Hedging Leverage, Speculative Leverage and Ponzi Scheme Leverage. Hedging leverage means that the income obtained from the loan can repay the principal and interest, maintain normal principal and interest payments, and fulfill the loan commitment. Leverage in real estate investment falls into this category. Speculative leverage means that the proceeds from the loan are only enough to repay the interest, but the principal cannot be repaid. The loan contract needs to be continuously extended after it expires. Those low-income borrowers who bought their own homes during the U.S. subprime mortgage crisis were unable to repay the principal. When the loan matured or the interest rate increased, they relied on additional mortgages to extend their lives. Once housing prices fell, their lives could not be extended. Ponzi scheme leverage means that after borrowing, there is no income to repay the interest, let alone the principal, and can only borrow new debt to repay the old debt. Madoff was discovered swimming naked during the subprime mortgage crisis. This is the reason. Although it is difficult to maintain the leverage of a private Ponzi scheme, this kind of leverage in the hands of the state can be used for a long time without incident. For example, CPP, the Canadian Pension Plan, uses the money paid by people who are paying CPP to be paid directly to those who are receiving CPP. It is a pay-as-you-go system, pay as you go, so Canada needs to continue to attract new immigrants, otherwise it will cause trouble.
With current house prices and rents in GTA, if the loan ratio is 80% of house prices, it will be difficult to maintain hedging leverage. Therefore, borrowers need to have off-site cash flow. Whether applying for an investment housing loan or applying for a mortgage investment housing loan, banks must see that the borrower has sufficient active income and maintain hedging leverage, so people with low incomes cannot be approved. In 2017, a household income of 80,000 yuan could obtain such leverage, but now it requires a household income of 140,000 yuan. There are two reasons. 1. Housing prices have increased, and 2. Bank stress test interest rates for loan approval have also increased. Currently, banks use 5.25% as the stress test interest rate. This interest rate was the peak after Greenspan raised interest rates 17 times that year. The Bank of Canada adopts this extreme interest rate to select qualified borrowers.Only if the dikes are high enough will they be safe in the event of a major flood.It is dangerous for those families who hide their illnesses and dare not go to the bank to do stress tests and rush into the field of real estate investment. Many people think they are doing well, but they get cold feet when faced with bank stress tests. Some people think that banks are too conservative, while others think that banks are too lenient. Regardless of their views, banks have always maintained this income discrimination in order to protect the absolute safety of Canada's real estate market. The current bad debt rate of major banks is 1.8% per 1,000, which is indeed too conservative and misses many opportunities to make money. However, banks have always insisted on this kind of righteous discrimination and will not relax. During the subprime mortgage crisis, the bad debt rate of Canadian banks was only 4.5% per 1,000. It is this conservatism and discrimination that ensures the safety of the real estate market, and banks survived the subprime crisis without government assistance. The current bad debt rate of private lending institutions is 8.6 per 1,000, which is five times that of banks, but is still very low. The current bad debt rate of mortgage loans of banks in the United States is 2.5%, which is three times that of Canadian private loans.
We all know that the distribution of assets among the population belongs to a power law distribution, that is, 20% of people own 80% of the wealth. The same goes for debt. In Canada, the debt of the top 40% of income earners accounts for 70% of the total debt. It’s a joke when some good people use averages to look at debt. What they see is that 177% of Canadians’ disposable income is used to repay debt. This is obviously impossible. Their ignorance is reflected in using averages to calculate debt levels. Some people are always worried that the sky will fall and nervously remind everyone not to borrow too much. Do you really think you can over-borrow if you want to over-borrow? Once you apply for a mortgage, you will know how strict the bank's fence is. The debt level of each family is controlled by banks, and those who worry about it are those who have no practical experience. Some people advise borrowers not to maximize their leverage. Come, let’s take a look at the actual situation. Canada’s housing prices have increased by 26% in the past year. Last year, investment housing borrowed 80%. Even if a penny of principal was not repaid, this year’s leverage ratio has dropped to 63%. Could it be that when the bank approved you for 80% of the loan last year, and you said, “I don’t want it, I want 65%,” then your leverage ratio this year will drop to less than 50%. When it comes to real estate investment, whether you can use leverage is the key to the success or failure of the investment. Those who are unfounded should not worry about banks.Mortgage comes with deleveraging effect, the principal and interest must be repaid every month, and the leverage is automatically reduced. The loan is 80%. In fact, it can only reach 80% in the first month, and it gets lower and lower thereafter. The maximum repayment period for a mortgage is 30 years. Some people require repayment in 25 years because of the interest rate. This is also a very SA idea. The longer the repayment period, the lower the monthly payment, the stronger the ability to support negative cash flow, and it can support multiple property investments at the same time. Leverage is used to support high-quality assets. It would be too wasteful to use it.
Take care of your own leverage and don't worry about your neighbors. Banks don't have to worry about you. There are regulatory authorities.The core of household leverage management is to accelerate the reduction of owner-occupied housing leverage and maximize the use of investment housing leverage.Many families have been brainwashed into thinking that interest rates are low, so they hide their money in tax shields such as RRSPs or TFSAs and do not pay off their home loans. I have seen some families with an RRSP balance of 800,000 and a home loan balance of 700,000. Such families are financially insecure. Unemployment risks and interest rate risks will bring troubles to the family finances. Moreover, their ability to borrow money for investment properties has been greatly reduced. They can only look for exceptional opportunities everywhere.
Conclusion:
It has been 4 years since I wrote the official account. Thank you all for reading such long words for a long time. As the New Year approaches, I wish northerners a happy New Year and southerners good luck and prosperity.
I hope that through my sharing, readers can understand the real investment world, popularize economic and financial common sense, and avoid being brainwashed and misled. Despite some gains, many mindsets remain deeply ingrained in the Chinese community.
The idea of diversified investment is illogical and impossible to achieve. Before the family net worth reaches 5 million, there is no need to diversify at all. Successful investors invest concentratedly and accumulate assets as quickly as possible.
It is not easy for ordinary families to understand financial products. To give an example related to real estate, institutional real estate investors financialize real estate investments into real estate trust funds (REITs). This process is to turn pork into sausages, but it is not known whether there is diseased pork or rat meat during the processing. When people deal with financial assets, they usually entrust their investments to "professionals". This entrustment relationship adds another conflict of interest.
The biggest characteristic of families that can quickly accumulate wealth is that they understand what they are investing in, make investments that return to nature, reduce agency links, and directly invest in tangible assets.
The phenomenon of brainwashing in investment is common and shocking. For example, the above-mentioned families who force themselves to put their savings into tax shields every year are carrying high home ownership debts. In fact, they cannot let go of immediate interests and lack financial intelligence for long-term financial arrangements.
In the past four years, the market has created myths about real estate investment again and again, but some people just hold on to the prejudice against real estate investment. They think that investing money is only when you put it in a tax shield and let others take care of it. It would be a pity not to use the tax shield provided by the government, but they have no idea what the investment in the tax shield is.
Some people have been demonizing the role of leverage, saying that maximizing leverage is for the interests of banks and mortgage managers. This kind of hostility has no other purpose than to show their jealousy. Suggestions that persuade people to increase their mortgage loan and use cash as a down payment for an investment house are truly malicious suggestions.
Whether housing prices are rising fast or slowly, whether asset bubbles are big or small, are all external events. Reducing your home loan and increasing the leverage of investment housing loans are the only ways to deal with asset bubbles and use leverage correctly. Some people who have been unable to obtain bank loans for many years are isolated from the world. Their complaints, dissatisfaction, and suggestions are not worth listening to. In Canada, you can tell whether you are a good person by going to the bank to apply for a loan. There is no need to belittle yourself or be pretentious.
Common sense has been fighting against all kinds of brainwashing. No matter how difficult or long the fight is, I will fight side by side with all readers. Because only common sense can defeat prejudice. The more common sense, the smaller the risk of being brainwashed. The first goal of working-class people is to save taxes. Canadians are too highly leveraged. These assumptions in people's minds are the result of brainwashing, and most people are not aware of it. Recently, the argument that the real estate bubble is explained by investors pouring into the market has been constantly mentioned. In fact, the number of mentions has only increased, and the fact that the current proportion of investors participating in buying and selling is lower than in 2018 has not been mentioned. This is typical brainwashing.
After the Spring Festival, spring is here. Canada's loan policy is a spring breeze for real estate investment for ordinary working-class people. There is no need to look for opportunities. The spring breeze is ten miles away. We have enough time to learn, think and practice. This is why immigration is worth it. I wish all readers fruitful results in real estate investment in the new year.
Mortgage borrowing formula:
