Saturday, April 12, 2008

Lessons from Japan’s Housing Bubble – V

All the king’s horses and all the king’s men, could not put the Housing Rubble up again.

The accompanying image depicts house prices post the Housing Bubble. By 2004, the Japanese housing bubble had become completely obliterated. More than $20 trillion (1999 dollars) were wiped off with the combined collapse of the real estate market and the Tokyo stock market.

A class-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.

One of the main reasons for the failure in containing the housing bubble was the late intervention of the Japanese central bank, the Bank of Japan, which stepped in late-1989, when it was too late and rates were stratospheric.

As with any desperate moves, the action it took was far too heavy and too fast, raising benchmark interest rates from 2.5% to 6% over 15 months. This was too much for Japan's over-inflated land and stock markets to handle, and economists say that this pulled the rug out from under both markets at the same time.

The Japanese housing bubble was a result of the availability of cheap money, at low interest rates, while the US sub-prime crisis was a result of inflation driving up the interest rates, which forced the Fed to cut benchmark interest rates from 5.5% to 2.5%.

Primarily, it is the availability of excessive funds sloshing around in the economy that causes bubbles. In Japan, business corporations themselves indulged in real estate speculation, so when markets collapsed, it wiped out company balance sheets, crippled the nation’s banks, and gave the overall economy a blow to the chin. This appears to be very similar to what is currently happening in India.

Read the first story in this series: Why is India's Housing Bubble Similar to Japan's

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



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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

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.”

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.

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.

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

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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