Tuesday, June 07, 2005

Before and After Real Estate Bubble In Japan

I would like to tell what I saw before and after the real estate bubble in Japan.
In Japan, banks were the biggest player to pour money into real property. Bank made loans to firms and to individuals on real estate collateral basis. To make matters simple, I would like to say that there were no Fannie Mae or Freddie Mac, and no mortgage market in those days in Japan.
Under the bubble, the return of investment on real estate from initial payment till future capital gain together with fruit born(accrued from rent, and so on), can be measured by “yield”. Demand for loan raised rate, and so long as expectations exist for the “yield” to exceed the expected rate, the investment to real estate continued and the bubble won’t burst (even Central Bank tightened its’ monetary policy). The hike in the market of real estate brought wealth effect to the economy.
Not all people were happy about the hike, because for the people who came late to real estate market felt opportunity unequal.
There were no means but to factitiously put down the price of real estate.
The policies established by the authorities concerned were as follows:
1) The principle that real estate must be purchased for the purpose of ultimate utilization, not for speculation
2) The principle that real estate should be transacted at appropriate price, not at speculative price
3) The restriction on quantity of loan to each bank on developing real estate, which become collateral for the bank.
4) The duty to each bank to strictly confirm the purpose of loan before executing, if it is for ultimate utilization or not.
5) Capital gain taxed heavily to the possessor, if the term between real estate purchased and sold is short
6) Unoccupied land (=undeveloped land or land without any utilization) which satisfied certain conditions, taxed heavily.
These policies succeeded in amending above expectations, and in fact, real estate price did begin to fall. But it caused another problem.
Till then quite a few firms and individuals possessed real estate, so the drop on the price of real estate directly inflicted their balance sheet. Moreover, the trend to appraise balance sheet on market price basis (under the situation, only fruit born against initial payment is grasped as “yield”, when appraising the real estate) brought about many insolvent firms. The way to protect their balance sheet was to sell real estate and to repay loan to bank as soon as possible, which spur the drop on the price of real estate and caused rate to dive as much money were supplied to the market. Some firms couldn’t avoid bankruptcy and damaged the balance sheet of the banks, some of which bankrupted too.
During these period, public investment and private companies’ export on depreciated yen bolstered GDP. As a consequence, the government comes to hold the worst fiscal deficit among the government in developed country, interest rate pegged at practically zero level and the depreciated yen favors some export companies and export manufacturers.
Later, the above policies were gradually abolished, but left durable balance sheet adjustment on the economy. It seems many companies that are unlisted on stock market are still groaning under huge debt on their balance sheet.
We can learn from this fact that, impressing expectation that above “yield” is lower than the above rate, incurs asset depreciation and further incurs balance sheet adjustment that exceeds the effect of fiscal policy and monetary policy.To avoid the situation, certain system must be built in the society beforehand.


At 8:49 PM, Anonymous ralph said...

Yamada - very interesting. You should note whether you think US is heading this same direction.

At 3:55 AM, Blogger yamada said...

Thank you for your reply, Ralph.
I think there is a chance for every country that bubble should occur, whatever the object(real estate or stock price).The point are how rational the markets are made and which policies are taken afterwards, by its' authorities.


Post a Comment

<< Home