In Hard Times, Should You Sell Land or Buy Land?

Recently, someone on social media shared a story about losing 400,000 RMB after selling their house. They listed several reasons for selling, one of which was a reluctance to pay interest to banks, which they referred to as "capitalists." I commented under the post: “Farmers sell land during hard times to survive; landlords buy land during hard times to grow their wealth. Viewing banks as mere capitalists is flawed logic—your loan comes from depositors' savings. How you use that loan depends on your ability.”

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Since interest rates have risen, many households are facing increasing financial strain. In this environment, deciding how to navigate current challenges while planning for the future has become a pressing issue for many families. Some households find that past decisions, like purchasing property, have led to today’s difficulties. The choice of whether to hold on or let go of their property has become a significant dilemma. The same interest rate environment and economic challenges—akin to a “hard year”—affect households differently, just like the contrasting decisions of farmers and landlords mentioned above.

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In Canada, approximately 30% of households own their homes outright, with no mortgage debt. I call this group A. Another 35% own their homes but carry a mortgage—this is B. The remaining 35% rent their homes; I refer to them as C, with their landlords collectively called D. Some households belong to both A and D, while others might fall into B and D.

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From this breakdown, it’s clear that A and A&D households likely make up more than 30% of the population, and these groups generally do not face excessive debt burdens. This aligns with advice I’ve consistently given over the past five years: strive to become part of group A as early as possible.

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For renters in group C, unless their financial situation has improved significantly compared to the past, it’s challenging to become homeowners in today’s high-interest-rate environment. Both A and C households are not the primary focus of this discussion.

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01. The Lucky Cat and the Pi Xiu

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Note: In traditional Chinese beliefs, Pi Xiu embodies both the desire for material wealth and the ability to safeguard it. This contrasts with symbols that merely attract wealth, as Pi Xiu emphasizes retaining it and ensuring financial stability.

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Many real estate investors pursue positive cash flow, sometimes to an extreme. If a property doesn’t generate positive cash flow, they won’t invest. To achieve this, some increase their down payment, purchase properties in remote areas, or even resort to illegal subletting or operating short-term rentals. These investors treat their rental properties as “Lucky Cats”, expecting them to attract wealth. However, since interest rate hikes began, many “Lucky Cats” have failed to generate wealth and instead are draining money. For investors relying on positive cash flow from their rental properties to cover basic expenses like groceries, the situation has become dire.

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Currently, “Lucky Cats” in less desirable locations face significant challenges. Their owners are under pressure from two fronts:

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Tenants struggling financially may fall behind on rent.

Declining property values deter potential buyers, who are waiting for prices to drop further.

Overemphasizing cash flow and purchasing low-quality properties is like an open wound, and high-interest rates are the salt. Property owners operating short-term rentals in British Columbia have faced policy changes that have become their “Waterloo.”

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Investing in stocks is like drinking hard liquor—if you can’t handle it, don’t try. Bonds are like beer—too much can also make you dizzy. Real estate is like fine wine—the region matters most, and it’s expensive. If you ignore location and chase bargains, it’s best to stay away from real estate.

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Another group of “Lucky Cats” has turned against their owners with even greater force. Some investors who purchased pre-construction condos in 2019 and 2020 planned to flip them at a profit before completion. But as completion nears, they’re finding no escape route. Even selling the “Lucky Cat” at a loss may not be an option. For example, pre-construction units in Toronto sold for $1,500–$1,800 per square foot during the boom, but now, as units are being completed, market prices have fallen to $1,100–$1,200 per square foot. Selling at a loss is difficult because buyers are scarce.

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Consider this case: in late 2019, someone purchased a 600-square-foot pre-construction unit for $900,000 at $1,500 per square foot. By late 2024, its market value is $720,000 at $1,200 per square foot. The bank would loan 80% of the market value, or $576,000. Having already paid a 20% deposit of $180,000, the investor faces two choices:

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Complete the purchase by securing a $576,000 loan and paying an additional $144,000.

Sell the contract. If the sale price is $720,000, the investor loses the $180,000 deposit. In a distressed market, selling for $680,000 results in a $22,000 total loss.

Those who bought pre-construction in 2021 and 2022 may face even worse outcomes when their units are ready.

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Over the past decade, people who profited by flipping or renovating properties have mostly exited the market. During the days of easy profits, home prices were lower, and small teams could quickly remodel and flip properties. If they failed, they could hold on as landlords. Today, with high home prices, being stuck as a landlord without an exit plan can be disastrous. In Vancouver, the proportion of speculative flippers among buyers dropped from 16% to 6% over the past 10 years. Pre-construction investors may have to learn the hard lessons that renovators experienced: sometimes, losses are unavoidable.

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Real estate investors fall into two categories: small landlords and institutional landlords. Among small landlords, some follow a “Lucky Cat” strategy—buying low, selling high, and constantly trading properties. Others are “Pi Xiu”: they hold multiple properties long-term without selling, overcoming challenges and steadily growing their portfolios. These “Pi Xiu” are rare and resilient.

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In Canada, the key to real estate investment is not timing the market but how long you hold and how much you own. The longer the holding period and the larger the portfolio, the more financially secure you become. For families without financial security, the best way to combat anxiety is to emulate the Pi Xiu: acquire and never sell, devouring everything without letting go.

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The differences between “Lucky Cats” and Pi Xiu are striking. The “Lucky Cat” flaunts its small gains, while the Pi Xiu remains discreet. More importantly, their motivations differ: Pi Xiu aim to accumulate wealth over a lifetime, sacrificing immediate consumption if necessary. “Lucky Cats” focus on increasing current income. Pi Xiu understand the mindset of “Lucky Cats,” but the reverse isn’t true—a difference akin to that between a swan and a sparrow.

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In a high-interest-rate environment, some people will first lose wealth. Over the next year, “Lucky Cats” are likely to shed wealth aggressively, while Pi Xiu will continue to devour opportunities.

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02 Life Is a Continuous Series of Choices

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Canada’s economic indicators are currently strong, but many individuals still feel overwhelming pressure. For households with loans, the strain is evident, but even those without debt are grappling with the burdens of inflation. Both businesses and individuals identify high interest rates as their greatest challenge.

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Critics of the Trudeau government argue that excessive pandemic-related support caused a secondary wave of economic harm in Canada. While this perspective holds some truth, it also oversimplifies the issue. As economist Richard Koo noted in a lecture, Canada and the United States had the highest unemployment rates globally during the pandemic, necessitating the largest rescue packages. These measures also led to the highest wage increases during the recovery period. Canada's inflation has shifted from a supply-demand imbalance to income-driven inflation, meaning it will take longer to stabilize. This, in turn, suggests that elevated interest rates may persist longer in Canada than in other nations.

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In economics, Public Choice Theory examines how governments make decisions to maximize societal welfare within limited resources. It also highlights that governments often choose options favoring reelection. The choices made by the Canadian government during the pandemic shaped our current environment. However, the motivations behind those decisions are now less relevant; what matters is how we address today’s challenges. Once individuals delegate authority to the government, they lose control over public decisions and must accept the outcomes. Yet, more critical than public choices are personal choices.

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When marrying, couples are asked—whether by a priest or a civil officer—if their decision is voluntary. Similarly, signing a loan agreement requires written confirmation of consent. Free will is fundamental in any civilized society, enshrined both in natural and statutory law. Contracts signed under free will must be honored unless proven to have been made under duress or mental incapacity.

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I once joked that if I retire and write a book, I already have a title in mind: Monthly Payments. These payments directly relate to debt sustainability, making them a critical consideration when choosing a loan. During periods of low interest rates, the allure of variable rates was strong, and many families opted for them. For those fortunate enough to have fixed monthly payments despite rising rates, it’s a stroke of luck. Conversely, those with adjustable payments face much tougher circumstances. Fortunately, interest rate choices are not permanent. Even if you secured a fixed rate three years ago or two years ago, you now face a fresh decision.

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Every choice is based on available information and reasonable predictions for the future. Nobody is infallible; outcomes won’t always align with expectations. Choosing is distinct from gambling. Signing a variable-rate loan without understanding its terms leans more toward gambling than informed decision-making.

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A by choice attitude contrasts sharply with a by chance approach. Making decisions by chance undermines one’s sense of agency and existence. For those intrigued by this perspective, existentialist philosophers like Sartre and Heidegger offer profound insights. Existentialism posits that humans define themselves through their actions, unlike inanimate objects, which exist without agency. Heidegger poetically described being as “the unfolding of meaning,” emphasizing that our actions define who we are. He also famously referenced the poet H?lderlin: "Man, full of toil, still poetically dwells on this earth." While the phrase suggests that one’s next action can always carry poetic significance, it has ironically been co-opted by real estate developers to market suburban housing projects.

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If you signed a loan agreement by chance, perhaps luck wasn’t on your side this time. If you made an informed, voluntary choice, then embrace the consequences. Life is inherently random and devoid of fixed structures or ultimate purposes, making it light and free. However, every decision carries weight and meaning, as Czech author Milan Kundera explores in The Unbearable Lightness of Being.

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Whether or not you have a spouse is likely a result of your choices, not chance. Likewise, wealth and poverty may involve luck, but choices can alter the trajectory. Few people want to rely entirely on luck throughout life. Lottery winners succeed through chance, but chess champions prevail through skill. Position yourself wisely between these extremes: decide whether you wish to live by chance or by choice, and take responsibility for your answer.

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Remember, the stronger your capabilities, the greater your capacity to make sound choices. If your financial situation feels like a cruel twist of fate—like during the U.S. subprime crisis when underqualified borrowers secured loans they couldn’t sustain—there’s no need for regret. Let fate take its course.

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If you made an informed choice, accepting negative cash flow and passing a stress test to secure a loan, stick to your decision and bear its consequences. For B and B&D families, deciding whether to persist or walk away is critical. A B household that abandons its home returns to renting (C status). A B&D household can sell investment properties to become debt-free (A status) or refinance using methods like those discussed in my article Paying Off Your Mortgage Overnight: How It’s Done to transition into A&D status.

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Everything is the result of choice.

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03 Is Borrowing to Invest Still Worth It?

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In a thought-provoking essay on debt, Professor Chen Zhiwu highlighted an intriguing historical comparison: in 1800, Qing China and neighboring India had overflowing treasuries, while Britain and the United States were drowning in debt. At the time, Britain owed ￡840 million, and the U.S. had $75 million in debt. Fast forward to today, and every heavily indebted nation of the 1800s has become a developed country, while nations with surplus treasuries remain developing or underdeveloped.

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Chen argues that countries bold enough to borrow heavily 200 years ago essentially guaranteed their path to prosperity. Borrowing required parliamentary approval, meaning that indebted governments were accountable to their citizens for every dollar spent. In the U.S., government shutdowns frequently occur because Congress needs to debate whether to approve more borrowing. The U.S. is a country with its own "chickens" (resources) but excels at borrowing others’ “chickens” to produce “eggs.” The more the U.S. borrows, the more it is held accountable, which increases trust in its creditworthiness. This dynamic is why, despite high fiscal deficits between 2021 and 2022, the U.S. dollar's share of global SWIFT payments increased from 39.38% to 46.46%. The oft-discussed "de-dollarization" remains largely theoretical.

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What applies to nations also applies to households. In my line of work, I’ve encountered numerous real estate investors, and those with longer histories of property accumulation are typically in stronger financial positions. This year, U.S. short-term Treasury yields exceeded 5%, but that didn’t deter the government from borrowing further. Similarly, seasoned real estate investors understand that high interest rates usually mean less inflated housing prices, creating opportunities. When rates are low, rapid price appreciation and increased inventory offer chances to capitalize as well. With rates peaking, people are eagerly anticipating rate cuts, knowing they will reignite market demand and competition, pushing prices higher.

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Savvy investors recognize that waiting for a “perfect moment” is futile. Like the mythical Pixiu, they seize opportunities when they arise, regardless of timing. The more “chickens” (resources) a household has, the more confident it becomes in borrowing to produce “eggs” (returns). This logic applies equally to families and nations.

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When governments borrow confidently at high rates, it signals trust in their ability to repay—unlike households, which cannot print money. However, families can “ride the government’s coattails.” Events like the subprime crisis and pandemic-driven stimulus measures have inflated asset values, benefiting households with stocks and real estate.

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For instance, during the pandemic, the Canadian government guaranteed $50 billion in small business loans through the CEBA (Canada Emergency Business Account) program. Businesses that borrowed $40,000 and repaid $30,000 by the 2023 year-end would see the remaining $10,000 forgiven. Similarly, businesses that borrowed $60,000 and repaid $40,000 would have $20,000 written off. For non-repayments, these interest-free loans would convert to interest-bearing ones, pending bank approval. Many small businesses have already defaulted, leaving commercial banks to recover losses from the government as guarantor. This could force the government to either raise taxes or print more money to cover shortfalls.

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The Bank of Canada, too, has been deeply affected. Pandemic-era bond purchases yield under 2%, but the Bank now pays over 5% on deposits, leading to daily losses. By Dec. 2024, these cumulative losses reached $8.5 billion. Historically, the Bank of Canada contributed profits to the federal budget; now, the reverse is true, with the government covering its losses. Printing more money to manage debt seems more likely than raising taxes, which risks alienating voters.

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For real estate investors, the high-rate environment underscores the government's fiscal vulnerability. The pandemic may have ended, but its economic aftershocks linger. Government interventions and policies—such as universal basic income (UBI)—are poised to intensify. Canada may well become the first nation to implement UBI on a national scale, reflecting the strong public appetite for such measures. Similarly, initiatives to provide affordable housing continue to proliferate, suggesting that large-scale monetary expansion is inevitable.

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Investors also draw confidence from Canada’s housing crisis. Decades of undersupply will take at least 30 more years to resolve, making quick fixes implausible. As I outlined in my September article, Don’t Waste Canada’s Housing Crisis, this enduring shortage creates long-term investment opportunities.

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Confidence stems not from arrogance but from capability. Those who struggle in prosperous times are unlikely to thrive during downturns. The same applies to nations like the U.S. or Canadian multi-property investors. Their willingness to borrow reflects their financial strength, with the ultimate “hard power” being the ability to borrow.

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In navigating interest rate fluctuations, Charlie Munger’s wisdom applies universally:

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“To live to 100, you must endure rates from 0% to 20%. When rates are at 0%, seize opportunities; when rates hit 20%, know how to endure.”

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Whether for governments or households, success lies in balancing opportunity and resilience.

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04 Should You Sell or Buy Real Estate in Tough Times?

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First, let’s address a key question: Is 2023 or 2024 a “tough year” for you? If not, think twice before selling your property just because others are.

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The saying, “Farmers sell their land in tough years to survive,” illustrates a harsh reality. For homeowners with just one principal residence (Group B), a high-interest-rate environment can feel like a tough year. Families that bypassed mortgage stress tests and entered the market during the low-rate frenzy of 2020–2021 are reminiscent of pre-2008 subprime borrowers in the U.S., who struggled to sustain their loans when rates rose. For these families, the best course may be to offload unaffordable debt to avoid greater financial harm.

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Owning only a primary residence with significant mortgage debt is a fragile financial position. Such households are highly susceptible to external shocks, risking cash flow breakdowns. Variable-rate mortgages can lead to immediate payment increases when rates rise, while fixed-rate mortgages may result in sharp payment hikes upon renewal. Whether it’s a slow or sudden financial squeeze, households in this situation (Group B) are at risk.

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The solution is simple but difficult to implement:

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Work harder and increase income.

Pay taxes diligently.

Aggressively reduce your mortgage balance.

Selling property during high-rate periods isn’t easy either. Larger homes can sit on the market for extended periods, and even condos may struggle to sell. Households whose mortgage balances exceed five times their annual income face two choices: stretch their finances to maintain payments or sell the property sooner rather than later.

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Toronto’s condo market in 2024 mirrors the conditions of 2014: an oversupply of units as pre-construction condos reach closing, creating downward pressure on prices and sales volumes. The pre-construction resale market has seen sharp declines, impacting the broader resale condo market. Investors offloading units in distress are learning painful lessons similar to those from a decade ago when pre-construction buyers faced significant losses in 2014–2015. However, history shows that markets recover. By 2016 and beyond, condo prices experienced strong rebound gains.

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In tough times, only well-prepared investors—those with substantial resources—are positioned to acquire assets. The gap between wealthy and less affluent individuals widens visibly during these periods. When stock markets crash and headlines proclaim massive losses in market capitalization, astute investors like Warren Buffett see opportunities, not evaporated value. Wealth changes hands, moving from distressed sellers to those with foresight, resources, and resilience.

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The world often equates wealth with boldness, decision-making power, vision, intelligence, and action. Those who buy during downturns, such as tough years in real estate, not only help sellers in distress but also build their wealth. As Friedrich Hayek suggested, “Business is the greatest public good,” and economist Professor Zhang Weiying echoed this by stating, “Business is the greatest form of charity.” Buying during tough times is not just a financial transaction—it can be an act of public service.

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Household Groups in a High-Rate Environment:

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Group A: Households with a fully paid-off primary residence.

Group B: Households with a primary residence that still has an outstanding mortgage.

Group C: Renting households.

Group D: Households with investment properties.

Group A&D: Households with a paid-off primary residence and investment properties.

Group B&D: Households with a mortgaged primary residence and investment properties.

Households in Groups A and A&D have significant advantages in the current environment and are well-positioned to be the key buyers during tough years. Those in Groups B and B&D, while currently constrained, can aspire to become impactful investors over time through perseverance and careful financial management.

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In real estate, tough years are not just a test of survival but an opportunity for those with the vision and resources to thrive.

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Conclusion:

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For most Canadians, this year has not been a "tough year." The term "tough year" as used in this article applies only to households experiencing challenges in meeting their debt obligations.

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Imagine Canada received an average rainfall of 500mm this year. We cannot conclude that every backyard in the country has a lush green lawn. Some households may have seen only 50mm of rain, leaving their lawns dry and brown. Similarly, using GDP to generalize the financial health of every household can lead to significant errors in judgment.

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How to navigate tough times is a decision every family must make for themselves—no one else can provide the perfect answer. Whether your household should sell property or hold onto it is a deeply personal choice. Advice, at best, serves as a reference. Ultimately, your decisions shape your life.

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If what feels like a tough year for others happens to be a year of abundance for you, then purchasing land during tough times can be a wise choice. Over a long enough timeline, you'll likely experience interest rates ranging from 0% to 20%. Current rates, while high, are no reason to despair or shift blame. The pandemic may be over, but we are still paying for its aftermath.

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The only way to overcome risks, anxiety, and feelings of inadequacy is to keep running—and to run fast and far enough to create a safe buffer in life. Households in Group A and A&D are in a secure position because of their relentless efforts, not because they sat back and waited for opportunities to appear.

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To all the "lucky cats" among our readers who are sprinting through life: may you one day become the resilient "Pi Xiu" safeguarding your place on the island of safety.

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