This article is from WeChat public account: bipolar real estate (ID: earthabglobal) , author: bipolar analysts, the subject map from: Oriental IC

If I can afford to pay in full, should I buy a house with a loan? Or, should conditions permit, should we borrow as long as possible and more?

Two or three years ago, this issue did not need to be discussed. Everyone’s point must be: Leverage, increase leverage.

Ten years ago, when we saw that some people in the central and western regions generally chose to buy a house in full, we couldn’t help but mutter that the concept of investment really lags a lot behind.

At a dinner in the beginning of the year, a friend asked, “How long should I borrow to buy a house?” A friend at the bank said with a smile, “Of course it is the longest loan.” At the time, I didn’t feel wrong.

However, when the cold winter of the property market hits this year, all of our real estate investors and practitioners have been frozen: If the house price drops, it may not even be possible to sell a house.

As an overseas real estate practitioner, bipolar analysts want to look beyond the past 20 years of domestic real estate experience and look at the global real estate market. To reflect, are we too optimistic about mortgages?

Will inflation continue?

Our infinite optimism about mortgages comes from an experience: inflation will swell debt.

Today, a colleague in the company also gave a story of her parents: “At that time, my uncle bought a house in Beijing and had to pay a mortgage of 300 yuan per month. It was really stressful for the family at the time . But what about today, 30 years later? Just a meal. “

Yes, real estate is really a very good anti-inflation asset. Even with hyperinflation such as Syria, the conversion of house prices into U.S. dollars is still not significantly lower than before the war.

Before the crisis, the exchange rate against the US dollar was 47: 1. Today, the official currency exchange rate is 435: 1, and the black market ratio is close to 900: 1. However, Syria’s house prices have not underperformed the outbreak of inflation. At the end of 2018, the price of a 100 square meter apartment in the Damascus AI Razi area had reached 250 million Syrian pounds, or about 538,000 US dollars.

It ’s not cheap. Can you imagine that Syria ’s housing prices are higher than domestic first-tier cities?

For example, in South America in the 1990s, most countries had annual inflation rates above 100%. In 1990, the inflation rates in Brazil and Argentina both exceeded 2000%.

In the 1990s, Russia’s annual inflation rate was as high as 2,500%. During the Civil War, the United States once reached an annual inflation rate of 3000%.

In Venezuela in 2019, inflation is as high as 50 100%. Even when converted into dollars, real house prices have fallen by 80%. The mortgage you owed? Obsolete overnight.

Even if we haven’t encountered hyperinflation, let’s take a look at the relationship between house prices and the fair value of homes in the United States after 1990.

House prices as a whole are growing with inflationBe consistent. Even in the absence of a speculative boom, debt will continue to swell, house prices will rise immediately, and the annual rental income is rising. This is the real gift that real estate gives to those who trust it.

Once you encounter a good market environment, you can even outperform inflation substantially like 1997-2006.

Under long-term inflation, there is no problem in buying a house with a loan and buying a house with more money.

However, is the economy always inflationary?

Some time ago, a point of view swiped the screen: “After removing pork, it is basically deflation.” We do not comment on the right or wrong of this view, but one thing we need to realize is that deflation is possible.

The economy will always be inflationary. This is a misconception that our prosperity has developed in recent decades. If you look at inflation data after the founding of the United States, you can find that before 1940, the United States was in fact deflationary half of the time.

How strong the United States was after 1940 Needless to say, only three years saw national deflation. Even so, however, there is the possibility of sustained deflation at the state and city level.

For example, from 2018 to 2019, the overall inflation rate in the United States remained around 2%. Inflation rates in cities such as San Diego, Denver, and Phoenix have returned to zero.

Is it possible for big countries to have sustained deflation?

A good example is our neighbor Japan. After 1999, Japan has been in a state of overall deflation, and it did not return to inflation until 2013.

Not just Japan, countries such as Bulgaria, Croatia, Greece, Poland, Sweden, and Spain have all experienced or are experiencing overall deflation in recent years. Germany, Thailand, these countries that we think are better overall, also have the risk of local or quarterly deflation.

Yes, from a global perspective, long enough cycles, real estate is more likely to outperform inflation. But what if you encounter long-term deflation? You know, if you add leverage to enter the market, even if house prices have not fallen in a deflationary environment, taking into account the cost of funds for leverage, the actual house prices will fall year by year. Not to mention deflation, rents are falling.

As an investor, can you handle it?

Even in the context of persistent inflation, it is unwise to blindly choose a loan for a longer period, aside from the market.

It’s like a young American who was educated in 1946 and said, “You must buy a house with a loan. You see, from 1942 to now, house prices have risen by 40%. If you add 10 times leverage, you have Earned 400%. “

He bought it on loan, then what? By 1966, after paying back the loan for 20 years, he suddenly found that the house price had not reached the level when he bought the house.

In 1977, someone told the same story to that generation of young Americans. The young man repaid the loan for 20 years, and in 1997, he suddenly discovered that history repeats itself.

In 2006, everyone was crazy. Add leverage! Buy on loan! Make sure!

As a result, the world has collapsed.

Summary

The Chinese economy today will not experience long-term deflation like Japan, and we have enough confidence in the Chinese market.

If you have just bought a house for self-occupation, if you do n’t have the economic conditions, there is nothing wrong with more loans. From a sufficiently long period of time, the reduction in loans and interest rates by inflation is still the general trend.

But we must understand that In a non-inflation environment, real estate is highly leveraged, follows and surpasses inflation, and the substantial advantage of reducing debt over time is non-existent.

Since this year we have seen the distress of many real estate investors around us.

A friend is under the pressure of not having a home loan and wants to sell his house. Very good location, but after many price cuts, still unable to sell.

In terms of real estate investment, a large proportion of investors who have entered the market with a leverage have no intention of investing in long-term value. We have grown so fast in these decades that we are all impatient.

People have considered inflation in the process of investing in real estate, but few people have considered the inflation rate, and fewer have considered deflation.

According to the current rate of return on domestic real estate, which is close to the lowest level in the world, assuming that inflation will remain at a low level in the next 5 years, your debt will hardly depreciate. Would you still like to borrow money to support your home?

This article is from the WeChat public account: bipolar property (ID: earthabglobal) , Author: Bipolar Analysis 师