Japanese real estate market resilience after the financial crisis

Japanese Housing Market your purchase.Japanese housing market

The world is now facing the consequences of the internationalized economic crisis. The financial problems which emerged within the United States real estate sector impacted the international community at a dramatic level and caused predicaments such as bankruptcies, downsizes, the demise of economies and industries and the loss of life long savings.

One of the most severely impacted sectors is the real estate segment, in which the values of the properties have decreased significantly. Economic agents collected unstable revenues; people became unable to repay their mortgages and the financial institutions restricted the access to borrowed funds. This situation is common throughout the world and it is expected that the international real estate community would require several years to revive to the pre-crisis features.

But unlike the incidence of problems, fact remains that the degree of severity across nations varies. At a general level, states which had implemented more restrictive financial policies and limited the population's access to borrowed funds were better able to contain the impacts of the crisis within the real estate sector. Nevertheless, there were also other forces which led to differentiated impacts of the crisis.

In Japan, the real estate sector seems rather stable and the impacts it has felt as a result of the subprime mortgage crisis are limited. The current project sets out to assess the features of the Japanese real estate market. In order to do so however, it would first focus on the Japanese general characteristics, which also play a role in the development and implementation of prudential approaches.

2. General information about Japan

Measured by the gross domestic product, Japan is the world's third largest economy, after the United States and China, with a national output of $4.33 trillion. The country is globally recognized as a cultural emblem, and more and more of an economic power. Japan's growth became sustainable in the aftermath of World War II, when the focus fell on cooperation, strong work ethics, and technologic developments. Today however, the country is encountering the challenges of globalization and increasing international competition, which force it to change and adapt.

The Japanese economy had been registering high growth rates for the decades 1960s, 1970s and 1980s (10%, 5% and 4%), but during the 1990s period, it was faced with problems pegged to high asset prices.

"Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor" (Central Intelligence Agency, 2011).

It could then be argued that the modern Japanese real estate sector is stronger as a result of the situation encountered and overcome in the 1990s. At a more specific level, Japan is characterized by the following features:

Less than 12% arable land, meaning as such that agriculture is not a viable option and that the country has to focus on other sources of income.

Agriculture accounts for 1.1% of GDP; industry accounts for 23% and services account for 75.9% of the gross domestic product.

A total population of 126,475,664 individuals, out of which 65,700,000 comprise the labor force; unemployment rate is among the world's lowest with 4.8%. 15.7% of the people live below the poverty line.

Life expectation at birth is of 82 years -- among the world's highest -- and the literacy rate is of 99% (Central Intelligence Agency, 2011).

All of these features indicate prudence and a life style based on adaptation to the features of the world, to the resource constraints and to the dedication to development and education. These characteristics then could also explain the resilience of the Japanese real estate sector in the face of the crisis and would be explained by the responsibility involved in the decision making processes which impacted the real estate sector.

Several characteristics of the Japanese housing market are worth mentioning now, as pointed by Noguchi and Poterba in their "Housing Markets in the United States and Japan." As the introductory chapter mentions, "Japan has had a serious problem throughout most of the postwar period" (Noguchi, Poterba, 1994). This problem was translated both in a low offer of dwellings and an overall scarcity of dwellings and unsatisfactory housing conditions, as a direct consequence of the former. One of the elements that caused such a problem was the high level of land prices, continuously rising over the past decades. High land prices directly impact the surface of land that people can buy and feed into the high price of the dwellings on this land, including in terms of what the client is able to build. Smaller dwellings better fit on smaller plots of land and are more affordable, although comfort also diminishes.

3. The real estate crises of Japan

The most relevant crisis encountered by the Japanese property market throughout the recent past is represented by the asset pricing bubble of the 1990s decade. In the latter half of the 1980s decade, the assets in the Japanese market were valuing at a rapid rate, to eventually lead to economic collapse in the following decade. The largest levels of overvaluation were observed in terms of stocks and land prices, and it was assumed that the bubble created was based on speculation (Baumgartner, Meredith and Kahkonen, 1995).

Stephen Giovanni Cecchetti at the International Center for Monetary and Banking Studies believes that the main causes associated with the overvaluation of the assets were represented by significant drops in foreign investments within the country. William Curt Hunter however states that the main fault is held by the Bank of Japan, which was, at that time, focused on increasing the international value of the yen, neglecting domestic stability. He also argues that when the authorities recognized the problem, their development and implementation of the necessary monetary policy was delayed. The result was that of the collapse of the stock prices and the gradual decrease in asset prices (Baumgartner, Meredith and Kahkonen, 1995).

The crisis was the result of excessive deregulation and increased euphoria in the economic system, but Japan was fortunate as it was able to contain the crisis. Specifically, the devastating impacts were felt throughout the entire 1990s decade, rather than in the full-blown collapse, as was the case of the current crisis within the United States.

At the level of the current crisis, the Japanese real estate investors were impacted to a smaller degree and the effects were felt generally by companies which had large investments overseas.

"We haven't felt much from the subprime crisis here, unquestionably far less than the effects felt in America and Europe. […] Most of the damage was to a few large mega-banks, one of which lost somewhere in the neighborhood of 6 billion yen. But considering that altogether these institutions only lost somewhere around 1 trillion yen, I think it's safe to say we got off easy" (Noorbakhsh).

And the main reason forwarded for this strong resilience in the face of the global crisis is represented by the prudential policies. Specifically, the Japanese banks did not offer subprime mortgages, but informed the populations on how to protect themselves against credit and interest rate risks. Also, the Japanese population had been already accustomed to an economic approach of saving, rather than overspending (Hunter, 2005).

5. Tsunami, earthquake and real estate

As it has already been mentioned, the Japanese real estate market has not been dramatically impacted by the internationalized economic crisis. Nevertheless, at the beginning of 2011, it was hit by a tsunami and an earthquake, which threaten economic stability.

"A 9.0-magnitude earthquake and an ensuing tsunami devastated the northeast coast of Honshu Island on 11 March 2011, washing away buildings and infrastructure as much as 6 miles inland, killing thousands, severely damaging several nuclear power plants, displacing and leaving homeless more than 320,000 people, and leaving a million households without running water. […] In order to stabilize financial markets and retard appreciation of the yen, the Bank of Japan injected more than $325 billion in yen into the economy. Estimates of the direct costs of the damage - rebuilding homes and factories - range from $235 billion to $310 billion. Some economic forecasters, who previously had anticipated slower growth for Japan in 2011, now believe GDP may decline as much as 1% for the year."

At a general level, the natural catastrophe is problematic as it generated the need to invest substantial resources in the reconstruction of the country. But despite the destructions, the Economics News Paper indicated that the Japanese real estate sector remained "robust." In this order of ides, at the level of the property market, it could be said that such a situation creates an increased need for building, creating as such a demand for the industry as well as numerous employment opportunities. The long-term impact has nevertheless yet to be observed.

6. Conclusions

The current endeavor has focused on the analysis of the Japanese real estate market. The initial question at the basis of the research was represented by the realization that the Japanese property market was impacted by the internationalized financial crisis to a smaller degree than other real estate sectors across the globe. It is now argued that the initial assessment of the increased stability of the Japanese real estate sector is valid. Furthermore, the resilience and stability of Japanese property markets was the result of the combination of multiple forces, such as a generally prudential nature of the people and the regulations, the lessons from the 1990s overvaluation of the assets or the very systems in the real estate market.

There are several interesting issues that this paper, based on Yukio Noguchi and James Poterba's book "Housing Markets in the United States and Japan" has pointed out to. First of all, land and house prices remain extremely high in Japan. Even more so, house prices are particularly determined by specific elements. One of the important one is the size of the lot. Due to the conditions, plots tend to be small, which impacts on the conditions of housing and living.

Another is the location of the plot. Distance from and to work is an important element that plays into the way price is determined on the housing market in Japan. People who are less willing to sacrifice their time for longer trips to work will also save on the amount of money they pay for housing, mainly because the respective additional time and effort is equivalent to an opportunity cost they are willing to pay.

The level of savings in Japan is an interesting element that also ties into the housing market. Traditionally, Japanese are conservative when it comes to savings and investments, which translates both into high levels of savings and into investments with lower returns and lower levels of risk. This aversion to risk allowed the Japanese housing market to be less affected by the global economic crisis and housing market crisis than other countries in the world. The earthquake and tsunamis had a tremendously negative impact, however, on the development of the market.

Overall, the Japanese housing market is one where price remains consistently high, with risks such as earthquakes and tsunamis making this a risky investment. In the medium and long-term, however, investment in real estate and on the housing market has proved to significantly increase the wealth of the household.

References:

Baumgartner, U., Meredith, G., Kahkonen, J., Saving behavior and the asset price "bubble" in Japan: analytical studies, International Monetary Fund, 1995

Cecchetti, S.G., Asset prices and central bank policy, Center for Economic Policy Research, 2000

Hunter, W.C., Asset price bubbles: the implications for monetary, regulatory and international policies, MIT Press, 2005

Noguchi, Yukio; Poterba, James. Housing Markets in the United States and Japan. The University of Chicago Press. 1994.

Noorbakhsh, S., Japan's housing market weathers subprime crisis, Japan Today, http://www.japantoday.com/category/executive-impact/view/japans-housing-market-weathers-subprime-crisis last accessed on May 26, 2011

After earthquake: Japan's property market remains robust, Economics News Paper, http://*****/policy/german/after-earthquake-japans-property-market-remains-robust-5341.html last accessed on May 26, 2011

The world factbook -- Japan, Central Intelligence Agency, 2011, https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html last accessed on May 26, 2011