Another report that says housing market continues to cool

Ian_W

Meanmachine wrote: And in Japan, house prices cooled first, then everything else just followed suit.

Sorry MM, that’s wrong. The Nikkei went to the wall about 2 years before land prices dived and neither has recovered to any great degree. You’re right they are connected, but in a far different way than you suggest. In fact, the whole Japan property crash is a red herring, as it bears no resemblance to the present UK property market.

Since you mentioned it on another thread I have researched dozens of reports by institutions and individuals, what those experts attribute Japan’s share and property collapse to are not in any way comparable to the UK now. Loads of different opinions about the issues - but the facts are pretty much agreed.

Years ago, the Japanese government established high capital gains taxes on land to discourage speculation. For any land held less than two years the capital gain tax is 150% , two to five years 100% CGT, over 5 years 50%. This tax system discouraged people from selling land and those who needed land had to pay exorbitant prices to get someone to sell. It’s not totally clear, but even principal residences don’t appear exempt, so there was no housing market as we know it and very little land/property changed hands, if it did it was often to relatives. Consequently the valuation of land was so artificially inflated that a few hundred acres of land beneath the Emperor's Palace in Tokyo was more valuable than the whole of California! I’m sure, despite London prices, HMQ’s highly desirable pile in SW1 wouldn’t be valued at much more than a few city blocks in downtown LA, let alone the whole State. With those prices you would have cause to moan [not saying you don’t have now!] as an FTB.

Two similarities you could draw were the belief that land [not property] was the best investment and that prices could only go up - the latter applied equally to land, shares & the economy - and was held by government, banks, corporations and individuals. As a result vast loans were raised against the future value of land, not just by individuals, more so by corporations and businesses and the amount lent bore no relation to the current, already inflated, land price.

A house occupied by a former prime minister which stood on one sixth of an acre had an estimated value of $22 million US - a very high value for a house - but it was used to borrow $96 million from seven banks by it‘s corporate owners. This wasn’t fraud or an isolated example. Culturally Banks were more prepared to lend to already heavily indebted customers they knew well and who they saw them as “safe bets” because they’d, “ wined, dined, golfed and wh*red together“. The lending criteria applied made self-cert, 5x salary and 40yr mortgages look like models of prudent lending!

Major companies avoided taxes by using the “hidden assets” in land due to the differences between the increased market value and the book value, they also inflated company values by raising and using these loans to inflate assets.

Individuals used property loans to finance major purchases of shares. There is a story of a retired as a nightclub “hostess” who bought 2 restaurants with her “pension”, these were worth several million yen but she was able to borrow several billion yen against them. She ended up as the major shareholder in the bank that lent her the bulk of the money, needless to say, that particular bank was one that went to the wall!

When the Nikkei finally collapsed it took 2 years for the Banks to even accept that these loans, secured on vastly over inflated land prices, would never be repaid, hence the delay in the Japanese property market collapse.

So there you have it MM, land prices inflated by government tax regime, borrowing based on future land price increases and used for corporate & individual flutters on the stock market. Not exactly a close comparison with BTL’s pushing house prices beyond the means of FTB’s!

Ian_W

GDB wrote: That is regarded by virtually every observer (except you apparently) as the single main cause of the ongoing economic problems.

I didn‘t say that wasn‘t the case - but what happened is less important than why it happened - if you want to compare Japan‘s property collapse to UK property now.

When you compare what happened in Japan and say “in the UK we have a huge speculative bubble in housing, caused partly by cheap loans” - compared to the Japanese bubble, it’s tiny and driven by a far less distorted market. And it wasn’t the cheapness of the loans so much that caused the real problems, it was the fact that banks loaned 3 or 4 times the already inflated value of the land on which they were secured to allow individuals to buy shares or companies to prop up corporate values. When the Stock Market collapsed those loans far exceeded what the banks could recoup - so banks went to the wall - after a period of denial.

Comparing the two is like comparing a motorist speeding thro’ a town at 35mph, with one speeding thro’ at 100mph. Both are breaking the law, both could have an accident because of excess speed - but the latter is far more likely to have catastrophic consequences than the former.

So I’ll stick with my view [post 39] that “the Jap economy that went t*ts up good style and dragged real estate [the most expensive on earth at the time] with it and it’s lack of growth and high unemployment that's kept it that way for 10yrs“.

But to answer your main question - which came first, the chicken or the egg? Dunno, but I like 'em both for my tea - so I'm glad they're both available.