How did Japan’s real estate bubble form?

  I put the real estate selling boom that began in 2013 from Abenomics It’s called “mini foam”. I call it a “bubble” based on these obvious factors. When the investment rate of return obtained by rental housing is substantially lower than 5%, it can be judged that the housing price has a bubble component; and when it is lower than 4%, it can basically be judged as a complete bubble. Since the second half of 2015, most of the expected yields of commercial housing sold in central Tokyo have not reached 5%, and some have even been significantly lower than 4%.
  I can explain in more detail. Since the introduction of Abenomics, most people who buy new commercial housing in central Tokyo are not for the actual needs of “living by themselves”, but for investment. The buyers are foreigners, as well as wealthy Japanese for the purpose of coping with inheritance tax. After the customer who wants to invest sees the model house, the salesperson will definitely come up with information such as “expected rate of return” and “expected rent table”. Of course, these are just “expectations” in the final analysis. In the first half of 2015, even in the “expected” estimates, most of the housing yields were only around 5%.
gradually falling rents

  Please think calmly. The so-called rent is generated only after someone comes to rent it. What happens to a house bought for investment purposes if no one rents it? First, it will increase the cost. The property fee plus the home repair fund, and perhaps the cost of broadband, plus property and city planning taxes. Without rental income, these are deficits that only go in and out.
  If no one rents for a year, the deficit can be quite large.
  There is one more grim fact. That is, the transaction price of houses will bubble, but wages will not. why? The reason is clear. Whether it is a new house or a second-hand house, some people buy it for the purpose of investment, but no one rents it for the same purpose. There will not be a demand for “the economic situation is good, let’s rent another set”. Therefore, the rental demand is just in demand.
  As mentioned earlier, bubbles only occur in the stock and real estate markets, with little or no impact on ordinary consumer goods and personal income. In other words, even if there is a housing bubble, it is basically impossible to expect wages to rise. Supporting the rental market is the working class, or the demand for dormitories from ordinary companies. None of them will affect the housing bubble.
  Furthermore, today’s housing in Japan is in a state of considerable oversupply as a whole. According to a survey conducted by the Ministry of Internal Affairs and Communications in 2013 and the “Housing and Land Statistics Survey” published in 2014, the national vacancy rate is 13.5%. The real estate website “HOME’S” shows that the vacancy rate of rental houses in Chiyoda Ward, Tokyo often exceeds 30%, and Chuo Ward and Meguro Ward often exceed 20%. In recent years, landlords of leased houses have paid intermediaries for several months of “advertising fees”, and “free rentals” in which rent is waived for about a month after moving in have become very popular. This is actually reducing rents.

High real estate prices are not a phenomenon unique to East Asia. Property prices in central New York, London and Paris have also froze in recent years.

  As mentioned above, although housing prices in some bubble areas are rising, rents are gradually declining. This is the reality. Rent prices are originally formed according to the “relationship between demand and supply”, so it is normal for rents to fall when there is too much supply. Therefore, the investment yield of housing in local bubble areas is bound to decline.
Tokyo is also catching up with the worldwide bubble

  One of the main “buyers” that drove Japan’s real estate into the bubble in 2015 was foreigners. It is no longer possible to think about Japan’s real estate market only in terms of the domestic situation. So I tried to turn my eyes slightly to the economic situation of Japan’s neighboring countries. After the subprime mortgage crisis, China’s economy has guided the world economy to the right track. The result was a bubble-like phenomenon in China, with stock and real estate prices soaring. As a result, further expansion of funds naturally turned overseas.
  In Hong Kong, China, bubble money pouring in from the mainland snapped up real estate. In the spring of 2015, I was interviewed by TV stations and newspapers in Hong Kong. Regarding Japanese real estate, they must have interviewed various people. Of course, I couldn’t afford to miss the opportunity to interview them in turn. “How is the housing market in Hong Kong?” The young female reporter, who had just graduated from university for two or three years, was immediately worried. “People from the mainland are snapping up houses everywhere. The price has risen too high. Even if I spend my whole life, it is impossible for me to own my own house.” It is said that even cheap commercial housing is 50 times her annual income. If this is converted into investment rate of return will be how much? It must be around 1%.
  In less than a hundred years, the investment capital cannot be recovered. How is such an investment possible? Moreover, can the investment property maintain its value corresponding to the investment price for a hundred years? This “high risk, low return” investment is clearly not realistic. This is without a doubt a bubble.
  In fact, soaring real estate prices are not unique to East Asia. Property prices in the heartlands of New York, London and Paris have also froze in recent years.
  When you think about it, this is a natural phenomenon. In order to get out of the economic depression after the subprime mortgage crisis, China, the United States, the United Kingdom and Japan in the late afternoon have implemented “different-dimensional monetary easing policies”. This worldwide monetary easing policy has led to the flood of funds all over the world. It is also a reasonable phenomenon that these funds are pouring into the real estate markets of various countries. Tokyo is the last point in the spread of this worldwide bubble phenomenon.
  It was written earlier that “if the yield is less than 5%, there is an element of bubbles.” If a simple calculation of 5% is used, the investment funds will not be recovered in less than 20 years. At 4%, it will take twenty-five years to recover funds. Moreover, there is a risk of asset depreciation. So I don’t think it’s a realistic investment goal by any means.
  In my opinion, the so-called real estate investment, even if it is a house in good condition in the city center, should have a minimum yield of around 5% to 8%, which is suitable. This is also the rate of return that can recover the investment capital in fifteen to twenty years. Considering the risk of asset devaluation or loss to disaster, this yield is just right.

The third bubble will finally burst

  I tried to dig deep into this wave of bubbles from the perspective of “real estate investment”.
  In fact, real estate investing is simple as long as the economy continues to grow. But in Japan, a country where the economy hasn’t grown in the last quarter century, while Japan’s GDP hovered around 500 trillion yen, China’s grew by more than twenty times, surpassing that in 2010. Japan, now easily more than twice the size of Japan. The asset value of real estate will rise as the economy grows. The use value of real estate in regions and countries with economic growth will continue to rise, so in countries with economic growth, real estate prices, including housing, will continue to rise.
  How about Japan? Japan’s economy has not grown for the past quarter century, so theoretically property prices should remain unchanged. But the price actually jumped up and down. First, after the Heisei bubble ended, real estate prices across the country began to decline. People clamored for “land myths busted”. However, from around 2005, overseas speculative hot money centered on Europe began to pour in, frantically snapping up Japanese real estate, leading to a “real estate mini-bubble.” Later, the bubble burst with the subprime mortgage crisis. Today, based on the monetary easing policy of different dimensions, due to the inheritance tax measures and the “explosive buying” of foreigners, a bubble that is limited to local areas in the city center has occurred.
  However, the downward trend in second- and third-tier cities and suburbs has not changed. Therefore, from a macro perspective, the overall real estate prices in Japan should be regarded as falling. In these times, it is quite dangerous for individuals to invest in real estate in Japan. Even if you buy a condo or ordinary home, the probability of being vacant is high, and you can’t expect the house itself to appreciate in value.
Japanese who like to dance with foam

  Today, the world is still surging with “real estate investment fever”, and even new words such as “salaried landlord” have appeared. However, what is the probability of success for ordinary wage earners to invest in real estate in Japan? I guess it’s less than 1%. For example, it seems that the single apartment for investment is selling well, but can it get the expected return? At the beginning of the purchase, the income tax is refunded, so it feels like a profit, but after a few years the house may be empty and unoccupied. In addition, many local home repair funds will rise five to ten years after completion. In addition, the newly built commercial house cannot expect the house itself to appreciate in value. If it is sold, there will almost be transfer losses.
  Currently, the number of households in central Tokyo and Osaka is still increasing, but it should decrease in the future, and there will be less and less demand for housing. Investing in real estate in a country where the economy is not growing and the population is declining requires considerable insight. Many Japanese who have had the experience of buying, selling, and replacing their own houses that seem to be “real estate investment” are prone to fall into the fantasy of “chasing dreams” again. Therefore, after the housing price bubble, ordinary people are often involved. In recent years, the characteristics of Japanese people can clearly see the tendency to “like to dance with foam”. The house you bought yourself has appreciated by several percent or several times compared to when you bought it, which will make people “floating”.
  I have experienced “floating” once, and I want to do it again. Some succeed and some fail. Buying real estate before the arrival of the bubble can experience the “excitement” brought by the appreciation. However, in order to get the profit, the property must be sold. Some home buying guides put forward “Please change the house every ten years and create your own assets”, which is tantamount to making him “backflip” for ordinary people.
  Even professional real estate brokers have many who fail to discern the peak of the bubble. Every time the bubble bursts, about 60% of the middlemen disappear. Although occasionally someone is seen resurrected in the next bubble, it is rare. Even experts are difficult to do, ordinary people better not think that they can easily succeed.
Disruption of the “land myth”

  The DNA of the Japanese is indeed engraved with the imprint of the “land myth”. The Japanese are a nation obsessed with “owning the land”. During the transition period from the Heian period to the Kamakura period, people unrelated to nobles, Buddhist temples, and shrines acquired substantial legal ownership of land for the first time in Japanese history. Once the land is in hand, they will not let it go anyway, leaving it to their children and grandchildren to inherit.
  In Japan, until the 1990s, when the Heisei bubble burst, as long as land was owned, the value rose every year. Today, however, the “land myth” has been completely shattered. The population is declining, the economy is not growing, and it is essentially shrinking, so real estate prices across Japan are falling. In a localized economic bubble, it is the “local” limited zone that rises. Of course this bubble will burst.
  However, the Japanese may still not be able to get rid of the shackles of the “land myth” and the fantasy of wanting to have a home. If not liberated from this “land myth DNA”, as long as certain conditions are met, most of the Japanese will still be involved in the economic bubble.