Why Did Japan Crash?

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Seeing that Japan saw massive house price inflation, and ever more flexible mortgages - I recall a Japanese gentleman telling me about cross-generational mortgages once - why did it all go pear-shaped. What sparked the crash there?

Edited August 26, 2005 by gruffydd

[The Masked Tulip]

Because they are a nation of automatons who could not do anything as individuals so they went mad en masse.

[Time to raise the rents.]

Because they were in a bubble. The avg price of a home in Tokyo in 1988 was about $2million US (nearly $4million in todays$) which was rediculous. Tokyo itself had an implied value that exceeded the entire USA.

Funnily enough, after such enormous falls from such highs, were you aware that Tokyo is still more expensive than London as we speak?

That must have been one hell of a bubble!!!!

Edited August 26, 2005 by Time to raise the rents.

[IPOD]

Because they were in a bubble.

Like we are now you mean?

The avg price of a home in Tokyo in 1988 was about $2million US

Source? (JREI, JARES, etc)

Tokyo itself had an implied value that exceeded the entire USA.

This is an urban myth. I have yet to see a single official source that backs up this (widely-propagated) claim.

were you aware that Tokyo is still more expensive than London as we speak?

Not surprising, considering Tokyo's population density is 3 times that of London.

[Jason]

Do you know what the house price to earnings ration was at the peak? unemplyment levels? and debt levels?

[Guest Charlie The Tramp]

What sparked the crash there?

<{POST_SNAPBACK}>

They discovered a new theory that houseprices can only go up, and up, and up.

The bubble got so big it eventually went pop.

[Time to raise the rents.]

Like we are now you mean?

Source? (JREI, JARES, etc)

This is an urban myth. I have yet to see a single official source that backs up this (widely-propagated) claim.

Not surprising, considering Tokyo's population density is 3 times that of London.

<{POST_SNAPBACK}>

So you agree the bit at the end & question the rest (upon which the bit at the ends foundation rests).

Do some research & let us know.

[needle]

They discovered a new theory that houseprices can only go up, and up, and up.

The bubble got so big it eventually went pop. 

<{POST_SNAPBACK}>

Yeah Charlie, it was all to do with property prices.

Get yer head out of yer ass mate, it was an equity crash and currency speculation that led to a prolonged slide - house prices were a symptom of this.

There was no real property crash - prices fell for 14 years straight.

Funnily enough those who owned BTLs did ok - residential rent fell too, but not as much as property prices so speculators were quids in.

Truth hurts. Be careful what you wish for.....

[Guest Charlie The Tramp]

Yeah Charlie, it was all to do with property prices.

Get yer head out of yer ass mate, it was an equity crash and currency speculation that led to a prolonged slide - house prices were a symptom of this.

Truth hurts. Be careful what you wish for.....

<{POST_SNAPBACK}>

I cannot believe you took my post seriously, it was a follow on from TMT.

Maybe the older and younger generations are after all miles apart.

Edited August 26, 2005 by Charlie The Tramp

[theChuz]

I cannot believe you took my post seriously, it was a follow on from TMT.

Maybe the older and younger generations are after all miles apart. 

<{POST_SNAPBACK}>

Nah we aint charlie, looking at needle's posts today he's having a bad day. We all have um so no big deal.

I actually smiled and made like an inverted grunt sound when i read it - a type of single syllable single phonem laugh-grunt (there must be a name for them really?)

[Odakyu-sen]

Do you know what the house price to earnings ration was at the peak? unemplyment levels? and debt levels?

<{POST_SNAPBACK}>

Hmm. I have some anecdotal evidence for late eighties for my suburb in the Tokyo Metropolitan Region.

Year: Approx. 1991

Suburb: Fujisawa (located on the Sagami Bay, some 20 km SW of Yokohama)

Commute to Tokyo: Approx 50 minutes on the Tokkaido railway line, 60 minutes on the Odakyu line.

Typical detached newly 3-bdrm built house with a floor area of 110 sq meters sitting on a land area of about 100 sq meters, located in a new subdivision: 70-80 million yen.

Average yearly salary: 5 million yen.

Estimated deposit: 10-20% (The typical buyer would have been saving hard for about 10 years, and have a stay-at-home wife and a young family.)

The usual term was 30 years at around 6% in those days.

I can have a dig through the archives if anyone has specific questions about figures during the Japanese bubble, but it may take a few days.

I guess that for many ordinary Japanese workers, the P/E ratio has always been pretty high around Tokyo. In the mid 80s as things started to rise, the ratio would have been about 10, rising to 20 at the height of the bubble. Prices how have fallen back to about 10, and interest rates are lower.

Official unemployment lept from 2.5% during the bubble to about 5.2% at present.

The bubble years in Tokyo were truly insane. At one time, sushi with gold leaf on top was a news item. I kid you not!

[needle]

I cannot believe you took my post seriously, it was a follow on from TMT.

Maybe the older and younger generations are after all miles apart. 

<{POST_SNAPBACK}>

Sorry - beered up

I'm on a mission to make people understand that a HPC (if it happens) is a symptom... it is not the problem.

I actually smiled and made like an inverted grunt sound when i read it - a type of single syllable single phonem laugh-grunt (there must be a name for them really?)

<{POST_SNAPBACK}>

A gruagh? A Laugnt?

Edited August 26, 2005 by needle

[Guest Charlie The Tramp]

Sorry - beered up

<{POST_SNAPBACK}>

No problem back on Xmas card list.

[Jason]

Hmm. I have some anecdotal evidence for late eighties

What about other areas in Japan? London is expensive now, and it will always be, it would take me 60secs to find a £1m flat.

Is the PE ratio of 10x just in Tokyo?

How do those figures compare to the normal joe bloggs, in a normal manual or office job?

On another note why are interest rates so low? Is there any specific reason, other than trying to boost industry?

[Odakyu-sen]

Sorry about the crushed table below.

Table 4: Comparison of price trends among gold, rice, rent, wages and land

(units: yen)

Item Early Meiji Circa 1900 1920-22 Postwar(1945-49) 1955-57 1970-72 1990 2000

Gold (1 g) 0.67(1868) 1.34 1.73 4.8 (‘45)75 (‘47) 585 (’53) 690 2,008 1,140

Rice (10 kg) 0.55(1868) 1.12 3.04 6 (‘45)149.6 (’47) 845 1,600 3,741 3,641

Rent (per month) 0.08(1880) 0.75 10 50 (’45) 1,800 15,000 130,000? 110,000

Carpenter’sdaily wage 0.5(1868) 0.66 3.53 35 (‘45)130 (‘48) 720 3,500 12,690* 14,790

Commercial land (per tsubo) 5(1873) 300 1,000 150,000 (‘47)400,000 (‘49) 2.63 M 6 M 100M 40 M

Source: Shukan Asahi ed., Nedan no Fuzokushi (The History of Prices), Asahi Shimbun-sha, 1987. Figures for 1990 and 2000 have been obtained via web search.

Gold: the maximum sales price of the year after 1970. (Figures for 1990 and 2000 from http://gold.tanaka.co.jp/commodity/souba/y-gold.php).

Rice: Price of standard-quality rice. (Figure for 1990 and 2000 from http://www.shizuoka.info.maff.go.jp/nousei/data/bekasyo.htm).

Rent: Either a detached or semi-detached house with 3 rooms, kitchen and bath in Itabashi, Tokyo (floor area of 40-50 m2). Figures for 1990 and 2000 are estimates.

Commercial land: 1 tsubo in Ginza, Tokyo’s central commercial district. Figures for 1990 and 2000 are estimates. (1 tsubo is about 3.3 sq meters)

Daily wage of a skilled carpenter. (* Average of all construction workers for 1990). Figures for 1990 and 2000 from the Ministry of Welfare and Labor.

Edited August 26, 2005 by Odakyu-sen

[Time to raise the rents.]

Hmm. I have some anecdotal evidence for late eighties for my suburb in the Tokyo Metropolitan Region.

Year: Approx. 1991

Suburb: Fujisawa (located on the Sagami Bay, some 20 km SW of Yokohama)

Commute to Tokyo: Approx 50 minutes on the Tokkaido railway line, 60 minutes on the Odakyu line.

Typical detached newly 3-bdrm built house with a floor area of 110 sq meters sitting on a land area of about 100 sq meters, located in a new subdivision: 70-80 million yen.

Average yearly salary: 5 million yen.

Estimated deposit: 10-20% (The typical buyer would have been saving hard for about 10 years, and have a stay-at-home wife and a young family.)

The usual term was 30 years at around 6% in those days.

I can have a dig through the archives if anyone has specific questions about figures during the Japanese bubble, but it may take a few days.

I guess that for many ordinary Japanese workers, the P/E ratio has always been pretty high around Tokyo. In the mid 80s as things started to rise, the ratio would have been about 10, rising to 20 at the height of the bubble. Prices how have fallen back to about 10, and interest rates are lower.

Official unemployment lept from 2.5% during the bubble to about 5.2% at present.

The bubble years in Tokyo were truly insane. At one time, sushi with gold leaf on top was a news item. I kid you not!

<{POST_SNAPBACK}>

I have 2 questions for you & thank you for your contribution:

1/ What were established houses selling for in established areas?

2/ Will you confirm current approximate prices in JPY & GBP for an average area in Tokyo?

[Odakyu-sen]

I have 2 questions for you & thank you for your contribution:

1/ What were established houses selling for in established areas?

2/ Will you confirm current approximate prices in JPY & GBP for an average area in Tokyo?

<{POST_SNAPBACK}>

Established houses (not rabbit hutches) on decent (by Japanese standards) plots of land can still be hideously expensive. Prices of 150 to 250 million yen for these kinds of houses (while adjacent rabbit hutches are 50 million yen) are typical.

I will have to do some research, but prices would be analogous to London ones.

[Guest Charlie The Tramp]

Established houses (not rabbit hutches) on decent (by Japanese standards) plots of land can still be hideously expensive. Prices of 150 to 250 million yen for these kinds of houses (while adjacent rabbit hutches are 50 million yen) are typical.

I will have to do some research, but prices would be analogous to London ones.

<{POST_SNAPBACK}>

Many thanks Odakyu-sen you have taught me much about the Japanese HM.

[Hoser]

Seeing that Japan saw massive house price inflation, and ever more flexible mortgages - I recall a Japanese gentleman telling me about cross-generational mortgages once - why did it all go pear-shaped. What sparked the crash there?

<{POST_SNAPBACK}>

Whats wrong with 125 year cross-generational mortgages when in the UK banks have skipped to offering mortgages of infinite length (interest only mortgages).

The following is from the JEI - the full article is very informative but only available to subscribers. With a few words changed the situation parallels the current UK situation.

Although Japan has experienced several bubbles in stock and land prices since the end of World War II, the tripling of asset prices between 1985 and 1989 and their subsequent collapse during the next several years was exceptional, both in terms of the scale of the rise and fall and the decade-long time span over which it occurred. Analysts are still trying to explain the bubble fully, but a consensus seems to be emerging.

The economy was passing through a transitional phase in the mid-1980s as manufacturing companies, the long-term customers for bank loans, sharply reduced their demand because of slower economic growth and more active capital markets. Also, the Ministry of Finance and the Bank of Japan had been deregulating financial markets since the late 1970s, giving banks more opportunities to seek new customers. Financial market participants, including individuals, sought higher returns as they took advantage of greater access to credit in the liberalizing markets. The combination of liberalized markets and shifting patterns of credit demand altered the customary relationship between money and credit expansion.

In the wake of yen appreciation, in late 1985 the monetary authorities loosened monetary policy to stimulate the economy, which created a sharp rise in the supply of money and a fall in interest rates. Instead of continuing to flow to manufacturing companies as in the past, the increased credit stimulated by this supply of money flowed into asset-backed loans, which fed into prices. Companies subsequently raised low-cost funds on the booming stock market and recycled these funds back into asset markets. Higher prices justified even more lending and borrowing, and the bubble was born. By late-1989 the fear that asset prices might spill over into general wage and price inflation prompted the money managers at the Bank of Japan to curtail the easy money policy, thereby placing the brakes on the unsustainable runup in asset prices and causing a collapse.

Banks' inadequate credit analysis and weak internal controls contributed to a serious nonperforming loan problem in the aftermath of the bubble's collapse. Companies used a portion of the low-cost money raised on the stock market to expand investment in plant and equipment at home and in assets abroad. Low returns on these financial and real investments are continuing to hold back the Japanese economy.

A mid-1980s shift in the relationship between the money supply and other financial variables clouded the vision of government policymakers and delayed a response to the rising asset prices. Such shifts are even more likely in the future as deregulation policies pick up speed. A lesson of the bubble is that government decisionmakers will have to approach policymaking more cautiously in the future as familiar rules of thumb lose their reliability.

This report is based on two lectures by Arthur Alexander in May and July 1997 at the Japan Information and Culture Center, Washington, D.C., on stock market and land prices in Japan.

Edited August 27, 2005 by Hoser

[Odakyu-sen]

Seeing that Japan saw massive house price inflation, and ever more flexible mortgages - I recall a Japanese gentleman telling me about cross-generational mortgages once - why did it all go pear-shaped. What sparked the crash there?

<{POST_SNAPBACK}>

To give gut-feeling answer: the failure of banks and other financial institutions, thought to be unsinkable.

When the stock market started to flag in 1989, a collective thought of yabaiiiiii!!! surged through the country.

Ominously, banks started to merge. In 1990, the Taiyo Kobe and Mitsui (or was it Mitsubishi?) banks tied the knot.

The unchi really started to hit the senpuuki in 1991 with the first bank failure. The faces of the gnomes in the Ministry of Finance turned blue with shock. What to do? This had never happened before! Where was the instruction manual? The whole scene started to descend into farce, like a bad movie.

By late 1992, land prices had started their retreat, which they are doing to this day.

[Odakyu-sen]

BTW,

Here's a cute little blog from Mari in Tokyo who makes some accurate observations about apartments in Tokyo. (It's in English)

Check it out.

http://smt.blogs.com/mari_diary/2005/08/the_price_of_la.html

And now, for an experiment. Here is the URL of a Japanese real esate site.

I don't know if your operating systems will support Japanese. The point is to click on the far left column of little icons. If it works out, you'll be able to see some photos of Japanese houses for sale. Let me know how you get on. If this works, I can try loading up some properties on sale in Tokyo.

交通 徒歩

バス

停歩 価格 間取り

建物面積（ｍ2） 土地面積（ｍ2）

私道負担面積（ｍ2） 構造・規模 物件種目

築年月

湘南モノレール

西鎌倉駅

5分

-

- 6,260万円 ４ＬＤＫ

158.26ｍ2 237.96ｍ2

鉄骨

2階建 中古売戸建

1991年6月

Edited August 27, 2005 by Odakyu-sen

[eurows]

What about the Japenese people in neg equity. What happened to bankruptcies and reposessions.

[Odakyu-sen]

What about the Japenese people in neg equity. What happened to bankruptcies and reposessions.

<{POST_SNAPBACK}>

I guess the bank or lending institution (who holds the title) would force the sale of the property to recover costs. Occupants of properties are protected pretty well under Japanese law, and the courts move very slowly.

Fundamentally, the legal system is similar to the U.S./French model. (No juries). Japan still has the death penalty, by the way (hanging). Happily, it is not applied to people who fall behind in their mortgage payments.

Negative equity is a sore point with many who bought apartments during the bubble for 60 million yen, only to find that now they are worth about 45 million yen.

Unlike in the U.K. used houses for sale in Japan do not have signs in front of them. It is a very hush-hush process. Open days are not publicized. It is all by apointment. Very quiet, you understand.

On the other hand, when a brand new apartment block is opened, there are huge signs. Newly constructed houses are similarly signposted. The signs in front of bare lots on new subdivisions are the biggest of all.