Historical article note: This article was originally published on 2019-02-28. 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.
Real estate, as an asset, is on average 2-3 times the GDP of each country and accounts for about 50% of a country's total assets, with stocks, bonds, gold, antiques, and other assets making up the remaining 50%. In Canada, 76% of wealth is in real estate. If we treat real estate investment as an important investment area, we should conduct careful and rigorous research on the inherent cycles of the real estate market. There are many experts and scholars studying real estate bubbles, and there are quite a few works on this topic, but the fact always proves that 95% of these research results are alarmist and of no value; meanwhile, professionals who study real estate investment are almost nonexistent, and micro-level research or data for real estate investment in a specific city is even more scarce. From existing materials and books, we can roughly understand that the real estate market has certain cycles, and if the patterns can be found, it will have a positive effect on investors making correct judgments. The saying 'long-term look at population, mid-term look at land, short-term look at finance' was summarized by China's macroeconomist Ren Zeping, and currently, this saying is regarded as the best summary of the cyclical patterns of the real estate market. In 2015, when some people in China were selling houses to speculate in stocks, he loudly proclaimed that housing prices in first-tier cities could still double. This precise judgment earned him the title of 'China's Real Estate Prophet.' It seems that the cycles and trends of real estate can indeed be understood; once the patterns and trends are really grasped, the returns from concentrated investment can be very considerable.
The earliest person to study real estate market cycles was Homer Hoyt, a real estate agent in Chicago. He was not satisfied with just being a broker earning commissions from buying and selling, so he analyzed data on Chicago real estate transactions from 1830 to 1933, a span of 103 years, and drew some very interesting conclusions: the interval between two troughs or two peaks is 18–20 years; the fluctuations in the real estate market are large, especially in transaction volume, which can reach 25 times the level of the trough at its peak; real estate market peaks do not necessarily coincide with stock market peaks, but troughs usually coincide with stock market slumps; the highest returns in real estate come from investments made during a depression, but these investors are usually not real estate professionals because the income and cash flow of real estate practitioners are pro-cyclical—when the real estate market is down, these professionals do not have money to buy cheap properties. Homer Hoyt found that in Chicago over 103 years, the best-performing real estate investors were merchants, retailers, and traders—entrepreneurs from non-real estate industries who had cash, vision, and decisiveness. The above content can be referenced in Twod's book 'The Inevitable Economic Cycle'. What insights do these real estate cycle characteristics offer to Chinese people living in Canada? Firstly, speculating on the bottom of a real estate cycle is extremely difficult; with an 18-year cycle, the duration is too long, and the critical point is that when the bottom appears, a real estate investor must possess vision, cash, courage, and borrowing ability, among other powerful tools, to catch the bottom. Starting work at 23 and retiring at 65 gives a 42-year career. Being able to catch two perfect buying opportunities and being fully prepared for them would be very romantic. Therefore, bottom-fishing in real estate is something that can happen by chance but cannot be relied upon deliberately; neither waiting passively nor rushing in is advisable. The last downturn in the Canadian real estate market occurred from 2008 to 2009, and it stabilized and began to recover in 2010. The subsequent seven consecutive years of rising housing prices and increased transaction volumes attracted many new real estate professionals, who actually have no firsthand experience of market fluctuations. When investors listen to real estate sales personnel for advice, they should understand whether the person giving the advice truly understands real estate cycles and has experienced the lows of the cycle.
In recent decades, the real estate cycle has not lasted as long as 18 years, mainly due to government intervention in the real estate market. When it comes to intervening in real estate, no one is more confident than China. In his new book "New Cycle," Ren Zeping explains his 2015 conclusion that "first-tier city housing prices will double" as follows: In the long term, look at population—only the populations of first-tier cities can continuously increase over the long term. Therefore, the trend of housing prices in first-tier cities has only one direction: up. In the medium term, look at land—the government’s urban development policy is to control the growth of large cities and actively build small towns. This policy obviously conflicts with natural principles because the government, being so powerful, confidently reduces land supply in first-tier cities, artificially creating a market economy 'BUG.' It is well-known that the origin of any wealth opportunity is always in these BUGs that resist market rules. With restricted land supply in first-tier cities, housing prices soar. In the short term, look at finance—in 2015, China’s monetary policy was to cut interest rates and reduce the reserve requirement ratio, releasing a flood of money. First-tier cities with incoming population faced declining land supply and monetary easing, causing housing prices to skyrocket. This inference is my favorite: the logic is thorough and needs no data to support it. For residents living in Toronto, the real estate market cycle characteristics that fit reality best are similar to the patterns of first-tier city housing prices, so the above logic is very enlightening for us. Toronto is the city in Canada that absorbs the most new immigrants and incoming population, so the long-term trend of housing prices is: up. The former Ontario Liberal government’s Fair Housing Plan aimed to curb demand, artificially creating conflict between locals and foreigners, and using locals’ negative sentiment towards real estate as an accelerant to disrupt potential buyers’ expectations. Although it did not limit or reduce land supply, it was another form of artificially creating a market economy 'BUG,' presenting an opportunity for those who understand economics, have cash, insight, and borrowing capacity. Interest rates and loan policies determine whether real estate prices can skyrocket. In fact, for long-term real estate investors, the specific period when prices surge is meaningless. Those who are eager to see prices soar are typically individuals who, due to misjudgment in the past two years, were trapped at high prices and are now struggling to get free.
People like to discuss the topic of “protecting the exchange rate or protecting housing prices,” but Chinese people in Canada don’t know how to localize this phrase. In Canada, “protecting the exchange rate or protecting housing prices” is equivalent to “protecting interest rates or protecting housing prices.” When the U.S. raises interest rates, does Canada follow? If it does, interest rates go up, the exchange rate is maintained, capital flight is prevented, but domestic mortgage borrowers suffer, willingness to buy homes declines, housing prices fall, the wealth effect disappears, consumption drops, and unemployment rises; if it doesn’t, the Canadian dollar depreciates, capital flows out, liquidity problems arise, and housing prices remain firm, with real estate transactions still active. The question of “protecting interest rates or protecting housing prices” doesn’t need me to answer—Canada’s central bank has already answered with its actions: protecting interest rates. As long as the U.S. raises rates, Canada follows, regardless of the consequences. Two-thirds of Canadian real estate transactions are second-hand home sales, meaning transactions among existing homes contribute to GDP only through real estate commissions and land transfer taxes. The central bank has never refrained from raising rates due to concerns over the volume of second-hand home transactions. What we see in reality is that Canada’s monetary policy is Made in USA. The U.S. balance sheet reduction process is slowing, and rate hikes are currently on pause. Next steps? Even the Federal Reserve Chair doesn’t know. I mean, in case, maybe, possibly, the Federal Reserve cuts rates, then according to the logic above, what should happen to Toronto’s housing prices?
Toronto is a first-tier city in Canada and an international first-tier city. There are very few cities suitable for civilian residential real estate investment, and there are no more than 20 in the world; fortunately, Toronto is one of them. An important characteristic of an international first-tier city is that its population is composed of three groups: locals, non-locals, and foreigners. The prejudice and unfriendliness shown by the Ontario government towards foreigners will sooner or later have a cost. By looking at those tenants paying rent above 5,000 yuan, we should understand that we must treat these foreigners well. Non-locals, including new immigrants, people coming from other provinces for study or work, whether renting or buying, are the main force driving up housing prices and rents, the creators of ultra-low vacancy rates, and also the reserve force for real estate investors. Locals, having bought their homes early, are now renting or selling their well-located properties, profiting or cashing out and moving to more distant locations. This triad real estate market should operate fairly in a free market, and any form of disruption or intervention is temporary.