I looked at the change curve of the Bank of Canada's interest rates over the past 10 years. Although the change range is not large, the shape is steep and steep, and the traces of human manipulation are very obvious. The changes in interest rates are not naturally formed by the market based on the relationship between capital supply and demand, but are hand-drawn by the central bank. No one's financial situation can be adjusted instantly as interest rates fluctuate up and down. When interest rates are cut sharply, savings cannot be invested immediately. When interest rates are raised sharply, debts cannot be paid off quickly. The magnificent adjustment seems reasonable and legitimate, but it brings great challenges to the financial arrangements of ordinary families. Slamming the brakes or accelerator will cause chaos in the car.
The sharp cut in interest rates in March 2020 left everyone at a loss, so the central bank governor came out to declare in July: "Interest rates will not be raised until 2024. I am very sure that we will keep interest rates low for a long time." At that time, the president still had a good reputation, and people believed in him, so the real estate market was booming. Two years later, in March 2022, the central bank changed its face and began to raise interest rates sharply, saying it wanted to control inflation. This kind of policy has forced families who bought houses and took out loans to get into the wrong car. The depositors who have been clamoring for the central bank to raise interest rates in the past two years are not doing well either. With the inflation rate of 6.3%, all deposits have even worse real negative interest rates. Families with no deposits, no loans, and fixed incomes have suffered the most severe blow from inflation; families with deposits and loans, and more deposits after the savings and loans are offset, enjoy real negative interest rates on deposits; families with deposits and loans, and more loans after the savings and loans are offset, enjoy real negative interest rates on loans. What if there are no deposits and no loans, just stocks? Unless it escaped from the top in January this year, there is a high probability that it has been trapped now. Ordinary people really don't have a good life. Even if you are a pure net loan long, it will be very difficult if you can't bear the negative cash flow. After all, the monthly loan payment is calculated based on the nominal interest rate.
Where is the safe haven for Canadian middle-class family wealth? I received two text messages last week, which gave me a sense of security. The first one was from Rose, and the content was very short. "Thank you, Mr. Hongyu, for helping me and my husband complete our first refinance in life! He helped us clarify our thinking and no longer be afraid of the mid-life crisis." The second one was from Jack, and the content was a little longer. "Brother Hongyu, today is a coincidence. It happens to be the third year since my wife and I started investing in real estate. Three years ago today, we moved out of our big house with a loan of 900,000 dollars. The annual income is more than 90,000, and the start-up capital is 280,000. Today, 4 investment houses have been cashed in, and the family wealth has exceeded 7 figures in three years. We are very lucky and grateful for your guidance and help all the way when we were most confused. "Obviously, these two young families have got rid of their anxiety, and they have landed safely when many people were drifting at sea. Financial security is highly subjective , some people have no financial security throughout their lives. The feedback from the two young families mentioned above makes me feel that it is not difficult to gain a sense of security, but two conditions are required: 1. Convince yourself that you have found a method of accumulating wealth that can be practiced repeatedly; 2. Confirm that you have already accumulated a certain amount, and the future will only get better and better, and your retirement life will not have a hard landing in your living standards. Income and wealth are two different things. Wealth, not income, brings security . I also received a call from Peter last Friday. He said that his wife's temporary job had been converted to a regular job. The originally scheduled one-year probation period ended prematurely in less than half a year. I told Peter that their family can immediately refinance the investment house, and the cash in hand can now be safely used to accelerate the repayment of the mortgage, reducing the negative cash flow on the home, thereby offsetting the negative cash flow increased after the investment home is remortgaged. Your family's wealth accumulation will soon start, and financial security will be achieved within two years.
01 Use the last to make wealth, use the basics to keep it.
The first sentence of Irving Fisher's "The Theory of Interest" is " Income is a series of events ", period. This sentence was used as the title of a book by Mr. Zhou Qiren, which was published in 2015. Humans are the only creatures on earth that need to consume to survive. Other species do not need to make money and consume. Money earned is income, so to make money you need to do a series of things to have income. If you don't do things, there will be no income, and your survival will be in crisis. Civilization and progress have pushed human life expectancy to 85 years. If you retire at 65, 20 or more years without active income will become unbearable.Saving income and turning it into assets, and then using it for consumption when active income is lost, is an investment activity in which income is turned into assets. Investment is people's last job. The more assets are accumulated, the more financial security is guaranteed. The central bank keeps fiddling with interest rates, which affects the value of many people's assets. Assets that are clearly sufficient for retirement may become insufficient. Inflation weakens purchasing power and reduces everyone's consumption ability. If you encounter today's inflation level after retirement, it may not only be a matter of anxiety, but a matter of survival. Most of the uneasiness and anxiety of middle-class families come from worries about financial security, including unemployment, asset devaluation, unexpected longevity, serious illness, etc. The solution is to find a reliable, repeatable method to turn income into assets. Such assets need to be able to resist inflation.
The effect of the Canadian tax system is to take away the most taxes when people's income is high, which brings great challenges to families who are accumulating wealth. In order to avoid paying more taxes, some families hide or do not file tax returns truthfully. As a result, they do not have proof of income to obtain mortgage loans, and therefore cannot afford inflation-proof properties. It's not good to leave your savings there and depreciate, so you fall into various financial management pits, and the strange phenomenon of "if you don't manage your finances, your money will never leave you" appears. Before investing your savings in financial assets, I recommend watching the movie "The Wolf of Wall Street." This is a Hollywood movie based on a true story. The protagonist Jordan encountered a stock market crash shortly after becoming a stockbroker and lost his job. He quickly found a sales job selling "penny stocks." Hong Kong people call stocks that cost a few cents a share "penny stocks," which are stocks of companies that are on the verge of bankruptcy. The commission for selling such stocks is 50%. His wife asked him why he didn't sell such penny stocks to rich people. He said that rich people are too smart and the most greedy are the poor. Inspired by his wife's problem, he founded his own company, pretending to sell some blue-chip stocks to middle-class families. After gaining trust, he sold penny stocks to these middle-class families. He took advantage of the middle-class families' eagerness to accumulate wealth and made huge commissions. His job is to exploit the greed of investors. A magazine reported on his behavior. Do you know the result? A large number of stockbrokers came to his company to apply for jobs, and within a month the number of employees in his company doubled. The story is not over yet, you can read it yourself. We are used to describing Wall Street as the base of greed, but what this movie actually reveals is: Greedy, pushy middle-class families created Wall Street. When middle-class families choose a stock broker, there are countless wolves of Wall Street waiting for you. This is one reason why the certainty of return on investment financial assets is low. Instead of investing in assets that you know well, you gave your money to wolves who took advantage of human greed and invested in completely unfamiliar assets. The results can be imagined. Since there is no income threshold for middle-class families to invest in financial assets, there are many participants but few profits. The correct investment mentality is very important. First of all, don't be impatient, as wolves prey on people who are eager to get rich; secondly, you must invest in assets you are familiar with; and finally, you must accept average returns rather than thinking about beating the market. I recommend everyone to read "Mutual Fund Common Sense" by John Bogle. My advice to people around me about financial asset investment is to order the S&P 500 Index Fund and buy John Bogle's Pilot S&P 500 Index ETF. The reason is that the handling fees are the lowest and the liquidity is the strongest. It represents the economic development of the United States. 500 companies represent all walks of life and 36% of operating income comes from overseas, so the dispersion is sufficient. Families with financial assets of more than 1 million can consult a financial advisor. If the assets are too small, they do not need the advice of others.
Canada's best asset is real estate in its metropolitan areas. Among the English-speaking Five Eyes countries, Canada has the friendliest immigration policy, so population growth is guaranteed, which has firmly supported housing prices. In recent years, the central bank has issued excessive currency, and housing prices have become a currency reservoir. The ability of housing prices in metropolitan cities to withstand inflation has been outstanding. There are thresholds for investing in real estate, so even if a bubble occurs, it will be difficult to burst, because households that can get loans have strong risk resistance. As housing prices continue to rise, blue-collar investors who used to speculate in real estate are being squeezed out of the market, and real estate is rapidly concentrating on a small number of households with strong risk tolerance, so the real estate market is becoming more and more stable. This round of interest rate hikes is a good thing for the market to clear up. Those households that cannot bear the negative cash flow will take profits and withdraw from real estate investment, because there is no threshold for selling a house. If you are fooled, you can sell it, but it is not easy to buy it back. Because there is a loan threshold, it will not be easy for those who withdraw from real estate investment to want to come back. I'm very confident about the future of property investing because income thresholds are playing a positive role in weeding out unqualified investors and short-term speculators and replacing them with households with greater risk tolerance.A family like Jack's is a family whose risk-taking ability has grown rapidly. When only one person had a professional income when he was a new immigrant, now two people have income, and the family income can reach more than 140,000. In addition, he became financially enlightened relatively early. He rented out his home with huge debts and lived in his own house. In just 3 years, he was freed from financial security anxiety. Families like Jack are replacing the property renovators who once dominated the real estate investment market and become the main force in real estate investment.
In "Historical Records. Biography of Huozhi", Sima Qian said when talking about the method of accumulating wealth, "Use the end to make wealth, use the foundation to keep it." At that time, industry and commerce were the last industry, and agriculture was the main industry. Sima Qian had long discovered the method of accumulating wealth: Work hard and do business, buy a house and land to keep your wealth . Today, this rule still applies to middle-class families. After various unreliable attempts, most middle-class families that can successfully achieve financial security rely on real estate investment. After the reform, joint production contracting, township and village enterprises, intellectuals going overseas, and national foreign trade did not create a middle class. Only when the commercial housing market was developed and people bought houses did China's middle class emerge. Becoming middle-class depends on real estate. Maintaining middle-class status and getting rid of anxiety also depends on real estate. In fact, the biggest obstacle to acquiring real estate is income. The current job market in Canada is very hot, and many jobs are vacant. So there is a scene where Peter's wife quickly changed her job from temporary to regular. If the employer does not go through the regularization procedures in time, Peter's wife will jump to another job.
02 The Key to Real Estate Investment: Income
There is only one key to the lock of real estate investment, income. You can transfer all your overseas assets without reservation, rather than just transferring some living expenses. Banks can use high-net-worth asset projects to specially approve mortgage loans, but this method is difficult to continuously increase mortgages and hold more than 6 properties, unless you have more than 3 million in financial assets in Canada. With neither income nor high-net-worth financial assets in Canada, real estate investment is a dead end. Those who achieve extraordinary results are not to be envied.
Peter's salary is very stable. Peter's wife has quite an entrepreneurial spirit and has started many businesses on her own or in partnership in the past 5 or 6 years. Due to her unstable income, Peter's family has very few chances of successfully applying for a loan. It only occurs when his wife has a stable income for two consecutive years. This moment is very difficult to capture. Peter respects his wife's choice very much. Although he knows that it is not good for accumulating wealth, he still supports his wife's career. I recommended the book "Five-Minute Business School" by Liu Run to Peter's wife, and suggested that she evaluate the feasibility of starting a business in Canada based on the full resource elements required by entrepreneurs in the book. The epidemic once again interrupted Mrs. Peter's entrepreneurial journey, and their family's plan to invest in a house and add a mortgage was postponed for another two years. After the epidemic, Peter's wife temporarily gave up the idea of starting a business and found a full-time job, but the probation period was long. Starting a business is difficult in Canada because the population is so small that it is not easy for any business to start and develop. Canada's financial environment is very lagging behind that of the United States. Silicon Valley banks are very active in lending to entrepreneurial companies. As long as there are venture capital investors, Silicon Valley banks can use equity as collateral and provide loans based on the proportion of venture capital investment. But I haven’t seen any startup in Canada get support from commercial banks so easily. There are many entrepreneurs with unfulfilled ambitions like Mrs. Peter, and business failure is a high probability event in Canada. After the wife finds a job and becomes a regular employee, the express train of Peter's wealth accumulation can start, because Canada is a financial environment dominated by big banks. These banks that are too big to fail are very old-fashioned and conservative. For example, temporary work requires two consecutive years of income, and self-employment requires two consecutive years of income. Only salary income does not need to be looked at for two years. In the past, these rigid requirements limited Peter's family's ability to borrow, making it difficult to convert their income into property. For real estate investment, what kind of income the bank recognizes is crucial. Families that can meet the bank's requirements can make great strides in accumulating real estate wealth. Those who do not meet the requirements can only get a loan when they meet the requirements. Those borrowers who bypass banks are currently in an embarrassing situation. Loans from non-bank financial institutions have high interest rates and short terms, which are very suitable for real estate speculators. When interest rates were low in the past two years, some people criticized me online and said that they had borrowed money without income. The most important thing is to get a car. The interest rates of non-financial institutions did not exceed 4%. Well, you will know how ruthless these financial institutions are when you renew your contract a year later. Even if you want to sell your house at that time, you have to look at the market's attitude.For these people who are too proud too early, only the market and reality can educate them, and I have no obligation to do so. There is no shame in bowing to the rules of big banks. Canada does not lack the incremental wealth created by entrepreneurs, because the existing wealth is already very huge. In Canada, getting a share of existing wealth is the goal of middle-class families. Because the competition for existing wealth is a zero-sum game, the competition is fierce and cruel. Without the leverage support provided by banks, it is difficult to obtain existing wealth alone. . Peter's wife worked hard and struggled, and finally gave up the idea of starting a business temporarily. Obtaining an income recognized by the bank is very important to their family. Only when the family income of the two of them exceeds 140,000 in salary income can they accumulate wealth. Otherwise, it will always be dormant. The wealth accumulated by parents is very important to the second generation of immigrants. Many second generations of immigrants have defected to the arms of the NDP because of their deep feelings of victimization. This is very sad. If you don't work hard in the front wave, you will be miserable in the back wave. Qian Lang sacrificed some of his entrepreneurial dreams. If he could help Hou Lang do what he likes to do without becoming paranoid, it would be considered a big achievement in life.
Income and wealth are two different things. Many people can't tell the difference and think that someone with a high income is a rich person. The gap between rich and poor is often misunderstood. It seems that people with high incomes are rich and people with low incomes are poor. In fact, this is not the case. 56% of Americans will enter the top 10% of the country's high-income group for one year in their lives. Of course, the vast majority of people cannot stay there. Income is like a big river. In the 40 years of working, 56% of the rivers have the chance to become the river with the largest amount of water in a certain year. Wealth is like a lake. Comparing the size of the lake depends on the stock. The tax bureau only levies taxes in large rivers, not in lakes, unless the water in the lake flows out again. When the river water is the largest, the most taxes are paid. At this time, the river water needs to be diverted into the lake to survive, and when needed, the lake water can be allowed to flow out to nourish life. When the income is high, it is easy to get a loan to buy a house, so when the income is high, the real estate investment strategy is to buy, buy, buy. After passing this village, there will be no such store. Many people do not understand this truth. The most typical situation I have seen is that real estate agents invest in real estate by themselves. According to the bank's policy, real estate agents are self-employed. It depends on the income of the past two consecutive years. In 2016 and 2017, when the real estate market was good, real estate agents had higher incomes. That is, when the river water was the most, you should buy a house in 2018, that is, 2018 is the time when the river water needs to be directed to the lake. However, the real estate market in 2018 was very sluggish, and many real estate agents did not dare to buy houses and invest. Therefore, what I see is that because the income of real estate agents is procyclical with the market, and at the same time, many people cannot distinguish the relationship between rivers and lakes, that is, the relationship between income and assets, they have missed the opportunity to accumulate wealth. In 2022, the same mistakes as in 2018 are happening again. There is an opportunity to buy a house with a loan. When you can buy it, buy it. , missed it, the river water was taxed in vain, and the income failed to be converted into assets. Many people misunderstand the buy-buy-buy strategy I mentioned. Of course, buy when you can buy. When you can buy, you can get a loan. If you look forward and backward at this time, is it possible to buy when you can’t get a loan? Online discussions are often ineffective communication, showing three typical characteristics of ineffective communication: 1. Personal attacks, 2. Questioning motives, 3. Infinite expansion. "Is now a good time to buy a house?" This is an invalid question. If you can buy it, it is a good time; if you can't buy it, it is useless to ask. Remember one thing, Income is time-limited. When you can get a loan to buy a house, don’t miss it. If the income conditions are not met, you need to work hard to create the conditions yourself, just like Peter's family, and strive to meet the bank's requirements in terms of income.
03 Ship of Theseus
Although there are many books and experience sharing that teach people to find financial safe havens and ways to accumulate wealth, it is very difficult to find the one that suits you. In Canada, we need to do as the locals do. The savings rate of Canadians is very low, from 5.8% before the epidemic to 11% now. However, Canadians have a lot of wealth, mainly because their wealth is hidden in their houses. 76% of Canada's wealth is in real estate, and other assets only account for 24%. Therefore, if you want to accumulate wealth in Canada as the Romans do, you need to invest in real estate. Real estate as a savings tool will face a problem, what should we do when we need to liquidate it?
Rose has bought 4 investment properties and paid off all the loans for her own home. She mainly relied on Qianlang's help to achieve this. This year Rose applied for a mortgage on an investment property for the first time, and she was very concerned about the cash flow after the mortgage. After getting the approval, he sent me the text message mentioned at the beginning of the article. Faced with future interest rate hikes, inflation and other uncertainties, Rose finally made up her mind and took the plunge for the first time. She applied for a loan and mortgage and prepared hundreds of thousands of cash reserves to cope with the uncertainty. Taking the first step is not easy, but it is important for understanding important financial concepts such as debt, risk, and cash flow. I recently rewatched a video by Robert Chingchi. When he talked about cash flow, he said: Control of cashflow, control of cash flow, is very important for investment ". But his statement was misrepresented as "to invest in real estate, you must have positive cash flow." When the job income is high, investment properties have negative cash flow, which is a way to control cash flow; when job income is low, for example, after retirement, releasing the positive cash flow of investment properties is also a way to control cash flow. When your income is high, investment properties must have positive cash flow, which is completely unnecessary. Compared with other customers, Rose's learning curve is relatively long. Taking the initiative to control cash flow and increase mortgage loans is a breakthrough for her. The spiritual wealth of this loan is more important than cash.
A philosophical proposition older than the Prisoner's Dilemma is the Ship of Theseus. A ship has 10,000 parts. When the ship is constantly repaired and all 10,000 parts are replaced, will it still be the same ship? If not, after which part is replaced, it is no longer the original ship? This proposition has been discussed by philosophers for more than 2,000 years. Although Rose changes parts slowly, she keeps changing them. Every time she makes a breakthrough, she replaces old parts with new ones. Is she still the same person she was 10 years ago today? When we get to Canada, how many parts do we need to update? I think it doesn’t matter whether a ship’s name is Theseus or Rossius. What’s important is that if you want to ride the wind and waves in new waters, the parts that need to be replaced must be replaced. Canadians store wealth in their houses and know how to convert house rights into cash with the help of banks. These new parts are indispensable for the new sea. Sooner or later, they need to be followed up, understood and acted upon. Canada is a naturally good school to learn investment from your rich dad. All you need is practice. Just reading financial articles is useless. If Rose didn't practice it, she would never know what her rich dad meant. When it comes to investment, action is the only criterion for testing truth, because the truth of investment is different in different countries and in different eras. In countries where you cannot buy investment properties or add mortgages to investment properties, the method I mentioned will not work at all, but in Canada this method is the only way to a safe haven for wealth.
04 The wind is strong and the waves are high, should I buy or sell a boat?
Oil prices are still fluctuating at high levels, the U.S. CPI has reached 8.6%, the central bank is going to raise interest rates, and the job market is still hot. If we want to control inflation, we must create a recession, and the future is becoming increasingly uncertain. How to deal with the stormy weather? Real estate serves as a ferry from income to wealth. Should you buy or sell? Or wait and see without doing any harm without buying or selling?
At present, the sudden cooling of the real estate market is not a problem of purchasing power, but an emotional problem. The stress test interest rate for bank mortgage loans is still 5.25%. House prices in May this year were the same as those in November last year. Therefore, compared with December last year to March this year, everyone's purchasing power has increased, not decreased. What has changed is the monthly loan payment. The current monthly loan payment is twice that of last year. The central bank came out to remind everyone that despite the low monthly payments on the loans you received last year, the monthly payments will increase by 40% when the five-year contract expires. I don't know how the central bank knows what interest rates will be in 5 years, so I can't understand the practical significance of this reminder. In short, people are intimidated and emotion replaces reason. As in 2018, some anti-intellectual claims have resurfaced to fan irrational fears. Some people advise homeowners to "escape from the ceiling", some ridicule property buyers since last year who are lifting weights, and some say buying a house now is disrespectful to the market. The market is a spontaneous exchange that occurs when the valuations of the highest bidder and the lowest bidder are consistent. The price is ultimately determined by the scarcity of the target. This kind of transaction is market behavior and happens every day. The market is the market, respect is also the market, and disrespect is also the market. Bloggers who use ignorance as their personality are full of ugliness.
When the winds and waves are high, the trading volume of ships decreases, which is a natural reaction. If your family's financial goal is to sail to a safe haven of financial security, the answer to whether you should buy or sell a boat is clear. It's not every day that you can afford a loan to buy a boat. Because there are opportunity costs, there is also harm in not buying or selling. The group consensus formed by 80% of people is often a herd effect, and it is these 80% of people who own 20% of the wealth. Going with the crowd and being in line with the majority means being like the majority and having no financial security.
Many people are still staring at one question and asking when the Federal Reserve will stop raising interest rates. I remember the Fed burst the subprime mortgage bubble after raising interest rates 17 times in 24 months. If the Fed wants a repeat of the cycle, it will keep pumping until the bubble bursts. From a historical perspective, it is not that bubbles have never burst, but who has survived from the bursting of bubbles? They are those families who can still afford their mortgage repayments even if house prices fall and interest rates rise. Families who bought real estate at high prices before the U.S. real estate bubble burst in 2007 survived the subprime mortgage crisis. Families who did not sell their boats or whose boats did not sink to the bottom of the sea, today, the wealth of these families has sailed into a safe haven.
90% of the uneasy speculations, fears, inquiries, and discussions come from the insecurity of one's own family finances. Financial security can eliminate 90% of the anxiety in daily life. It’s a shame that people have time to worry but not time to work toward financial security. People who spread rumors to cause trouble and incite emotions are the people who are least responsible for their own financial security and the financial security of others. Think about it, if you were tempted to sell your house, what would you do to move towards financial security?
Conclusion:
I really like the words of the German philosopher Simmel: "Money is only a bridge to the ultimate value, and people cannot live on the bridge." I want to say, Real estate wealth is a boat. What we want to go to is a safe haven for wealth. There is no financial anxiety there. It is a paradise for our peace of mind. And this peace of mind is my hometown. Even if we are in a foreign country, real estate is a boat. We don’t have to live on the boat.
My friends who are pursuing real estate wealth and I learn from each other and encourage each other. The progress and achievements of Rose, Jack and Peter are my affirmation. Tell the truth, do the facts, this heart is bright, what else can I ask for.