8 Economists' Investment Tips
Political Commissar Lu: “Decoding the Two Pillars of China's Economy” -- Housing is not being touted; what is more important than housing prices is the mobility of the house
Summary of this issue
1. In the context of “staying in a house without frying”, why is it said that the mobility of a house is more important than housing prices?
2. If the transactional nature of real estate decreases, what new thinking can we start with when focusing on real estate?
What's in this issue
We have seen that the current administration has put forward very clear requirements for the regulation of real estate since 2016.
In March 2016, the government work report proposed the elimination of real estate inventories due to the city's measures, because it was felt that real estate inventories in various regions were very high at the time. Real estate purchase restrictions in 21 cities during the “Eleventh” period in 2016 marked the completion of the inventory removal task, and real estate regulation has entered a new stage. What is this new stage? That is, the March 2017 government work report proposed resolutely curbing the excessive rise in housing prices. Intuitively, it only stops housing prices from rising too fast; that is, you can go up, but it's not OK if you go up fast. However, by July 2018, the Politburo meeting of the Central Committee proposed resolutely curbing the rise in housing prices. The word “too fast” has been removed. It used to be possible, but it is not OK if it rises fast; now it just can't rise. In April of this year, the Political Bureau of the Central Committee proposed adhering to the position that houses are for living, not speculation; in May, the People's Bank of China said that in 2019, the central bank will continue to stabilize land prices, stabilize housing prices, and stabilize expectations.
Let's take a look at how our housing prices have changed since 2017?
The following chart shows the month-on-month increase in housing prices in 100 cities since 2013. The month-on-month increase is equivalent to how much the previous month. We can see that before the purchase restrictions in 21 cities in October 2016, housing prices often rose 1% to 2% a month. If you simply calculate the monthly increase multiplied by 12, it will rise at least 10% or more in a year, or more than 20%. After the purchase restrictions, we saw that housing prices began to drop month-on-month.
However, by 2017, the increase had risen again, more than 1%, so at the time, the government proposed resolutely curbing the excessive rise in housing prices. Later, it was discovered that there were some results, and by 2018, it was further proposed to curb the rise in housing prices. Therefore, we saw that after 2017, the month-on-month increase in housing prices in first-tier cities was close to zero, that is, only 0.1% increase every month, and the month-on-month increase in housing prices in second- and third-tier cities also fell back to 0.1% one after another. Of course, everyone should be aware that what we are talking about here is a month-on-month comparison of the average housing price, not a month-on-month comparison of the price of the same house; there may be some statistical errors in the middle.
So now everyone recalls that we have been talking about real estate as an industry highly influenced by policy. In the past, Greenspan said that monetary policy had no way to control asset bubbles well, so after the 2008 financial crisis, everyone was wondering if there were new methods or new policy tools for asset bubbles, so we had the “double pillars” mentioned later. In addition to traditional monetary policy, we also had interest rate increases and decreases, as well as other ways to guarantee macroeconomic stability. For example, we now see that the macroprudential evaluation system of the People's Bank of China has requirements for the amount of real estate mortgage loans, requirements for the amount of real estate development loans, and in addition to monetary policy, there are also regulatory requirements for real estate to control its risks.
The general secretary said that a house is for living, not for speculation; speculation is a colloquial phrase. What is its written word? Deals. If houses are not used for trading, this means that the liquidity of real estate will drop drastically in the future. At the same time, the government also tells you that housing prices and land prices must be stable, and they don't want them to fluctuate; that is, it's not OK to rise or fall. Once housing prices are expected to be roughly like this year and next, the logic of everyone's views on houses will change; it's just a matter of time sooner or later. In the past, buying a house was actually just like buying a stock. Even though this stock didn't pay dividends, I would still buy it because I just wanted to wait for it to rise before selling it to make money. If you tell me that this stock will always be at this price, and there are no dividends, will I still buy it? Why don't I use this money to do anything else? Unless the price of this stock doesn't rise, the annual dividend return is OK.
Therefore, once housing prices have stabilized, it will cause two problems. The first problem is quantity. Originally, volume and price were integrated; after the price was not allowed to move, the quantity would also change. When housing prices are going to rise, sellers won't want to sell if they don't let the price go up; when the price falls, the seller wants to sell, but if you don't let the price drop, the buyer won't want to buy it. Therefore, after housing prices stabilize, the liquidity of the house will drop drastically, because the house is not used for speculation; it is not used for trading; not trading means that liquidity will drop drastically. So I think the online section also has popular wisdom; it says be careful that you'll be poor in the future and only have a house left. What does that mean? Housing prices are generally stable, but if you're in a hurry and plan to sell your house, you'll find that it's not easy to sell.
Therefore, I often say that future houses are a bit like the jade bracelets that everyone wears. People always say that jade will take tens of millions of years to form, so they are all scarce. The more you dig, the fewer and fewer. Isn't this the same as talking about houses? Houses in good locations are scarce, and there are fewer and fewer. So when you go to the jade market, the jade seller tells you that the price of jade has increased again; it will rise 20%, 30%, or more in almost a year. Many years later, I think very well. I think the jade I bought for 10,000 yuan back then is now almost worth 100,000 yuan because it should have been worth almost 100,000 yuan. But if you really don't have enough money and want to sell jade, can you sell it for 100,000 yuan? It can't be sold. I think the house in the future might be like this. You have thought of it very well yourself, but if you really don't have enough money and want to exchange it for money, it won't be that easy. This is the real meaning of the house we are talking about for living in, not for speculation.
Another question is, if housing prices don't change much, other than a house I live in, I need to see if the return on rent can at least reach the level of a deposit, or better at the level of bank financial management; otherwise, why would I buy so many houses.
However, at least from a static perspective, the return on rent for a house now doesn't seem very impressive. For example, for a 100-square-meter house in Shanghai, the monthly rent is about 8,000 to 10,000 yuan, but how much does a 100-square-meter house cost to sell? A house that can be rented at this price will probably sell for 10 million. If you think about it, how much is the return on rent? Assuming a monthly rent of 10,000 yuan, or 120,000 a year, the return on rent is only 1.2%. I think this is lower than the interest rate on deposits, and lower than the return on financial management. In the past, people always habitually extrapolated and thought about the current situation using the old thinking from more than 20 years ago, but once they discover that housing prices will actually continue to be stabilized in the future, I think sooner or later, everyone will begin to look at the problems of the real estate market with a new way of thinking.
That is the content of this course, thank you all.
This issue's guests
Chief Political Commissar Lu has been deeply involved in financial and real estate-related research for many years. He has also been the chief economist of Huafu Securities for many years. He has been awarded the top ten most watched economists in China many times, and is hailed by the market as a “forecaster” level gold medal analyst.