Is the Japanese property market set to crash again?

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Amid the gloom of a worldwide economic slowdown there are serious concerns about the Japanese economy and the Japanese property market market which has come under severe pressure over the last few months. This is not the first time that property markets have been under pressure in Japan with the “economic bubble” which began in the 1960s spectacularly bursting in the early 1990s and literally holding back growth in Japan for over a decade.

The great property crash of the early 1990s

The growth in the Japanese economy from the 1960s right up until the end of the 1980s was phenomenal by any standards. This was a country which was going places, this was a country which was in demand and this was a country which was averaging annual economic growth of 8% over the 30 year period. While the final throes of the economic bubble occurred between 1986 and 1990 this was a disaster which had been waiting to happen for many years.

A look back in history shows us there were a number of reasons why the Japanese economy grew substantially and finally burst in dramatic fashion :-

Tariffs

After the end of World War II the Japanese authorities introduced a number of tough tariffs and policies which were aimed at encouraging the Japanese public to increase their savings. This massive increase in deposits fed growth in the banking sector where large asset backing meant more and more finance was available at cheaper and cheaper prices.

Trade surplus

As the stature and reputation of Japan continued to grow in the western world the country began to post massive trade surpluses as demand for their goods and services blossomed for many years. This saw the Yen appreciate in value and also allowed local companies to reinvest significant capital into their businesses which continued to grow and grow as demand for Japanese goods and services mushroomed.

As businesses in Japan became bigger and bigger, goods became cheaper and cheaper and the export market continued to grow. This led to a further widening of the Japanese trade surplus and encouraged a growing financial sector in the country.

Japanese property

As the general wealth of Japan continued to increase so we saw a significant move in the stock market which hit an all-time high on 29 December 1989 of 38,957.44 and real estate values moved higher and higher. At the peak of the property market in 1989 the Ginza district of Tokyo saw prime properties going for $1 million per square metre!

The explosion in Japanese property prices was a disaster waiting to happen and by 2004 many of the prime properties in the Tokyo region were valued at less than 1% of their peak. Residential homes fared a little better but even those were only valued at around 10% of their all-time peak. The bubble had burst but much worse was to come as the Japanese economy collapsed.

The Japanese economy

As the Japanese stock market and real estate market crashed in the 1990s this took away much needed investment funds for Japanese businesses which affected their competitive edge over overseas competitors. As this differential between Japanese companies and overseas competitors continued to narrow there was a significant reduction in export business which then exposed the relatively low consumption of Japanese goods and services in the country.

This collapse in business levels lead to the Japanese central bank reducing interest rates to 0% although they could not stop the onslaught of deflation which would affect the Japanese economy for well over 10 years. Even towards the end of the 1990s the Japanese banking system was still in disarray with many loans written off and a number of banks still chasing business at ridiculous margins. As the Japanese authorities stepped in to avoid the total collapse of the financial sector we saw the creation of companies known as “zombie businesses” which are effectively dead but being kept alive by the government.

The Japanese stock market bottomed out in October 2008 at just under the 7,000 level although there has been a partial recovery to 7,500 at which the index now stands. This fall in the stock market and real estate sector reflects the explosion rather than bursting of the real estate, economic and stock market bubble of Japan.

Can it happen again?

There is no doubt that the slowdown in the worldwide economy has impacted upon the Japanese export industry which is the engine behind the Japanese economy. However, when valuing Japanese property the main focus is actually on the value of land rather than the houses themselves because the country is very prone to earthquakes which can obviously reduce a home to rubble in a matter of seconds.

To this end there was a significant fall of 6% year-on-year to the end of the second quarter of 2008, in the Japanese urban land price index (covering the six largest cities in the country). When you set this against a rise of 8.4% in the same period 12 months previous and a rise of 4.1% in the same period in 2006 the fall in land values becomes more and more apparent. While the picture is not as bad for the more rural areas there is still a general downturn in Japanese property values.

There has also been a major shakeup in the property development sector where a number of leading companies have been forced out of business with massive debts. It is also apparent that the credit markets in Japan are still very difficult, which has impacted upon the property sector.  Many experts feel it could take between two and three years to see any real recovery in the property markets covering the major cities of Japan.

Conclusion

While economic growth is falling and house prices are under pressure it appears as though the Japanese economy and property market are more secure than they were in the 1990s. While the recovery in the early 2000 was relatively short lived, as the after-effects of the bursting of the “economic bubble” continued to hit home, there is a general feeling that property in the region will bounce back quicker than the vast majority of other countries around the world.

However, the Japanese property market is very varied with significant price differences and price performances across the rural areas and larger cities of the country. Lessons have been learnt from the 1990s when deflation lead to “a lost decade” and seriously undermined the trading power which Japan had created between 1960 and 1990.

While life is tough in Japan at the moment, as in many other countries around the world, there is no doubt that politically and economically the country is better equipped than in the more recent past. The key to recovery is growth in the export market which has been the fuel for the engine of the economy of Japan for some time.

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