Thursday, April 10, 2008

Lessons from Japan's Housing Bubble - II

Myth: Prices will keep rising forever.

Too many homebuyers, lured by sleek advertising and media-generated hoopla, buy properties that they can rationally ill-afford, given their financial background and potential. However, their eyes are usually centered in to a future where they expect to sell their newly-acquired properties at huge profits, while allowing rentals to pay for their EMIs. However, when prices drop, buyers get financially battered and in worse cases even completely wiped out.

Human beings have a congenitally designed to not learn from the past. During a bubble, people don't believe that prices will fall, even though it has been proven wrong so many times before.

Another indicator of a bubble is the unbridled bidding for worthless land.

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.

Prices were highest here in 1989, with some fetching over $1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. 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. Such structures later become reminders of a different era, like the aftermath of a boisterous party.

Another indicator of a bubble is the acute scarcity of affordable housing. In Japan too, during the housing bubble, the focus was only on building commercial property and luxury apartments. In India too, currently, especially within the city limits of Mumbai, a standard 2-bed room apartments cost no less than Rs 1 crore.

By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

Read next story in this series: Mad Rush for Home Loans and Huge Debt

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Posted by Eclectic Investor at 12:29 PM  

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IN PASSING

Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book


“When everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

“Last year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

The most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Prachi Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror

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