Historical article note: This article was originally published on 2018-03-04. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
The middle class refers to working people or small business owners who hold certain assets. These assets include financial assets and real estate. The people who are most anxious about wealth should be the middle class. They are less than the upper class but more than the lower class. They live on capital and assets. It is difficult to change their capital. However, if they are not careful, they may fall back into a state of proletariat. What is the connection between the middle class and real estate? I would like to recommend a book to everyone, "How the Middle Class Protects Their Wealth." The author is Ou Chenggong, known as "Ou Shen" on the Internet. This book was published in April 2017, and the content is selected from some of Ou Shen's articles on the "Reservoir Forum" public account. The topic of asset protection for the middle class is very popular. There are a vast number of books, magazines, audio and video materials, but this book is different. It is only written for the middle class who live in big cities and have a special liking for real estate investment. The author's views are completely subversive, for example, real estate investment is more glorious than industry, real estate investors' sense of justice, disdain for macro-control of housing prices and government intervention, etc. I recommend friends who live in the Greater Toronto Area to get to know people living in Shanghai who laugh at the government’s tightening regulation and suppression, overcome all kinds of obstacles such as loan restrictions, purchase restrictions, and sales restrictions, and still hold firm faith in real estate investment. Where does their confidence come from, where does their theoretical basis come from, and why is this niche group able to challenge the seemingly powerful government regulation. Below I will share with you my thoughts after reading it.
The author of this book explains the basic ideas of real estate investment, investment strategies, and the application of fragmentation techniques from three levels: body, application, and technique, or Tao, method, and implement.
The first is the body, that is, the principles of real estate economics. The author is a admirer of Austrian economics and firmly believes in market forces and that the invisible hand will ultimately defeat the visible hand of the government. Representative figures of Austrian economics include Mises and Hayek, both god-level economists. Before Hitler even came to power, Mises predicted that this man would come to power and launch a war. He fled his native Austria early. He was a prophet among economists. He could see so accurately because he had a profound understanding of human nature. His representative work is "Human Behavior". Hayek's thoughts are even more widely known: the functions of the government should be limited to maintain free competition and maintain a fair legal system. He opposes the government's plundering of people's wealth and then redistribution by the government, and opposes the nationalization of resources and the operation of state-owned enterprises. He pointedly pointed out that excessive government intervention in the economy will lead to socialism and even totalitarianism, leading the people on the road to slavery, which is represented by "The Road to Serfdom." China started its housing monetization reform in 1998 and commercial housing appeared. It was not until 2003 that welfare housing distribution was completely stopped. So far, it has a history of 54 years of welfare housing distribution and 20 years of real estate commercialization. According to the description in Ren Zhiqiang's memoirs, 95% of Chinese houses in 2000 did not have square halls, that is, there was no place for the whole family to socialize. The house and home were the place where they ate and slept. This was the result of divided housing - not enough housing and not enough room, and the quality of the property was poor. Due to urbanization and the need for improvement, houses are a scarce resource in China, whether it is a house allocation or a house purchase era. As early as 2010, the government began to vigorously crack down on real estate speculation. At one time, it was said that housing prices were pushed up by unscrupulous developers, and at other times it was said that they were caused by real estate speculators, but it was not said that it was caused by excessive currency issuance. Economist Xue Zhaofeng pointed out in his 2011 article "Cracking down on investment is a big mistake": "I have never understood what "investment demand" is, but cracking down on investment is a big mistake. "Having a roof to cover your head is a necessity, having a house to live in is a normal good, and buying a house is a luxury." The author has a profound understanding: Houses are for living, and the tenants' living needs are exactly the investors' investment needs. Therefore, houses have only one need, that is, living needs. The government always dictates housing prices, which leads some people who do not understand the principles of economics to hold unrealistic illusions and believe that the government has the ability to suppress housing prices to a price that everyone can afford. The author believes that if this were the case, China would not change housing allocation to selling housing in 1998. The commercialization of real estate is because no country has the ability to allocate a house to its citizens. The government artificially distorts prices, markets, confidence, and expectations, creating unprecedented room for real estate arbitrage, because fools and short sellers really think that housing prices can fall, and encourage each other to "wait and buy again." There is a continuous flow of good and bad news, but faith cannot follow the trend. The rise and fall of interest rates, loose and tight policies, etc. are just grains of sand on the rock, drifting away as soon as the wind passes. Whether to believe in the government or the market is a matter of belief and a key issue that determines a person's life's destiny. You cannot just follow what others say, you must have your own opinion. Faith and IQ are the watershed of wealth.
Now that you understand the economic principles of real estate investment, how do you apply them? This is the investment strategy, that is, the "use" aspect. The author believes that only international metropolises have real estate investment markets, because only first-tier cities have: locals, latecomers, and foreigners. A steady stream of latecomers will buy properties at higher prices, leaving room for arbitrage. In the process of buying and holding, someone must be able to rent it. A house with a monthly rent of US$6,000 can only be rented out in first-tier cities with enough foreigners to afford the landlord's mortgage loan. The important reason why the middle class always feels that the assets in their hands are in danger is that the currency depreciation caused by the over-issuance of M2 has continued to depreciate the purchasing power of currency in the hands of the middle class. The most classic part of this book is that it proposes ways for the middle class to save themselves: 1. The low-level mode of financial management is to save money, and the bank manager kneels down to provide services; the intermediate mode is to purchase assets; the advanced mode is to borrow money, and you kneel to the bank manager. 2. Build an asset portfolio centered on mortgage loans. Since the disappearance of the gold standard, deflation has been basically eliminated in the world, leaving only inflation. Borrow 100 yuan today, and use banknotes with a face value of 100 yuan but an actual value of 70 yuan to pay off the debt tomorrow. This is the ultimate solution to asset protection proposed by the author for the middle class. The author believes that a qualified real estate investor spends 80% of his time looking for loans, 15% of his time looking at properties, and 5% of his time completing transactions. Mortgage lending is the core task of real estate investment. After getting the loan, deleveraging begins from the first day of repayment of principal and interest, so you need to increase your mortgage regularly to restore the leverage effect. The author believes that the profit point of real estate investment lies in arbitrage, rather than making a fortune by collecting rents. Therefore, rents must be available, but they are only an auxiliary force for holding real estate. You cannot buy properties that do not appreciate in value just because the rents are good, or choose to buy properties in outer suburbs or even second- and third-tier cities. Regarding the question of the chain of disdain for real estate investment, the author loudly answered a small group of people who made moral accusations against real estate investment: "In the final analysis, the profit margin of any industry has nothing to do with high technology, but only to do with competitors. Why are profits in industry so thin? Because too many people are doing industry. Real estate investment Why are the profits huge? Because there are too few people doing it! "Investors buy real estate and rent it out, which does not affect the market supply. The house is rented out on the market and is solving the housing problem; the house will be sold sooner or later, and it is just sold to people who come to the city later, helping more powerful buyers to hold it in the city for a few years.
Regarding investment skills, that is, the level of "skills", the author introduces a lot of fragmented field experience such as buying opportunities, Shanghai real estate classification, and even decoration skills. Regarding the timing of buying and interest rates, the author believes that for every 0.25% increase in interest rates, house prices will fall by 1%. This statement is really difficult to verify. Taking real estate in Toronto as an example, the central bank raised interest rates three times from July 2017 to February 2018, but the prices of condominiums rose instead of falling, and the prices of detached houses in surrounding cities were indeed declining. It can be seen from this that there is no specific numerical connection between interest rates and housing prices. There is a positive correlation between housing prices and effective demand.
If you buy a house and live in it, the house is a resource; if you buy a house and rent it out, the house is an asset. Since it is a commodity economy, houses are commodities and can be bought and sold legally. If some people can’t get used to the real estate investment phenomenon unique to big cities, they can only slowly get used to it. There is only one buying point for house investment or self-occupation - "buy early". No one will benefit from delaying buying a house, unless the place where you buy a house is a city that everyone is fleeing from. Many middle-class people lose money on their investments because they don’t find suitable jobs for their money. Whether you use your money to buy stocks or buy a house depends on the city you are in. In addition, compared with Canada, it is much easier in Canada to regularly increase mortgage payments for investment properties in China. The ways and means for real estate investors to cash out are more diverse and flexible. The method of Buy, Hold, Refinance, continue to hold, continue to refinance, and finally Sell is easier to operate in Canada.
Regarding the three-dimensional attributes of housing prices, this book is the clearest. Many friends who can't sleep peacefully when seeing housing prices fluctuate must read this part about the components of housing prices.
After reading the above book, I feel that real estate investment in China is at least ten times more difficult than in Canada. I pay tribute to my friends who still firmly believe in the value of real estate investment in China, a country with a semi-market economy, and who have overcome all difficulties and dangers and are determined to invest in real estate. The publication and distribution of this book shows that the correct financial management direction attempted by this small group of people in China is being recognized and spread. Skyline Bookstore in Toronto has just arrived at this wonderful book, which is highly recommended for middle-class families who are still confused.