Japanese Real Estate Market

The Japanese real estate story is important as well as different. Most property market stories that one would hear include periods of booms and busts. The property market goes under for a few years only to recover a few years later. However, the case of Japan has been very different. The Japanese market witnessed a bull run never witnessed before. This period continued till 1991.

Then came the downfall! Since 1991, Japan has witnessed a downfall of epic proportions. The property valuations have significantly fallen and have stayed there for over two decades despite the frantic efforts of the Japanese government to revive it.

In this article, we will witness the story of the Japanese crash, the implications of which are still seen in the Japanese market.

Three Decades Long Economic Miracle

After World War-2, the Japanese economy was virtually destroyed. They had been fighting battles for decades and as such their economy had suffered a lot. Also, two of their major cities Hiroshima and Nagasaki had been bombed out of existence by the United States. As such the worker morale was also low.

However, the post war economy of Japan experienced an economic boom. Japanese corporations started making major headway in the electronics and automobile markets of the world. This led to an increased prosperity in the economy. The high prosperity created jobs for many Japanese employees. This along with the fact that Japanese corporations consider employees to be part of their family i.e. never fire them gave rise to an increased purchasing power.

By the late 70’s and early 80’s, Japan which was a country that had an area smaller than the state of California and was consistently rocked by natural disasters like earthquakes and volcano eruptions had become the second largest economy in the world. It was slowly closing in on the heels of United States. To many economic observers this was nothing short of an economic miracle which Japan had pulled off in three decades.

During these three decades, the Japanese real estate market witnessed a steady upward boom. The prices of real estate were being driven up at around the rate of economic growth and very few suspected any sort of bubble being created.

Tax Laws Modified

Around the mid 1980’s the government of Japan decided to liberalize its hitherto conservative property markets. The Japanese property markets had a draconian taxation regime which prevented any change in the ownership of properties. For instance, if a property was sold in less than two years after its purchase, taxes accounted for over 90% of the capital appreciation! If the same property was sold more than two years but less than five years after its purchase, around 75% of the capital gains made by the investors were payable to the Japanese government as tax. If the investors sold the property at any time after 5 years, 50% of the capital appreciation was payable as tax.

In short, the transaction costs of Japanese real estate market made it unviable for anyone else except genuine homebuyers to buy a property. This changed in the mid 80’s as the government of Japan revoked a lot of these rules to create an open real estate market to suit the needs of the open Japanese economy.

Stock Market and Real Estate Market Loop

As a result of the economic miracle and the liberalized laws pertaining to real estate, a situation was created wherein the real estate and the stock market started feeding off each other. Many people would sell off their highly valued stocks in the market to buy real estate. This created a demand for real estate that was rising in value. As such, many real estate investors would cash out and then once again buy stocks of Japanese corporations. Both these asset classes in the Japanese markets were outperforming every other investment in the world. As such, they attracted more and more money and the valuation of both these asset classes went sky high! By 1991, real estate valuations in Tokyo were several times higher than competing valuations in more prosperous cities like New York and London.

The 90’s: Real Estate Crash

The 90’s marked the beginning of the end for the real estate market in Japan. The Bank of Japan raised interest rates drastically to curb the inflation that was caused by the loose monetary policy that it had followed for decades. As a result of this raised interest rates, money supply in the market became tight. Also the mortgages became more expensive to service. Therefore, the demand for Japanese real estate suddenly went down. This created the ultimate downward spiral as property prices ended up plunging more than 64% in Japan in the short period of a decade! Investors and homeowners, most of whom, were highly leveraged, lost a significant portion of their investments as prices continued to crumble.

2015: Worth Half the Price!

Today, in 2015, the Japanese housing market has still not recovered. This is after the fact that Japan has held its interest rates near zero percent for many years now. On top of that Japan has also followed a quantitative easing program but that too has proved to be ineffective in raising the prices of the real estate market once again.

Today, the average price of real estate in Japan is over a 50% discount compared to the peak prices that were seen in 1991. The prices are approximately at a level when they were in 1985 i.e. when the bubble had just begun.

To sum it up, if you had invested in Japanese real estate in 1985 and wanted to cash out after three decades, you would have ZERO capital appreciation! This is what makes the Japanese real estate story important as well as interesting for any student or real estate investor.