Buying a house without renting it out is either consumption or gambling

In the comments section of the previous article about the rent-to-price ratio, I found that many people still don’t understand and are still looking at houses through the lens of the past—so I’ll explain further.

There are only two correct ways to use a house—two, two ways! One is consumption, meaning owner-occupancy. Calculate how much it costs you to use it each year—like a car. How big a “hat” it wears is determined by the annual depreciation: assume a loss of about 1% to 2% per year. Then you buy the house with a total price that you can afford based on how much loss you can bear.

The other is investment. Investment means collecting rent. If you don’t collect rent and you just hold the property expecting prices to rise, then it probably shouldn’t be called investment—it’s gambling. And it’s a relatively poor kind of gambling, because the expected value is very likely negative. A house will deterministically become older and wear out. But assets like stocks, gold, Bitcoin, and the parts of things like that that don’t produce cash flow—although they also depend on someone else buying the asset later at a higher price—they at least don’t necessarily deteriorate in the same deterministic way. It’s not like a fish or fruit that spoils over time, making it hard to use as a long-term inflation-hedging asset and a store of value.

Of course, some people say that in the core city areas, the location is always going to take up a slice that gets smaller and smaller. Even if the house gets old, the central “prime land” is still limited. But that’s actually fine. Whether we talk about the bull market cycles of the past 20-plus years, besides a small number of periods where there was a mismatch between “people and land,” it’s only been investment in those times. At other times, it’s just gambling—houses should have fallen long ago, and they simply shouldn’t have risen that high. It was completely detached from China’s actual reality of wealth and poverty. It was an abnormal and imperfect market, layered with the government’s determination to “prop it up” from above—creating the property bull market. But you, in advance, “shouldn’t” have known that the government would not allow a pullback and would force the housing prices higher. So after subtracting those who profited in the early stage of urbanization, and aside from cases where you have strong personal factors, other years when people made money by gearing up were no different from those who opened high-multiple contracts in Bitcoin and ended up winning. The gains were all lucky money. Even now, some people still bring up 2016, saying, “If you didn’t buy a house, don’t regret it—look at the precedent from 15 and 16.” This is completely mistaking winning a low-probability bet for your own investment ability.

As for the so-called city-center locations, why can houses be sold at high prices even as they get older? It’s not because everyone loves living in old houses. It’s because people keep betting correctly that demolition will keep being “right.” After the demolition, the old house becomes new, and they can expand their household size and take advantage of the situation. So everyone becomes used to not discounting old houses—sometimes even charging a premium for particularly old city-center properties—and it’s only because the city-center just happened not to be relocated. That is luck—pure luck. But the fact is that demolition expectations are gambling. They are not investment. Once the era of large-scale demolition and rebuilding ends, when houses are old, they are simply not worth much anymore—regardless of what kind of city-center area it is. Most cities over these past 20 years or so have gone through center relocation and dispersion. The so-called “core locations” are only bets that in the next 10 or 20 years—or before you sell—things won’t change.

So when it comes to this thing called “a house,” the only thing that can truly be called a “reasonable investment” is collecting rent, and the rental return must be higher than the costs required to maintain the house plus annual depreciation. If it’s purchased with a loan, then you also need to add the mortgage interest, allocated into the yearly cost. That’s all. If it can cover those costs and still be higher than the risk-free rate, then it’s a worthwhile investment; otherwise, it’s a failed investment.

As for whether the house’s market value—after subtracting depreciation—will rise or fall in the future, that’s all luck. Other than using your experience and understanding to judge the current price cycle and the overall economic cycle, there are policy changes, whether the prosperity level of your area will change, whether supporting facilities will move, whether the city itself still has net population inflow, whether industries can be sustained, and a whole series of variables you absolutely cannot know in advance. Its relationship to your “foresight” isn’t that strong.

Many people think they are doing “investment” in real estate, but in reality, they’re only gambling. Unless what you allocate to real estate is only a small portion of your total assets—for diversifying risk and increasing the resilience of your investment portfolio. Almost no wealthy people have real estate as the majority of their assets.

So how do you distinguish investment from gambling? Your investment portfolio must have at least one underlying logic that guarantees it will always go upward, unaffected by the performance of any other variables—so even if other variables don’t go the way you expected, and your luck is very bad, at worst it will only extend the time it takes for you to realize investment returns, but it won’t cause losses. That is what investment is; otherwise, it’s all gambling.#比特币站稳8万关口