The Japan Real Estate Crash Revisited

Bubble burst quickly, but the pain lingered
By Martin Fackler, NY Times

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 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.

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 sorts 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.

Like their U.S. 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.”

Caveat Emptor,

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8 Responses to The Japan Real Estate Crash Revisited

  1. Anonymous says:

    The US consumer is living off of borrowed money and monthly payments while the Japanese consumer is cash rich.
    Stagnate wages and increasing debt payments equals consumer meltdown.

  2. grim says:

    Yield curve inverted early this morning..

    Treasury yield curve inverts


  3. skep-tic says:

    shows the limits of monetary policy. anyone who thinks bernanke can stop this is in for a rude awakening

  4. gary says:

    Oh, I guess they’re making more and more land in Japan, right? I mean, why else would prices fall over 60% in the last 14 years? (sarcasm off)

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