Thanks for that Terry W.
I liked this story from that site. Thought I would post it here....
See ya's.
Take It From Japan: Bubbles Hurt
By MARTIN FACKLER
KASHIWA, Japan
FOURTEEN years ago, Yoshihisa Nakashima looked at this sleepy suburb an hour and
20 minutes from downtown Tokyo and saw all the trappings of middle-class
Japanese bliss: cherry-tree-lined roads, a cozy community where neighbors
greeted one another in the morning and schools within easy walking distance for
his two daughters.
So Mr. Nakashima, a Tokyo city government employee who was then 36, took out a
loan for almost the entire $400,000 price of a cramped four-bedroom apartment.
With property values rising at double-digit rates, he would easily earn back the
loan and then some when he decided to sell.
Or so he thought. Not long after he bought the apartment, Japan's property
market collapsed. Today, the apartment is worth half what he paid. He said he
would like to move closer to the city but cannot: the sale price would not cover
the $300,000 he still owes the bank.
With housing prices in the United States looking wobbly after years of
spectacular gains, it may be helpful to look at the last major economy to have a
real estate bubble pop: Japan. What Americans see may scare them, but they may
also learn ways to ease the pain.
To be sure, there are several major differences between Japan in the 1980's and
the United States today. One is the fact that property prices rose much faster
and more steeply in Japan, partly because speculators used paper profits from a
booming stock market to invest in property, insupportably leveraging the prices
of both higher and higher.
Another difference is that the biggest speculators in Japan's frenzy were
deep-pocketed corporations, and they pumped up the commercial property market at
the same time that home prices were inflating.
Still, for anyone wondering why even the possibility of a housing bubble in the
United States preoccupies so many economists, it is worth looking at how the
property crash in Japan helped to flatten that economy, which is second only to
that of the United States, and to keep it on the canvas for more than a decade.
And as American homeowners contemplate what might happen if their property
values fell -particularly if they fell hard - there are lessons in the bitter
experiences of their Japanese counterparts like Mr. Nakashima.
JAPAN suffered one of the biggest property market collapses in modern history.
At the market's peak in 1991, all the land in Japan, a country the size of
California, was worth about $18 trillion, or almost four times the value of all
property in the United States at the time.
Then came the crashes in both stocks and property, after the Japanese central
bank moved too aggressively to raise interest rates. Both markets spiraled
downward as investors sold stocks to cover losses in the land market, and vice
versa, plunging prices into a 14-year trough, from which they are only now
starting to recover.
Now the land in Japan is worth less than half its 1991 peak, while property in
the United States has more than tripled in value, to about $17 trillion.
Homeowners were among the biggest victims of the Japanese real estate bubble. In
Japan's six largest cities, residential prices dropped 64 percent from 1991 to
last year. By most estimates, millions of homebuyers took substantial losses on
the largest purchase of their lives.
Their experiences contain many warnings. One is to shun the sort of temptations
that appear in red-hot real estate markets, particularly the use of risky or
exotic loans to borrow beyond one's means. Another is to avoid property that may
be hard to unload when the market cools.
Economists say Japan also contains lessons for United States policy makers, like
Ben S. Bernanke , who is expected to become chairman of the Federal Reserve at
the end of January. At the top of the list is to learn from the failure of
Japan's central bank to slow the rise of the country's real estate and stock
bubbles, and then its failure to soften their collapse. Only recently did Japan
finally find ways to revive the real estate market, by using deregulation to
spur new development.
Most of all, economists say, Japan's experience teaches the need to be skeptical
of that fundamental myth behind all asset bubbles: that prices will keep rising
forever. Like their United States counterparts today, too many Japanese
homebuyers overextended their debt, buying property that cost more than they
could rationally afford because they assumed that values would only rise. When
prices dropped, many buyers were financially battered or even wiped out.
"The biggest lesson from Japan is not to fall into the same state of denial that
existed here," said Yukio Noguchi, a finance professor at Waseda University in
Tokyo who is perhaps the leading authority on the Japanese bubble.
"During a bubble, people don't believe that prices will fall," he said. "This
has been proven wrong so many times in the past. But there's something in human
nature that makes us unable to learn from history."
In the 1980's, Professor Noguchi said, the frenzy in Japan reached such extremes
that companies tried to outbid one another even for land of little or no use. At
the peak, an empty three-square-meter parcel (about 32 square feet) in a corner
of the Ginza shopping district in Tokyo sold for $600,000, even though it was
too small to build on.
Plots only slightly larger gave birth to bizarre structures known as pencil
buildings: tall, thin structures that often had just one small room per floor.
As a result, Japan's property market in the 1980's was much more fragile than
America's today, Professor Noguchi said. And when the market fell, it fell hard.
Because of all the corporate speculation, the collapse wiped out company balance
sheets, crippled the nation's banks and gave the overall economy a blow to the
chin.
Since 1991, Japan has spent 11 years sliding in and out of recession. It is only
now showing meaningful signs of recovering, with the World Bank forecasting that
Japan's economy will grow by a solid 2.2 percent this year
Despite the differences, Professor Noguchi said he also saw parallels between
Japan then and America now. Last year, as a visiting professor at Stanford, he
said he read real estate articles in local newspapers that sounded eerily
familiar. Houses were routinely selling for $10 million or more, he said, with
buyers saying they felt that they had no choice but to buy now, before prices
rose even further.
"It was deja vu," Professor Noguchi said. "People were in a rush to buy, and at
extraordinary prices. I saw this same haste psychology in Japan" in the 1980's.
"The classic definition of a bubble," he added, "is people buying on false
expectations about future prices, and buying with the hope of selling in the
future."
Economists and real estate experts see other parallels as well. In the 1980's,
the expectation of rising real estate prices made many Japanese homebuyers feel
comfortable about taking on huge debt. And they did so by using exotic loans
that required little money upfront and that promised low monthly payments, at
least for a short time.
A similar pattern is found today in the United States, where the methods include
interest-only mortgages, which allow homebuyers to repay no principal for a few
years. Japan had its own versions of these loans, including the so-called
three-generation loan, a 90- or even 100-year mortgage that permitted buyers to
spread payments out over their lifetimes and those of their children and
grandchildren.
But when property prices dropped in Japan, homeowners found themselves saddled
with loans far larger than the value of their real estate. Many fell into
bankruptcy, especially those who lost their jobs or took pay cuts as declining
property prices helped to incite a broader recession. From 1994 to 2003, the
number of personal bankruptcies rose sixfold, to a record high of 242,357,
according to the Japanese Supreme Court, which tracks such data.
Even many of those who avoided financial collapse found themselves marooned in
homes that they never intended as lifelong residences. For many Japanese
homebuyers in the 1980's, land prices had risen so high that the only places
they could afford were far from central Tokyo. Many went deep into debt to buy
tiny or shoddily built homes that were two hours away from their offices.
Now, after years of tumbling land prices have made Tokyo more affordable again,
few people are shopping for homes in the distant suburbs. That has led to severe
declines in property values in these outlying areas, leaving many people with
homes that are worth less than the balance on their mortgages from a decade or
more ago.
Mr. Nakashima, who bought the apartment here in Kashiwa, said it would take him
at least another decade to whittle down his loan to the point that he could pay
it off by selling his home. And this assumes that the apartment does not drop
further in value - a real possibility, because lower prices in Tokyo have led to
a recent boom in construction of newer apartments in neighborhoods closer to
downtown.
"We can't sell and get something better because we'll take such a huge loss,"
said Mr. Nakashima, a serious man who recounts his story with careful precision,
sometimes pausing to check dates. "The collapse of the bubble robbed us of our
freedom to choose where we can live."
He rues the idea that homes came to be seen as just another investment. "Homes
should be different from stocks," he said. "They shouldn't be the object of
speculative investing. If home prices move too much, they can ruin your life."
Mr. Nakashima says he is resigned to spending the rest of his days in Kashiwa.
It is peaceful here, after all, he said. There is also a bit of history: he
pointed to two tree-covered mounds in a corner of the apartment complex that are
said to contain the severed heads of samurai killed in a battle here five
centuries ago.
Some economists say that there are probably millions of people like Mr.
Nakashima, trying to make the best of life in homes that are distant from work
and for which they grossly overpaid. "There is a whole generation of homebuyers
stuck out in far suburbs," said Atsushi Nakajima, chief economist at the
research arm of the Mizuho Financial Group in Tokyo. "It's sad, but Japan has
basically forgotten about them, and is moving on. They are just left out there."
Mr. Nakajima said he had barely missed being stuck out there himself. In 1991,
he was looking at a 100-square-meter apartment (1,080 square feet) for about
$600,000 about two hours outside Tokyo. He said his wife stopped him. Six years
later, he spent the same amount to buy a more spacious house in a downtown
neighborhood. "Maybe my wife should be the economist," he said.
Now that Japan's real estate market is finally showing signs of recovering from
the 1991 collapse, economists say it offers a lesson for Americans in how to end
- and not to end - a long slide in property prices.
For years after the real estate bubble burst, the Japanese government tried to
resuscitate the market and other parts of the economy with expensive public
works projects, but they were so poorly planned that they succeeded only in
inflating the national debt.
NOT until the late 1990's did the government try a new tack: deregulation. To
kick-start the economy, Tokyo started loosening restrictions on the financial
industry. While most of this effort was aimed at reviving the banking industry,
it also allowed investors to create real estate investment trusts, essentially
mutual funds that invest in commercial property. A few years later, the
government also eased building codes, such as height limits, and cut approval
times for building permits.
Economists and real estate executives credit these changes with bringing new
money into the market, and with making redevelopment easier. The results are
visible in a boom that is dotting the Tokyo skyline with cranes and new
high-rises.
They are also visible in statistics. Residential home prices in Tokyo rose 0.5
percent in the 12 months through July, the first gain in 15 years, the
government said in September. Nationwide, land prices are still down, but the
pace of decline has slowed to a crawl, the government said.
"Deregulation revived the Tokyo land market," said Toshio Nagashima, executive
vice president at Mitsubishi Estate, one of Japan's largest real estate
companies. He said the changes were one reason that his company committed to
spend $4.5 billion by 2007 to build six skyscrapers in the central Marunouchi
financial district.
Japanese economists say the United States is not likely to suffer a decline that
is as severe or long-lasting as Japan's, because they see a more skilled hand at
the tiller of the American economy: the Federal Reserve. Japan's central bank,
the Bank of Japan, failed to curb the stock and real estate bubbles until
mid-1989, when it was too late and prices were sky-high, they said.
When it did take action, it moved faster and more drastically than Japan's
overinflated land and stock markets could handle, raising its benchmark interest
rate to 6 percent from 2.5 percent over 15 months. Economists say that this
pulled the rug out from under both markets at the same time.
Akio Makabe, a finance professor at Shinshu University in Matsumoto, says the
Fed has been more deft in handling the rise in America's property market, which
he believes is definitely in a bubble. He praised the Fed for apparently
learning from Japan's mistakes, tightening more gradually and taking the
economy's pulse as it does so.
"Japan shows the importance of avoiding a hard landing," Professor Makabe said.
"Avoid big shocks. That is the biggest lesson of Japan's bubble."
