Historical article note: This article was originally published on 2019-10-17. 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 economy is going to decline" is like the story of 'The Boy Who Cried Wolf'; although it has been widely spread for a long time, it has never materialized. Various scientific excuses for not buying a house, such as 'wait until the results of the Canadian election before buying a house' or 'wait until after the U.S. presidential election to decide whether to buy a house,' genuinely exist. Some people even leave comments under my public account articles saying: during the upcycle, investing in real estate can be extremely profitable, like mercury pouring out, earning a lot; during the downcycle, investing in real estate will lead to complete failure, with no chance of success.

I will use two articles to talk about my views on the relationship between economic recession and real estate investment. The theme of this article is: the relationship between urbanization, capital surplus, and real estate investment. The theme of the next article is: the impact of economic cycles and credit policies on ordinary people.

01 Urbanization = Building cities = Economic development

When everyone is discussing 'economic recession,' 'economic depression,' or 'economic downturn,' have you ever thought about what the antonyms of these terms are? They should be 'economic development,' 'economic recovery,' or 'economic upturn,' right? So what does developing the economy, or economic development, actually mean? My understanding is: building cities. Mobilizing natural resources, human resources, and technological forces to build bigger and more cities, allowing more people to move into the cities, in short, 'building cities.' Once people enter the city, they can no longer be self-sufficient; they can only participate in division of labor and consumption, becoming interdependent and relying on the market and division of labor to survive. People in the city need to build cities again for those who haven't moved in yet; otherwise, they have no income and cannot sustain themselves. 'Building cities' is not just a matter for any single country; it is the driving force behind the development of human civilization as a whole. The countries that are most active in the city-building movement have the fastest economic development. Over the past 40 years, China has moved 500 million people into cities, increasing the urbanization rate from 18% in 1978 to the current 59%. Now, more than half of the Chinese population lives in cities, whereas in 1978 'city dwellers' were still a minority, less than 20%. During the same period, India has made almost no progress in urbanization; currently, India's urbanization rate is only 32%. India plans to build 100 smart cities by 2050, moving 800 million Indians into cities. If India's urbanization dream can be realized, the 21st century will belong to India. Unfortunately, not a single one of the 100 smart cities in the fairy tale has started construction yet.

Countries that have completed the first round of urbanization, i.e., those with urbanization rates exceeding 70%, have economic growth rates below 5% because there is too little city creation. After the urbanization rate reaches 70%, re-urbanization begins, meaning the population within cities re-concentrates in megacities, also known as post-urbanization.

Canada is a post-urbanized country, with a current urbanization rate of 81%. So, urbanization means that new immigrants and small and medium-sized cities re-concentrate their populations in Toronto, Vancouver, and Montreal. The so-called "economic recession" refers to the interruption or halt of the city-building process, and Canada's city-building movement was never very popular; it was only through new immigrants landing and population reconcentration that new homes needed to be built. The most active real estate transaction is in the Greater Toronto Area, where the most new immigrants settle there. Even so, over 65% of real estate transactions in the Greater Toronto area are still second-hand homes, merely transferring existing stock. Therefore, the interruption or cessation of city-building movements, also known as economic recession, has little impact on ordinary Canadians. In short: the demand for city-building in Canada has already stabilized, so the likelihood of major economic fluctuations is low.

On the contrary, many countries face situations where they must either build cities or borrow money to keep their countries running. When debt defaults occur, only city building remains, but no one lives in the city. Look at those small European countries that can't survive—passports and houses must be sold together to sell, unless someone wants to run away. Who would buy passports and houses from these countries?

02 Is Urbanization the Root or the Way Out of Capital Stagnation?

Humans have been building cities since ancient Greece and Rome, and the accumulated wealth has always been extremely unevenly distributed. The methods humans use to write off capital are usually very cruel, either through war, deflation, or inflation. The First and Second World Wars were the most brutal instances in the history of human capital write-offs. Not to mention other countries, just take China as an example: in 1949, all private property was reduced to zero. Currently, we have experienced 70 years of peace without large-scale wars, and the enormous yet unevenly distributed wealth accumulated has nowhere to be written off. The term 'rotting capital' originates from capital premiums. The phenomenon of premiums refers to a situation where, relative to the total economic output, the total payments of capital exceed the nominal value of the economy. For example, in 1978, the US securities trading volume accounted for only 4% of the total economy, but by 1998, it reached 230% of the total economy, with massive capital circulating outside the real economy or being invested in virtual assets. During the industrial era, only Andrew Carnegie explicitly stated that he was not interested in the game of making money from money; profits from industrial production were reinvested in industry, while other capitalists had long started playing the game of making money from money. Today’s society has advanced even further: even without having made money, people first burn investors’ money, using concepts and beliefs to directly play the game of making money from money, with the audience anxiously afraid of missing the next Jack Ma, eagerly giving money to be burned. The question arises: where does this money being burned come from, and why is it so lowly, so easily taken through deception?

A Mr. Chen Gong wrote the book "Urbanization That Subverts the World," blaming cheap floating capital on urbanization, that is, urbanization is the root of capital floating. The author believes that humans greedily and endlessly extract natural resources and continuously build cities to satisfy their desire for pleasure, leading to global capital surplus. Globalization drives this floating capital to raise asset prices everywhere, leaving decline and disaster when speculative capital withdraws; when people recover from disasters, a new round of city-building begins, generating more floating capital and recklessly rushing toward the next disaster. This book highly correlates economic cycles with city-building cycles, presenting a very unique idea with strong data and information, and is recommended for reading. According to the author, China's urbanization movement was encouraged and approved by authoritative institutions such as the World Bank and McKinsey. It abandoned the export-oriented secondary industry and sprinted toward urbanization and tertiary industry transformation, naming it structural reform, 'freeing cages to replace birds.' In fact, this transformation follows the old path already taken by capitalist countries, generating floating capital through urbanization. The book was published in 2016, and looking at the situation now, China is determined to continue on the path of city-building. For example, in Harbin, a border city that is not a transportation hub, the construction of an international airport on a large scale shows that 'city-building' in China equals meeting the growing material and cultural needs of the people, equals economic construction, equals economic development, equals creating employment, equals expanding domestic demand... This kind of city-building is not enough; China plans to extend infrastructure projects along the Silk Road and help others build cities, otherwise the floating capital already generated in China would be difficult to absorb.

Regarding the book 'Urbanization That Subverts the World,' I think that the pursuit of urbanization is certainly one of the reasons for the global accumulation of bad capital, but urbanization is not the result of bad capital. On the contrary, city-building is an effective way to absorb bad capital. Take Japan, for example: capital has been bad since 1995, and the Bank of Japan started QE as early as 2001 and has never stopped. That is, creating bad capital on an ultra-large scale artificially. After 18 years, the Japanese economy has shown no improvement. My personal view is that this bad capital in Japan has not only failed to enter commercial activities, but it also has not entered the city-building movement, because the Japanese entered a low-desire society earlier than other countries—no marriage, no children, no buying houses—so there is no new demand for city-building. Bad capital cannot even enter real estate, so it continues to stagnate. The United States is similar: the capital released through three rounds of QE lingers in the financial market, unable to enter the real economy or real estate, causing the U.S. stock market to remain booming to this day. Although everyone knows it is a false prosperity, there is nothing they can do about it.

Canada has never conducted quantitative easing (QE), and international hot money cannot quickly enter and exit Canada's cumbersome resource-based economy. The driving force that allows the Canadian economy to continue moving forward at a staggered pace is still city-building—building cities for new immigrants. I completely disagree with the platform proposed by the Conservative Party candidate. They believe that in order to maintain budget balance, a large number of infrastructure projects should be cut. What is the point of achieving budget balance if the outlet for disposing of idle capital through city-building is blocked? In 1998, the trading volume of U.S. securities was 230% of its GDP, whereas at the same time, the trading volume in the Canadian securities market was 331% of its GDP. The excess capital in Canada was even more severe than in the U.S. The reason is that Canada has hardly participated in any significant world wars. In the more than 150 years since its founding, its capital has never been offset by war, making it a country with severe capital surplus and idle capital.

03 What can ordinary people do when facing a possible economic recession?

Most people who are worried about an economic recession are anxious because they don't understand what a recession is and have never seen what the Great Depression was like. The last global economic recession occurred in the 1930s, and anyone who experienced it firsthand is at least 90 years old. The 'Great Depression,' this dead old tiger, is still a spell recited by many who don't dare to invest today: 'Once there’s an economic crisis and the Great Depression, all investments will be gone, Amitabha; investing during economic downturns will lead to total loss, how virtuous, how virtuous...' The crisis that started in the financial markets in the 1930s, how did it evolve into the Great Depression? After very in-depth research, Bernanke discovered that back then the dollar was linked to gold, and when the crisis occurred, the central bank raised interest rates and tightened liquidity. Coupled with the improper fiscal policies of Hoover and Roosevelt, a crisis turned into a prolonged depression. When the financial market crisis occurred in 2008, Bernanke happened to be the Federal Reserve Chairman. To avoid repeating history, Bernanke took the drastic measures of cutting interest rates and 'helicopter money,' successfully preventing the financial crisis from turning into an economic depression. Ten years later, the whole world saw clearly this experiment: financial crises can be prevented from evolving into a depression by injecting money.

In 1971, humanity bid farewell to the gold standard, thereby severing the anchor that constrained economic development by natural resources, and the great ship of the world economy finally sailed into the unfathomable ocean without any ties. Global currencies are all fiat currencies, that is, a special kind of paper backed by the government’s promise to repay debt as a form of faith. If the gold standard were still in place, the U.S. wouldn't have enough gold reserves, so how could Bernanke print money? This is not a secret; the whole world knows it. As long as you trust the government, the government will print money for you to spend. Holding U.S. dollars means trusting the U.S. government, holding Canadian dollars means trusting the Canadian government... Since the way to prevent a financial crisis from spreading into a Great Depression is so simple, is there any honest country that wouldn't print money to save the market? Then, when will the recession and Great Depression caused by our panic actually take hold?

As ordinary people, the fundamental issue we face is not an economic recession, because that is a problem for the central bank governors of various countries. For central banks, it is not a difficult problem either; it is simply a matter of how much to print, how to print it, when to print it, and who gets to spend it first. Ordinary people face only one problem: when a flood of money comes, do you have an Ark? If the world is flooded with money, running is useless; without a life preserver, without an Ark, you will be drowned no matter where you go. Let's review that round of money flood after the 2008 subprime crisis: U.S. dollars rushed into the capital market, and the stock market has prospered ever since; Canadian dollars entered commercial banks and the residential housing market through the secondary mortgage market, and once house prices went up, they didn't come down; Chinese yuan went into state-owned enterprises and infrastructure, reviving real estate companies and migrant workers. Before the next flood of money arrives, what we need to prepare is to purchase assets that are easy for money to enter and wait for the money to inflate the prices of these assets.

Real estate belongs to immovable property, which is very unfavorable for speculative capital to flow in and out. Therefore, it has the least chance of being ravaged by non-performing assets, which is also a major advantage of assets that are not very liquid. The value of real estate depends on the full resource value of the land. If the land is used to grow grain, the value of the land is the price of grain; if the land produces oil, the value of the land is the price of oil; if 300 IT elites live on the land, the value of the land is the elite price. People who buy houses in remote suburbs and still think that a large land area matters, and that the land will not depreciate, have already suffered greatly in real estate investment. The characteristic of urban real estate is: people and wealth gather, and the expensive survive. To invest in real estate, buy houses in the most crowded places, where future elites will be most concentrated; though it seems expensive now, it will be more expensive later, which is the meaning of investment. Fluctuations in real estate prices are normal, and the best time to buy is during an economic downturn. In Chapter 23 of 'The Inescapable Economic Cycle', Mother of Cycles: In the section on the art of bottom-fishing in the real estate market, it is written: 'The people who make the most money are obviously those who buy at particularly low prices during a crisis, but these are usually not successful real estate experts, because when real estate prices really become cheap, they themselves may be in a recession, with extremely limited funds on hand. As a result, when opportunities arise, the benefits are often reaped by others in different fields who have enough liquidity to buy land and real estate. For example, leather goods merchants, retailers, wholesalers, hotel owners…'

From the overall perspective of the Canadian real estate market, the incremental market is very small, that is, there are not many newly built houses, while the existing stock market dominates. When a flood of money is rampant, all houses, whether new or second-hand, will rise along with it. Whether as a flood discharge channel or as a tool to absorb floating capital, houses are the most effective and reliable assets. When the economy as a whole is in recession or stagnation, an important way to protect personal assets from shrinking is to write as many houses as possible in one’s own name and wait for the flood to come. Many Chinese scholars highly praise Singapore's property system: its home ownership rate ranks second in the world, and housing prices are stable or slightly decreasing, seemingly allowing people to live in peace and contentment, and young people, without struggling for houses, can freely pursue their ideals. This claim is no different from saying 'the prince and princess lived happily ever after,' and it too naively simplifies the real world. In the first half of 2019, Singapore's GDP grew by 0.6%, with the full year expected to see zero growth. According to the scholars' assumptions, shouldn't a country where people do not struggle for housing live full of ideals and have stable economic development? With no incremental wealth and no growth in housing stock wealth, where can Singaporeans pursue any ideals? Houses are not just for living; their function as a wealth repository is unmatched by any other asset. One generation with houses equals one generation of wealth; families without real estate are not just poor for one generation, right?

Summary: Urbanization means building cities, which equals economic growth and economic development. Real estate is an important drainage channel for absorbing idle capital. Idle capital entering real estate will drive up housing prices, enhance homeowners' ability to withstand economic fluctuations, and at the same time worsen the financial situation of proletarian families. People without property are most afraid of economic recessions and unemployment. In a world without anchor currency, real estate is the anchor for families to resist economic fluctuations. If you insist on asking when the best time to buy a house is, it is during an economic downturn, and a once-in-a-lifetime opportunity is during an economic downturn before the Federal Reserve starts QE4.