Wednesday, April 09, 2008

Lessons from Japan's Housing Bubble - I

Why India's Housing Bubble Similar to Japan's?

A housing bubble is in place when property rates start rising at double-digit rates, and people start taking loans to invest in property, with the idea that the loan can be paid back easily and the property sold at a profit.

Once the bubble is burst, the property is worth a fraction of its purchase price and people get left behind with a negative asset, where the EMI is higher than what the asset can earn in a month. In such a situation, the balance outstanding loan cannot be paid off even if the asset is sold.

Japan is an excellent example of a housing bubble that went horribly wrong, and it has a glaring similarity to what is happening in India. Read on and identify the similarities:

  • The Japanese real estate market boomed from 1985 to its peak sometime in early 1991.
  • During this time, Japan’s property prices rose much faster and more steeply as speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
  • 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.
  • 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. A commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California.

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. In 2005, the land in Japan was 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 2004. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.

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: Myth: Prices Will Keep Rising Forever

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

4 Comments:

Colton said...

There is simply no comparison between the Japanese real estate market and the India real estate market. The Japanese bubble collapsed due to a myriad of financial mistakes and accounting tricks which created a tulip like frenzy for real estate. India has no such situation and is very under-leveraged financially. Sure some prices are too high, but the underlying fundamentals are still sound.

Sanjeev said...

SIR U HAVE IGNORED THE VERY BASIC FUNDAMENTAL POINT... THAT IS THE DEMOGRAPHY.....
WHILE JAPAN HAS BEEN SUFFERING FROM REDUCTION OF POPULATION, INDIA IN FACT HAS THE OPPOSITE CASE.....
DEMAND FOR NEW HOMES WILL E INTACT IN INDIA FOR AT LEAST NEXT 25 YEARS....
TRUE THAT THERE WILL BE SOME CORRECTION IN PRICES, BUT ITS NO WAY RATIONAL TO COMPARE IT WITH THAT OF JAPAN.

niraj said...

Yeah... I agree. As of now it seems to be having a bubble but a very small one.
Prices in most of the places are still in the region of 3000 to 5000. This can't be considered as a HUGE bubble.
But I guess, this is Bob's style of writing !

StockingUp said...

Regardless of whatever Colton or Sanjeev have said, one thing is for certain that the Indian property market has become very speculative with gains from stock markets causing real estate speculation just like what happened earlier in Japan.
Now that those gains have evaporated and lending has tightened one is witnessing the decline of the real estate market.
As far as demographics is concerned - property prices are not directly dependent on demographics. It is a pure demand-supply equation.
Another thing to remember in recent months commercial real estate prices had risen to such levels that tenants began doubting the financial viability of doing business in such expensive locations.
Real estate is mostly a facilitating asset not a directly productive asset. Apart from rising wage costs the rising cost of real estate is one of the major contributors to the increasing cost of doing business. When the good times end, real estate is bound to decline.
This is what we are seeing now.

KM

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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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