8 Economists' Investment Tips
Lu Ming: “The Spatio-temporal Pattern of Real Estate in China” — two important variables in the room for rising housing prices
Summary of this issue
Why does real estate have an investment function?
The room for housing prices to rise is determined by two important variables
What's in this issue
I think many people may have overlooked one point. Real estate is a product that naturally has an investment function.
Why does it have an investment function? Generally speaking, everyone should believe that income will continue to rise regardless of whether it is a country or a city, but the rate of increase is fast or slow. If you understand this, plus the relatively fixed ratio between rent and income I mentioned before, you should believe that as time goes by, rent will continue to rise in a city. There is also a proportional relationship between rent and housing prices, so you should be able to introduce housing prices that will continue to rise over a long period of time; it's just a question of whether they rise more slowly or faster. The faster a city's income rises, the more you should believe that in the long run, local housing prices will continue to rise, and the rate will rise a little faster.
Let's think about it. If you have a sum of money in your hands as an investor, you want this money to preserve and increase in value. At the same time, based on the reasoning I just mentioned, you judge that housing prices will have an upward trend in the long run, then at this time you will choose to buy a house. By buying a house when the price hasn't risen, you have locked in the cost of buying a house. If housing prices do continue to rise in the future, doesn't this constitute a return on your investment? This is a natural attribute of a house; it itself has an investment function. Because according to what I just said, there is room for the value of a property to continue to rise as income rises.
Moreover, the real estate price problem within a country is actually mainly about the issue of urban housing prices. Everyone thinks that in a developing country, farmers are constantly entering the city. This is what we usually talk about in the process of urbanization. Moreover, this country will have big cities and small cities. Not only will rural residents enter the city, but urban residents will also have a problem choosing where to stay. As I will talk about later, there is a trend around the world, and the population is gradually migrating from small cities to big cities.
Thus, the room for rising housing prices in every city depends on the two most important variables on the demand side. One is income level, and the other is the rate of population inflow.
How would you judge that? The faster a city's income rises, and the more people flow into the region, then the demand for housing in this area is supported by actual demand. In the long run, the rising trend of housing prices in this area will be more intense. From an investment perspective, real estate in this area is more valuable for investment.
Having realized this, let's talk about China again. For a long time, our interest rates have been regulated by the government. Let's think about what determines interest rates? For investors who buy a house, interest rates determine the cost of a loan to buy this house.
Because we in China are implementing a policy that encourages capital accumulation and investment, interest rates are actually being lowered by the policy. What does this mean? This means that if you buy a house through a loan to invest, the investment cost is actually not high.
If you see that investment costs are not high, interest rates are relatively low, and housing can be purchased through mortgages, and at the same time, you also see a city, especially the richer and larger city I just mentioned. It has room for long-term demand growth. If you were someone with money to spare, what would you do? You'll try to take out a loan to buy a house.
I think today's middle-aged friends in Shanghai will probably all regret why they didn't start buying a house 10 years ago, even though they thought it was very expensive at the time. This is one of the buying motivations brought to the real estate market by the investment function I just mentioned. You will buy when housing prices have not risen to a higher level, and the sooner you buy, the more room you can enjoy future housing price increases.
When people do this, what kind of results will come out? Even when income was not rising in this city, people started buying houses. Moreover, the lower the interest rate, the more you expect the city to have more population inflows in the future, the higher the level of income growth in the city in the future, the sooner you can buy houses, and the more houses you can. Moreover, the more friends who understand the investment principles I just mentioned, the more people will buy a house. What kind of situation would this cause? Even in the early stages of the real estate market, housing prices had already begun to rise before income had risen.
How is the price-to-income ratio calculated? It's the average housing price divided by the average income, or average wage. Many friends say that housing prices are too high. My income isn't high enough, so I can't buy a house, but you need to know that when you can't, there are probably many people in the market who can afford it. In the real estate market under a normal market economy, not everyone will be able to afford a house. Using the logic of economics, if everyone can afford a house, it's not an equilibrium, why?
If everyone in this city could afford a house, and you just happened to be one of the high-income earners, what would you do? Buy more, buy a little more, then the price of housing will rise. When some people with strong financial strength use houses as investments, then relatively speaking, low-income groups will not be able to buy houses. This is the balanced performance of the market.
Next, people may ask me, so don't low-income people need a house to live in? It's not. They can rent a house, and public rental housing and low-rent housing provided by the government can also meet their needs. In this sense, we say everyone should have a place, but not everyone can afford a house; this is a relatively normal state of the real estate market.
However, due to the truth I just mentioned, I'll repeat that when a real estate market is in the early stages of development, and since the real estate market is a market with investment functions, when you buy a house, you look at the room where the price of this house will rise in the future. The faster the income level of this place rises, the faster the population flows in, the sooner you buy a house and buy more houses. At this time, housing prices will rise faster than income.
At this time, if you use the housing price to income ratio as a measurement indicator to measure whether there is a bubble in housing prices, it will be seriously misleading. Because even under normal market economy conditions, if a local real estate market has a relatively good investment value, there will be a situation where the ratio of housing price to income is relatively high. This is one reason I want to tell you.
That is the content of this course, thank you all.
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