turning japanese i think i'm turning japanese i really think so

pricedout_1

I am hoping to buy my first property at some point over the next few years. Somebody please tell me that this is not going to happen here ...

"If we want to understand the economic misery that can ensue when a property bubble is left to grow unfettered by a central bank, we should look to Japan.

Japan suffered one of the biggest, and best documented, property market collapses in modern times. At the market's peak in 1991 all the land in Japan was worth about £10 trillion, or almost four times the value of all property in the United States at that time. Then came the property crash, after the Japanese central bank finally moved to raise interest rates. House prices plunged into a 14-year slump, from which they have only recently started to recover.

In 2005 Japanese property was worth less than half its 1991 peak, meanwhile un-mortgaged property in the United Kingdom has more than tripled in value, to reach a total value of around £3.6 trillion and debt secured on UK property has risen to around £1 trillion, both all time highs. Private homeowners were amongst the hardest hit. In Japan's six largest cities, residential prices dropped 64% between 1991 and 2004. By most estimates, millions of homebuyers suffered substantial losses on the single largest purchase of their lives.

Their experience contains clear warnings for UK homebuyers. One is to avoid the sorts of temptations that appear in over-heated property markets, particularly the use of risky or exotic loans to borrow beyond one's means e.g. extended lending multiples, interest-only and 125% mortgages. Another is to avoid property that may be hard to sell when the market cools.

Like their UK counterparts today, too many Japanese homebuyers overextended their borrowing to buy property that cost more than they could sensibly afford, because they wrongly assumed that house prices could only rise. When Japan's house prices dropped, many buyers were financially ruined or caught in the negative equity trap and a similar tale is now unfolding in the US.

Japan's story of post-crash woe also contains obvious lessons for UK policy makers. Firstly, MPC members should be mindful of the failure of Japan's central bank to attenuate the growth of the country's property bubble, although this lesson may have been learned too late. Second, policy makers should be aware of the Bank of Japan's failure to soften the fall and help reduce the pain."

Japanese interest rates in 1991 were the same as ours are now. They then lowered them quickly but the slump continued regardless. Japan is an island nation just like our own and their attitude towards property at that time sounds like it is similar to our is now.

Does anyone have any data on house price/earnings ratio, unemployment, interest rates etc in Japan in 1991 before their mega crash occurred ? How does it differ to the UK now ?

Xbigman

Its not a case that we didn't learn from the 1991 Japan crash, its more a case that we didn't learn from the 1991 UK crash.

Its also pointless looking at numbers, especially overseas numbers. Anyone watching the news unfold in recent weeks will see all sorts of financial data coming out as the highest/lowest numbers since the early 90's. Its all pointless because the housing market is driven by sentiment. Its negative sentiment that will stop people buying, and its people not buying that will crash prices.

Will people stop buying soon? Thats the million dollar question. But that last rate rise was a real shock, which along with other negative data is driving sentiment the wrong way. Its still not quite enough though. Maybe worse inflation figures and another rate rise in Feb will be the straw that breaks the camels back.
Regards




X

pricedout_1

I suppose it is the parallels between Japan then, and the UK now that I am interested in. I know it's not an exact science but I thought it might be interesting to see if there are parallels in the economic indicators anyway. Surely it's the hard economic facts that eventually give rise to negative sentiment ?

At Japans peak in 1991 the interest rate was at 5.5 (same as ours is likely to be in a month or so), so what was the price to earnings ratio ? What pushed Japan over the edge ?

This is the "tipping point" that is referred to in the full article ...
http://www.home.co.uk/company/press/API_Nov06.htm

Alan_M_2

I was disappointed to find this wasn't a thread about "The Vapours".

Anyway back on topic - I think, and I may be wrong here - that Japan is the most densely populated island on the planet and has always had historically high real estate prices as a result. So I suppose you could draw parallels, the problem with doing that is you need to discus the economy of each country in it's entirety....it isn't all so clean cut unfortunately.

benood

From memory wasn't the Japanese crash blamed on poorly regulated banks and bad debts. Also I'm not sure how much bigger Japan is than the UK but £10tr in 1991 was a lot more than £3.6tr in 2007 (perhaps this isn't comparing apples with apples I'll stand corrected), roll on a further trebling of house prices:D

F_T_Buyer

Interest rates will never fall to zero like they did in Japan. Why?

Because Japan is a big exporter, they could take away the yield on the currency and it was still of reasonable value because foreigners needed Yen to buy their goods, hence gave demand for that currency.

In the UK we are a big net importer. If we gave no return/yield on our currency (i.e. zero interest rates) who would hold sterling? Why would anyone accept it for their goods? They wouldn't, so the value would fall and fall until we are a net exporter.

Right, that over with.

Yes, it's obvious prices are too high. Ask yourself, can the average person afford the average home (£24k vs £175k)? Nope.

So what do you think will happen? Will wages catch up - if they do, interest rates will go up. Will prices fall? You decide.


For any FTB out there, I urge you to think about the consequences of a HPC and/or recession.

devils_advocate

the problem with doing that is you need to discus the economy of each country in it's entirety....it isn't all so clean cut unfortunately.

You're right Alan, its impossible to draw comparisons, because even cultural factors will have an effect. Most Japanese homeowners (as oposed to flatowners, the vast majority) will tend to demolish and rebuild their houses every 25 -35 years. Thus build quality is low. Similarly, if you have a family home on a nice plot in Tokyo, and you want to sell, you'll demolish and sell the site fot the next person to build on. Thus walking down the average street with houses on it, out of 20 houses there will be 20 different styles of varying ages and I'm reasonably sure there is no planning permission required (or at least in the way we know it). Economically thing are completely different too, but thats afar longer essay.

(and by the way, it used to be said that at the height of the boom the land that the British Embassy compound stood on was worth more than Wales!)

pricedout_1

benood wrote:

From memory wasn't the Japanese crash blamed on poorly regulated banks and bad debts.

Isn't this pretty much what we have now - irresponsible lenders and a monutain of debt ? :eek:

benood wrote:

Also I'm not sure how much bigger Japan is than the UK but £10tr in 1991 was a lot more than £3.6tr in 2007 (perhaps this isn't comparing apples with apples I'll stand corrected), roll on a further trebling of house prices:D

I believe Japan has twice the population of the uk.

Getting back to the economic conditions between the two states, unemployment was around 2 % in Japan in 1991. Ours is around 4.5 % ?
(and rising ?):think:

Out of interest, does anyone know what the house price/earnings ratio was for Japan in 1991 ?

specs_3

Sorry, here by mistake, didn't realise from the title that it was another Housepricecrash thread.

Alan_M_2

Seeing as I've got a fun filled evening I've been on Google...well interestingly the CIA seem to be wealth of information....

So Japan's -

population:- 127,463,611 (July 2006 est.)
Land Area:- 374,744 sq km

Versus the UK:-

Population:- 60,609,153 (July 2006 est.)
Land Area:- 241,590 sq km


Followed by a article on the Japanese Bubble - which is heavy going of you ask me.

http://www.sjsu.edu/faculty/watkins/bubble.htm

I'll get my anorak now......

meanmachine_2

specs wrote:

Sorry, here by mistake, didn't realise from the title that it was another Housepricecrash thread.

Yes, heaven forfend that on a money saving website we discuss whther UK property offers value for money.

Jeeez.

Not that Japan is anything like the UK. One is a densely populated island, the other a densely populated island; one enjoyed massive property inflation on the back of lax lending, the other has "enjoyed" the same etc etc