Housing Bubbles And Japans’ ‘Lost Decade’
One reader wants to compare the current US housing bubble with Japan’s. “I don’t know if you’ve ever discussed this but I’m interested in hearing about the differences & similarities between the U.S. today and the peak and decline of Japan’s real estate.”
From the Times Online. “After a decade and a half of recession, deflation and national funk, Japan may be bouncing back. If so, it has much to do with couples like Masaaki and Mikiko Isozu. Like young Japanese families across Tokyo, they have just reached a momentous decision. After years of renting, they have decided to buy a home.”
“But the Isozus’ excitement is tempered by a deep caution. The anxiety can be summed up in a single word, ‘bubble,’ the period of high growth in the late Eighties that burst so disastrously in the early Nineties and pitched Japan into 14 years of economic stagnation. ‘When it comes to property, we can’t shake off the memory of the bubble,’ says Mr Izozu. ‘Could this be another bubble? We can’t be sure of the recovery yet.’”
“The evidence suggests that, after several false dawns, Japan’s economy is expanding once again. Yesterday the Government announced that consumer prices were rising for the first time in eight years. Unemployment is sinking. Across the capital, old buildings are being demolished to make way for new shops, offices, hotels and homes.”
“But, however encouraging the figures, this will be a recovery very different from Japan’s last period of high growth. No one of the Isozus’ generation can forget the disastrous popping of the bubble economy in 1992. Intoxicated by surging asset prices, banks lent money on the back of apparently unquenchable property values.”
“When the bottom fell out, debtors found themselves unable to meet repayments. Bankruptcies, unemployment, homelessness and suicides soared. The job of writing off bad loans, streamlining companies and dealing with the surge of dismissals and bankruptcies took more than ten years, the so-called ‘lost decade’ in which the economy was further damaged by a spending slump.”
“Little wonder, then, if many people are watching and waiting. Japanese are the world’s most assiduous savers, but after 14 years of recession, a quarter of households have no savings. Such families are likely to use their salary rises and bonuses not to buy new cars and flat-screen televisions, but simply to replenish bank accounts.”
Maybe some economic historians can help out here. Japans’ stock and real estate bubble were huge. Wasn’t the land of Japan ‘worth’ more than the entire US at one point? I understand speculation among individuals was really crazy, which was why so many were bankrupted. On a corporate level, I’ve read that their refusal to book loses was another reason for the long deflation. Here is a link on how they are trying to do it different this time.
‘Japanese authorities have raided the offices of Royal Bank of Scotland (RBS) in Tokyo as part of an unprecedented crackdown on the banking industry.’
What about the oft-mentioned prospect that the imperial palace grounds were “worth” more than the state of California?
BTW, I’ve been in and out of Japan every year since ‘98. The last two trips to the in-laws (winter and spring breaks) were the first time, in my relatively short Japan experience, that I have seen construction. Both individual homes in the suburbs (not many SFR housing developments in Japan) and megastructures in Tokyo are starting to pop up. In fact, there is a new skeleton of a fairly-large-footprinted building going up directly in front of Tokyo Station.
Of course, the highway construction (jobs!) projects have been ongoing. You want bridges/highways to nowhere? Try Tokyo’s surrounding prefectures.
were doing the exact same things
1. public works to fight deflation -katrina,iraq,dhs
2. BB will keep the bubble going
3. free health care and other senior diaper goodies
the jap gov “saved” jobs and “created” jobs
sound familiar
1921 was the year of the greatest drop in US CPI
why? no gov bail
America’s economy looks awfully like Japan’s after its bubble burst
Why Japan-style malaise could happen here
Fleckenstein is a sharp tack…..
http://moneycentral.msn.com/content/P116564.asp
Yeah, they had 50 year mortgages, the streets were bleeding money so everyone thought they would be able to pay it off. Prices are half of their peak, but still very expensive relative to incomes. The place I worked in Tokyo has homes going for about 50 million yen, or 500 thousand greenbacks, STILL a lot of money.
I doubt another bubble will form there, it destroyed consumer confidence and so many people’s net worth. My aunt paid 600K for her Tokyo Mcmansion, now its 300 with no buyers to be found. One difference, they had Honda and Toyota with decent future outlooks, a lot rosier than GMS and Fords. God help us all when the shit hits the fan.
BETTER HAVE YOUR GOGGLES ON!
If that much brown stuff is coming, go the face mask… or better yet the whole body protection gear might be appropriate.
The reason Japan did not tank completely was that they could export to the US. If the US consumer drops due to a housing bust, who will Japan sell too? A housing bust in America will result in a global depression.
“But the Isozus’ excitement is tempered by a deep caution. The anxiety can be summed up in a single word, ‘bubble,’ the period of high growth in the late Eighties that burst so disastrously in the early Nineties and pitched Japan into 14 years of economic stagnation. ‘When it comes to property, we can’t shake off the memory of the bubble,’ says Mr Izozu. ‘Could this be another bubble? We can’t be sure of the recovery yet.’”
“The evidence suggests that, after several false dawns, Japan’s economy is expanding once again. Yesterday the Government announced that consumer prices were rising for the first time in eight years. Unemployment is sinking. Across the capital, old buildings are being demolished to make way for new shops, offices, hotels and homes.”
Too bad for Japanese homeowners that the bursting of the world’s 800lb economic gorilla’s (aka Uncle Sam’s) housing bubble will likely pull their housing market back underwater.
I have been thinking the same thing for a few years now. What happens to Japan when we stop buying stuff from Sony, Toshiba, Sanyo, NEC, Sharp, Canon, Fujistu, Hitachi, Pioneer, Matsushita (Panasonic), Nintendo, Mitsubishi, Honda, Suzuki, Nissan, Lexus, Infinity, Toyota…
Thanks for clarifying my point. Japanese manufacturers are at least as housing-ATM-dependent as are US firms whose sales have been bolstered by the debt-funded US consumer credit binge of the last six years.
I don’t know any numbers, but I keep reading that Japan has been extremely successfull lately in expanding its sales of expensive industrial products to China instead of the US.
Even if China gets into some trouble from a US recession, a significant part of the Japanese production can be absorbed by the Asia/Pacific region.
nhz,
Yes. IMO, a healthy economy requires decent production capacity and consumption capacity. Most Americans seem to exaggerate the importance of the U.S. Right now, there are **billions** of people in emerging markets who have little or no debt, rising incomes and are not swimming in excess “junk” which most Americans have. These countries also have lots of productive capacity. The US has neither. We are dead in the water, IMHO, with no real **needs** and no ability to compete with other countries on the production side.
The only thing that could possibly bail us out would be dollar debasement, but that would have other horrible consequences as well. Not sure how we’re going to get bailed out of this one.
?
Not a question mark for you, Stucco, just wondering where my post went. It’ll probably show up in a minute.
Ah, there it is.
And everyone else’s, too. We delayed a necessary correction in ‘02 and now we’re going to take Japan, China, Europe, and everyone else with us. We’re the last link in a global correction…
no, I think Europe is the last link - they are still on easy money without any serious recession. But that recession will come for sure once the easy money solution stops working.
My limited understanding is that Europe’s baby-boomer retirement induced fiscal crisis will be even worse than that of the U.S. But of course the worst of that is probably >10 years out, and there’s little reason to believe European democracies produce politicians that are dramaticly more concerned with the future than those of the U.S.
when i wrote to a realtor about the need to reduce (substantially) prices at the current environment, he wrote back thus:
Sir,
I’m not sure what you are referring to but I am a Realtor and believe I
try
to explain to sellers that prices need to adjust but that’s the
toughest
sell in the business.
Anyways, thanks for your email.
Max Introini
954-347-8729 cell
Kroll Realty Co., Inc.
5447 N. Federal Highway
Ft. Lauderdale Fl. 33308
————
that tells me there are still few more months to go before many sellers realise……
There is one key difference between Japan and the US.
Japan - saving nation
US - spending nation
That one parcel alone should keep the US economy afloat even after the popping bubble. People have been groomed to believe they need a new car every couple years. House be dammed I don’t see too many people trading in Suburbans to drive 1975 Pintos. Plus the Federal gov’t will do everything available to keep values somewhat reasonable including inflating away the debt if necessary.
The coming depression will quickly change us back to a nation of savers, just like the last one. Unlike before, though, the government’s options are all bad ones; don’t count on them doing anything worthwhile.
Anyone who thinks BB can readily inflate us out of the mess ought to check out how many basis points the long-bond yield has gone up in the past sixty days, and to reflect on the fact that the rate of increase will accelerate if a widespread perception develops that he would rather defend subprime homedebtors than defend the currency.
The US was not much of a saving nation back in the 1920s, as back then we were using I/O loans to buy Florida swamp land, and leveraging our corporate stock purchases with margin loans. Even shoeshine boys knew that buying and holding stock was the obvious path to riches. For some reason, this party seems to have come to a grinding halt around 1929 or so.
It is very strange to me how US homedebtors have recently adopted a deep-seated belief that a house can provide a risk-free income source in perpetuity whose earning stream exceeds that of the household labor supply. Anyone (like myself) who grew up with grandparents who were raising young families during the Great Depression can fully grasp what it means to scrimp and save. I am not just talking about saving money here, but foregoing the smallest consumer purchases in order to make sure there would be enough household resources to feed and clothe the family. I am afraid these lessons are long forgotten from the collective US mindset, and will consequently have to be relearned the hard way.
GetStucco -
Can you dumb this down please?
“and to reflect on the fact that the rate of increase will accelerate if a widespread perception develops that he would rather defend subprime homedebtors than defend the currency.”
Eyeball this yield chart for the thirty-year T-bond, while reflecting on the fact that BB took over as Fed Chairman on February 1, 2006:
http://tinyurl.com/qykot
You need to divide the right scale of the chart to back out the 10-year T-bond yield, which has evidently increased from 4.5% to 5.2% since the beginning of March 2006 — a big increase over two months.
Long-term Treasury bonds pay a nominally fixed stream of payments in $US; if the Fed neglects its duty to maintain price stability, then the bond market reacts negatively by demanding a higher yield to cover the risk of higher inflation that will erode the value of future interest payments (”coupons”). The quick increase in long-term bond yields can be interpreted to mean that the bond market is worried that Ben Bernanke will turn out to be an inflationist.
The long-term bond market sold off in spring 1987 (the year Alan Greenspan took over at the Fed), setting the stage for the stock market crash of October 19, 1987 (Black Monday). Generally speaking, higher long-term bond yields reduce the value of stocks, other things being equal.
Long-term mortgage rates more-or-less move in lockstep with the 10-year T-bond yield, but at a level about 1% higher.
“need to divide the right scale of the chart by 10 …”
“and to reflect on the fact that the rate of increase will accelerate if a widespread perception develops that he would rather defend subprime homedebtors than defend the currency.”
- Higher inflation helps fixed-rate borrowers at the expense of lenders, as debt payments are denominated in nominal dollars (not real, inflation-adjusted dollars), so the value of a fixed stream of future dollar payments is reduced over time by inflation.
- Higher inflation will not help ARM borrowers much, as interest rates go higher with inflation, resulting in upward adjustment to ARM rates. So subprime borrowers with ARMs may not get much relief, even if inflation increases sharply.
- Pausing the series of Fed Funds rate increases while inflation seems to be going up is a risky strategy for the Fed, as they may create the perception that they will not take the necessary measures to keep inflation under control. Our government has relied heavily on foreign demand for our Treasury debt to finance our housing and consumption expenditures in recent years. Letting inflation get out of control increases the risk that foreign demand for our government debt will dry up, resulting in a sharper selloff in long-term Treasuries (reflected in accelerating increases in long-term T-bond yields).
“Higher inflation helps fixed-rate borrowers at the expense of lenders, as debt payments are denominated in nominal dollars (not real, inflation-adjusted dollars), so the value of a fixed stream of future dollar payments is reduced over time by inflation”
Usually, the borrowers are not winners too, since their leveraged equity is suppressed by high interest rates. Wasn’t it in Argentina during their peso meltdown, leveraged assets like real estate lost significantly, beaten by high costs of borrowing. RE declined by about 1/2 from the pre-inflation levels.
He can’t win either way. The Fed’s raising rates will kill the credit bubble and earn them the blame for the recession we’ll enter. A pause or rate cut will kill the dollar, driving up rates because no country will want our debt, pushing into a recession.
The Fed is hamstrung; we are headed into bad economic waters no matter what they do. The housing (credit) bubble is dead no matter what.
I’ve said it before and I’ll say it again. The subprime mortgage brokers have been designated this recession’s scape-goat. Bernanke will raise rates until the bubble bursts, speculators are driven out of the market, and the full scope of mortgage fraud is revealed. Then all blame will be off him as the mortgage brokers do their perp walks and he’ll be able to take whatever “emergency” measures he wants.
My prediction: Look for rates on 30-year bills to soar as he defends the dollar while 30-year fixed rates fall to 2-3% as the government prints money and buys MBSs on the open market. At 2-3% the buy/rent calculation goes back to favoring buy. Thus he’ll be able to create his permanently high plateau in nominal values while letting inflation wipe out real values. Buy gold.
Thanks
From observation and conversation in my 4 trips to Japan to visit in-laws, I have to respectfully disagree. It seems that in Japan, more people get new cars every couple of years. Partly cultural, and partly the frustration of younger people priced out of the housing market (IMHO). But they do know how to save!
It is my understanding that after 3 years, inspections are required for registration, and they don’t just TELL you what needs fixing, the inspectors have let to do all repairs that they perceive are required and present you with a bill. I’m guessing that you don’t get by very often with a “headlight alignment” very often.
“When the bottom fell out, debtors found themselves unable to meet repayments. Bankruptcies, unemployment, homelessness and suicides soared. The job of writing off bad loans, streamlining companies and dealing with the surge of dismissals and bankruptcies took more than ten years, the so-called ‘lost decade’ in which the economy was further damaged by a spending slump.”
The parallel buildup in debt-funded asset price inflation in Japan circa 1990 versus the USA circa 2006 is quite hard to ignore, and is likely to result in similar dire consequences once the debt bubble pops.
Someone who passed on to the next world just yesterday is looking on from the afterlife in amazement at how little has been learned from a book he wrote in the early 1990s called “A Short History of Financial Euphoria” –
Be sure to read the last line of this obituary.
http://news.bbc.co.uk/2/hi/business/4960280.stm
Saw that this morning that he died! I met him a few times ~ 20 some odd years ago. Real nice guy, and he had a very dry wit in person, too!
And it took WWII to get us out of it, God bless us!
No it took debt destruction and then spending on new debt for the war too get us out of the depression. At some point debts must be destroyed too resume the cycle. Bring on the debt liquidation.
From what I read, Japan’s economic revival is really an illusion. Over 1/3 of the permanent jobs have been lost and ex-employees are hired back as temporary contractors with lower pays and less benefits (another statistics I read says it costs 1/3 as much to hire the same employee as a contractor).
Japan is losing its middle class big time.
1/4 of Japanese families now have no savings.
NYT: “REVIVAL IN JAPAN BRINGS WIDENING OF ECONOMIC GAP”
well, that also looks quite similar to what is happening in the US and Europe …
The Netherlands was one of the worlds savings champions about 15 years ago; now it is one of the biggest debtors at the personal level (but no worry, we got extremely valuable homes to back all those debts).
The difference in wages between normal workers and high level executives / government officials has soared in the same period.
Small businesses get chrunched while big business has the bigs profits ever year after year. But again no worry, economic growth is accelerating so things will get better (for the few at the top, of course and worse for all the rest).
Sorry for OT (I’ll BitBucket it as well), but the LA Times today is showing a majority of Santa Barbara zip codes with Year Over Year DECLINES:
(City, zip, sfh sold, median sales price, YOY median change, $K sq. ft.)
Santa Barbara 93101 9 $822 -0.8% $741
Santa Barbara 93103 5 $775 -33.9% $911
Santa Barbara 93105 20 $1,181 18.9% $808
Santa Barbara 93108 20 $2,433 -17.2% $1,165
Santa Barbara 93109 7 $1,065 -7.2% $986
Santa Barbara 93110 2 $938 -37.3% $681
Santa Barbara 93111 7 $915 -3.4% $600
http://tinyurl.com/no5xm
Why no big story?
Why no big story by the larger non-bubble media, I mean…
I guess the big story was the UCSD Economic Forecast, which concluded that SB prices will stop going up “meteorically”, and only go up a bit slower over the next several years. Forget about your data that suggests prices are dropping — economists often conveniently choose to ignore evidence which contradicts their stories.
Sorry — meant UCSB (Santa Barbara, not San Diego).
Japan narrowly avoided a complete demand collapse by lowering their interest rates gradually to zero and pumping liquidity into their banking system. This didn’t solve the problem, but delayed it by causing their government to accumulate gargantuan debt. A side effect was that hedge funds and corporations and world investors have dipped eagerly into the Japanese liquidity flood and used it to overinvest in everything throughout the globe. With Greenspan pumping and other central banks pumping (”all together now”), they created an international bubble of epic proportions. The real estate bubble we see now is only a small part of the global liquidity bubble that dates back to 1987 and beyond.
Yes, we will follow Japan into the tank, as will the entire world. If you think outside the real estate box it is truly an amazing thing to see gold, commodities, oil, stocks and real estate all rising together. If you’ll page back through history you will find that this is quite rare. It is a sign that serious problems are being floated on an ocean of cash.
In real estate, the greatest collapses will occur in areas that had the greatest booms (for example, South Florida), but no area will be spared. The midwest didn’t do a full-speed bubble, but home prices went up and everybody leveraged by withdrawing from the home ATM. The leverage is almost a Universal theme. When the leverage begins to unwind it sets off a chain of dominos that will circle the globe and fall for years.
Actually, the prices of commodities are not particularly surprising. They bear a striking resemblance to the late 70s/ early 80s times of high gold and oil and a weak dollar. High gold prices have a particularly strong correlation to a weak dollar.
To your point, stocks and real estate are due a hefty correction. The commodities have a little way to go…
By the way, a heck of a lot of liquidity will be removed when U.S. real estate tanks. A surprisingly large number of our MBSs are in foreign hands.
The earlier poster put it best, Japan a nation of savers, the US a nation of debtors. Not trying to get religous here but the bible even says the borrower is servant to the lender.
In the US the stock market funds companies, shareholders demand high dividends and forces companies to seek short term profits. Nobody saves and consumption is king, the entire opposite of Japan.
A couple of things on Japan:
1. Real estate went down by as much as 90% vs. the peak high.
2. Even having doubled and then some, the stock market is at less than half (of this writing at least) of its previous peak.
3. Moreso than the US, stocks and real estate were tied together, where corporate holdings inflated balance sheets, and you still saw massive P/Es.
Now, finally, most of the bad banks have gone bust or merged out of existence, and the entire bad loan process is largely dealt with. Outsourcing has come, and that is a *good thing*, and there are many reasons to hire contractors rather than “permanent employees”, the first and foremost being that a “permanent employee” can require as much as six months or a year’s severance, while a contractor can be let go when the contract is up. (There are several variations on this, but that is the gist).
I have lived in Japan from 1995 until the present. Here are my two cents on the real estate market here:
(1) Because real estate prices have fallen continuously for the last 15 years, people who buy homes today do so on the assumption that their new home will continue to lose value. Nobody, and I do mean nobody, buys on the assumption that their home will appreciate in value.
(2) Because of (1) above, people who purchase a new home do so because they need the additional space, or want to live near their kid’s school.
The attitudes described above may sound odd to people in the US, but I suggest you get used to them. Because in about 5 to 10 years from now, the average American is going to think the same way.
if people assume that their home will depreciate, why are homes still quite expensive in Japan? Is this because there still is an enormous glut of liquidity present? Otherwise one would assume that homes would sell significantly below ‘fair value’.
It surprises me how sticky the prices are after all those years of downslide. As far as I know, most private real estate and land prices went down only 50% or so from the top, with 70-90% down for corporate real estate.
I think it is because you can’t just walk away from a mortgage like you can in many parts of the US. And declaring personal bankruptcy is career suicide here - you just don’t do it.
So, a tremendous number of people have held on to their property, even though they’ve been underwater on their mortgage for a decade or more. This kept prices from really collapsing.
The question is, how are mortgage costs compared to rents? One would expect that mortgage costs would be quite competetive with rents in a falling price environment. I also gather that the banks have been in no hurry to realize their losses and get bad debt off of theri books, or is that just on the commercial side? A friend of mine also pointed out that it is extreemly difficult to evict somebody from house, whether their lease has run out or not, so that might enter into the equation somehow
Having lived in the Kansai area of Japan for 11 years I’ve seen prices drop by 90% on some properties. I’ve purchased several houses in Kobe and the one I’m living in cost 2 million Yen (about $18,000 US). I think that the prices are comming back, but there are a few cultural differences. Japanese tend to shy away from used housing. So, there are apartments within walking distance of this house that are selling for 15 times my house price. Of course that makes buying new apartments much like buying a new car as the value drops quiclky because it is not new anymore. Interest rates are rising here, so it’ll be interesting to see how the housing market deals with that.