Real estate experiences fluctuations every ten years; look at population in the long term, land in the medium term, and finance in the short term , this is the real estate cycle law summarized in our previous article. The real estate cycle has shortened from 18 years to 10 years in recent decades. The reason for the shortening of the cycle is that the government's restless hand has been intervening. No matter what the government thinks, the market has its own inherent laws, and the market is the sum of human behaviors. The price of a house is reached by agreement between the buyer and seller, and is not set by the government. Including Toronto, housing prices in all market economy countries around the world are the ultimate reflection of the government's wishful intervention and the market economy. This involves politics and economics, but it is not political economics. Real estate investors must clearly understand the following things, otherwise their minds will be confused.
First, let’s talk about the impact of politics on housing prices, and how real estate investors should follow the political winds and profit from them. The 20 years that China has experienced since its housing reform in 1998 have condensed the role that the government has played in the global real estate market for thousands of years. China's first real estate macro-control with the goal of "stabilizing housing prices" took place in 2005, with administrative orders restricting purchases; in 2006, it began to cut costs, reduce land supply, deny loans to developers, deny approval for real estate companies to go public, and vigorously build affordable housing. You can find out for yourself who the great savior of the people was at that time. These measures made the homeless people in the city cheer and tell each other: the central government has finally taken action, and poor people can now afford houses. Similar suppressions occurred one after another, roughly 7-8 rounds. Not only did the market not give face, it also slapped the government in the face: pent-up demand, met with scarce supply, ignited housing prices like firewood. Coupled with the doubling of developers’ financing costs, housing prices added fuel to the fire. As for affordable housing, that’s even more interesting. The central government has no Allocate funds for 10 million units of affordable housing and force local governments to build them. The local government requires builders to build 3 units of affordable housing for every 7 units of commercial housing and gives the affordable housing to the government for free. Therefore, the price of those 7 units of commercial housing includes the cost of 3 units for free. Fourteen years have passed, and even a fool can see that none of these policies have reduced housing prices. Otherwise, how could housing prices in Beijing and Shanghai have increased 14 times. A political show is when leaders demonstrate their love for government and the people, and flex their muscles to scare the reactionaries. As for the economic consequences, haha. For real estate investors, once the policy changes, they must judge whether housing prices are going to rise or fall, and decide whether to buy or sell. After the introduction of the above-mentioned macro policies, people with common sense in economics saw the signal that housing prices were going to skyrocket. They overcame all difficulties, divorced, and exhausted all means to buy a house. People who have no knowledge of economics are waiting for house prices to fall. They learn about real estate through news broadcasts, go to BBS to criticize developers for their evil intentions, and real estate speculators who die early and die early... For investors, it is necessary to see clearly that it does not matter who is in power, whether he is democratically elected or centralized. When the people's savior makes a mistake, he is creating market bugs, pleasing ignorant voters, paralyzing vulnerable groups, and ultimately creating opportunities for bright-eyed investors. Take a look at Ontario’s Fair Housing Plan in April 2017. As soon as the policy came out, the keyboard warriors on the BBS were all jubilant. The proletariat was proud to be the masters of their own country. Two years later, they watched the lowest-end apartment properties in Toronto increase by 10%+. The proletarians are still proletarians. What about the Liberal Party, which has vowed to suppress housing prices? Even the fig leaf was lost in the 2018 election.
Even a semi-market economy must follow market laws, and The market is the sum of human actions . Once a policy to stabilize the real estate market is issued, it will be filtered by the market, that is, human behavior, and the consequences should be certain. Therefore, the research purpose of economics has always been only one, that is, not to study how policies backfire, but to study how policies backfire. The so-called economic mind refers to " Second-order economics thinking model ”, that is, assessing the consequences of consequences. For example, everyone can understand immediately: the government announced to increase the minimum wage for workers from 12 dollars per hour to 15 dollars per hour, and the poor people who had the votes were jubilant; but if you consider the consequences using second-order economic thinking, you will know that this is a policy to deceive voters. The consequences of an increase in wages from 12 dollars to 15 dollars are: employers will reduce their employees and unemployment will increase. Some people who can only earn 12 dollars an hour will no longer be able to find a job. The social security situation will immediately deteriorate. The government has raised the first rung of the career ladder, causing people with low skills and low education to give up the idea of climbing the ladder and focus on a life of smashing, smashing, and stealing. The government's restriction on rent increases is another clear proof. The more restricted rents are, the faster they rise. The conflicts between landlords and tenants are getting deeper day by day, and legal disputes continue. In his economics textbook, Mankiw specifically cited two examples to illustrate how government policies backfired. One was raising the minimum wage and the other was rent control. The former Ontario Liberal government made exactly these two classic mistakes that can be found in the textbook. Is this really a coincidence? Absolutely not. Politicians have to put on a show to impress voters who don’t understand economics, while pretending not to see the objections of people who understand economics. All political decisions that go against the common sense of economics are tricks to deceive ignorant people under the guise of conforming to public opinion. Therefore, the most important thing that Toronto real estate investors need to do is to keep learning and keep in mind the basic principles of economics to avoid being deceived by political tricks.
The economics listed below are important for Toronto real estate investors to keep in mind:
Will excessive debt affect economic development? NO . The quality of Canadian debt is very high , the average amount of mortgage debt is 210,000, which is very low in absolute terms; the late payment rate of mortgage debt is 2.4 per thousand, which is one-tenth that of the United States. Canada's subprime mortgages are all lent to new immigrants, and the down payment is more than 35%.
Are Toronto housing prices too high/over value? It depends on what happens. Toronto house prices are based on average annual income 11 About times, New York is 13 times, Tokyo is 21 times, London is 28 times, Shanghai is 33 times, and Shenzhen is 44 times. If compared with other first-tier international cities, housing prices in Toronto are not too high; if compared with other cities in Canada, housing prices are too high, and will continue to be too high forever. In countries with an urbanization rate of more than 70%, there is only one direction for population mobility: the agglomeration of large cities into megacities. Toronto and Shanghai are about the same size, and Shanghai's population of 30 million is six times that of Toronto. The population density is low and housing prices are unlikely to be too high.
Is there a real estate bubble in Toronto? The algorithm for bubbles is the ratio of house prices to rents. The larger the number, the bigger the bubble. Toronto's detached houses have a bubble, but condo buildings don't 。 Apartment rents and apartment house prices rise at the same time. When the moon moves, I move too. It is the hardest bubble among all bubbles, defying all regulation and suppression. Some people think that their fate is harder than the apartment bubble, so they should continue to wait for the bubble to burst.
Are there subprime mortgages in Canada? No. Canada's loans that do not look at local income basically only cater to new immigrants. Subprime mortgage situations similar to those in the United States will not happen in Canada. Banks are economic entities and need to consider their own safety and profits and will not act recklessly. Both the United States and China have experienced government interference in bank mortgage businesses, but Canada has not. One of China's macroeconomic control policies is: a 30% discount on the interest rate for the first home, and a 40% premium on the second mortgage. As a result, when commercial banks faced first-loan applicants with no credit history and low incomes, they were required to charge a high-risk interest rate premium, but they were required to discount the interest rate. Customers who bought second homes were all customers with the best strength and credit, but were required to increase the interest rate by 40%. Commercial banks were confused, making things difficult for first-time loan customers, and found various reasons not to lend. In the end, the poor could not afford to buy a house. The U.S. government is even more stupid. The government requires banks not to discriminate against Mexican boys picking strawberries, and the policy must favor professional dancers in basement bars. Just watch the movie "The Big Short" and you will know. When a bank makes a loan, it immediately packages it into a bond and sells it. Even if the flood after the loan is huge, it has nothing to do with the bank. People who buy such toxic bonds know nothing. Banks must maintain reasonable discrimination and cannot lend money to borrowers with low incomes. Eliminating all discrimination will cause chaos in the world.
