Term Paper on "Japanese Housing Market"

Term Paper 10 pages (2514 words) Sources: 1

[EXCERPT] . . . .

Japanese Housing Market your purchase.Japanese housing market

The world is now facing the consequences of the internationalized economic crisis. The financial problems which emerged within the United States real estate sector impacted the international community at a dramatic level and caused predicaments such as bankruptcies, downsizes, the demise of economies and industries and the loss of life long savings.

One of the most severely impacted sectors is the real estate segment, in which the values of the properties have decreased significantly. Economic agents collected unstable revenues; people became unable to repay their mortgages and the financial institutions restricted the access to borrowed funds. This situation is common throughout the world and it is expected that the international real estate community would require several years to revive to the pre-crisis features.

But unlike the incidence of problems, fact remains that the degree of severity across nations varies. At a general level, states which had implemented more restrictive financial policies and limited the population's access to borrowed funds were better able to contain the impacts of the crisis within the real estate sector. Nevertheless, there were also other forces which led to differentiated impacts of the crisis.

In Japan, the real estate sector seems rather stable and the impacts it has felt as a result of the subprime mortgage crisis are limited. The current project sets out to assess the features of the Japanese real estate market. In order to do so however, it would first focus on the Japanese general characteristics, which also play a role in the development and implementation of prudential approaches.

2. General information about Japan

Measured by the gross domestic product, Japan is the world's third largest economy, after the United States and China, with a national output of $4.33 trillion. The country is globally recognized as a cultural emblem, and more and more of an economic power. Japan's growth became sustainable in the aftermath of World War II, when the focus fell on cooperation, strong work ethics, and technologic developments. Today however, the country is encountering the challenges of globalization and increasing international competition, which force it to change and adapt.

The Japanese economy had been registering high growth rates for the decades 1960s, 1970s and 1980s (10%, 5% and 4%), but during the 1990s period, it was faced with problems pegged to high asset prices.

"Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor" (Central Intelligence Agency, 2011).

It could then be argued that the modern Japanese real estate sector is stronger as a result of the situation encountered and overcome in the 1990s. At a more specific level, Japan is characterized by the following features:

Less than 12% arable land, meaning as such that agriculture is not a viable option and that the country has to focus on other sources of income.

Agriculture accounts for 1.1% of GDP; industry accounts for 23% and services account for 75.9% of the gross domestic product.

A total population of 126,475,664 individuals, out of which 65,700,000 comprise the labor force; unemployment rate is among the world's lowest with 4.8%. 15.7% of the people live below the poverty line.

Life expectation at birth is of 82 years -- among the world's highest -- and the literacy rate is of 99% (Central Intelligence Agency, 2011).

All of these features indicate prudence and a life style based on adaptation to the features of the world, to the resource constraints and to the dedication to development and education. These characteristics then could also explain the resilience of the Japanese real estate sector in the face of the crisis and would be explained by the responsibility involved in the decision making processes which impacted the real estate sector.

Several characteristics of the Japanese housing market are worth mentioning now, as pointed by Noguchi and Poterba in their "Housing Markets in the United States and Japan." As the introductory chapter mentions, "Japan has had a serious problem throughout most of the postwar period" (Noguchi, Poterba, 1994). This problem was translated both in a low offer of dwellings and an overall scarcity of dwellings and unsatisfactory housing conditions, as a direct consequence of the former. One of the elements that caused such a problem was the high level of land prices, continuously rising over the past decades. High land prices directly impact the surface of land that people can buy and feed into the high price of the dwellings on this land, including in terms of what the client is able to build. Smaller dwellings better fit on smaller plots of land and are more affordable, although comfort also diminishes.

3. The real estate crises of Japan

The most relevant crisis encountered by the Japanese property market throughout the recent past is represented by the asset pricing bubble of the 1990s decade. In the latter half of the 1980s decade, the assets in the Japanese market were valuing at a rapid rate, to eventually lead to economic collapse in the following decade. The largest levels of overvaluation were observed in terms of stocks and land prices, and it was assumed that the bubble created was based on speculation (Baumgartner, Meredith and Kahkonen, 1995).

Stephen Giovanni Cecchetti at the International Center for Monetary and Banking Studies believes that the main causes associated with the overvaluation of the assets were represented by significant drops in foreign investments within the country. William Curt Hunter however states that the main fault is held by the Bank of Japan, which was, at that time, focused on increasing the international value of the yen, neglecting domestic stability. He also argues that when the authorities recognized the problem, their development and implementation of the necessary monetary policy was delayed. The result was that of the collapse of the stock prices and the gradual decrease in asset prices (Baumgartner, Meredith and Kahkonen, 1995).

The crisis was the result of excessive deregulation and increased euphoria in the economic system, but Japan was fortunate as it was able to contain the crisis. Specifically, the devastating impacts were felt throughout the entire 1990s decade, rather than in the full-blown collapse, as was the case of the current crisis within the United States.

At the level of the current crisis, the Japanese real estate investors were impacted to a smaller degree and the effects were felt generally by companies which had large investments overseas.

"We haven't felt much from the subprime crisis here, unquestionably far less than the effects felt in America and Europe. […] Most of the damage was to a few large mega-banks, one of which lost somewhere in the neighborhood of 6 billion yen. But considering that altogether these institutions only lost somewhere around 1 trillion yen, I think it's safe to say we got off easy" (Noorbakhsh).

And the main reason forwarded for this strong resilience in the face of the global crisis is represented by the prudential policies. Specifically, the Japanese banks did not offer subprime mortgages, but informed the populations on how to protect themselves against credit and interest rate risks. Also, the Japanese population had been already accustomed to an economic approach of saving, rather than overspending (Hunter, 2005).

4. The Japanese housing market systems -- main elements

There are several elements regarding the housing market systems in Japan that are worth discussing. First of all, there is the housing finance in Japan, with all its particularities. There is, first of all, a "virtual absence of a mortgage market for used houses" (Noguchi, Poterba, 1994) in Japan, unlike in the United States. This means that the mortgage instruments are not bought and sold on the open market, like in the United States, which somewhat reduces the flexibility of the financing market, with a direct impact on the housing market as well. On another hand, there is an "unusual combination of private- and public-sector loans" (Noguchi, Poterba, 1994). While most of the finance market supporting housing was made up of public loans before 1965, this had diversified lately to include private loans as well, with commercial lending significantly increasing over the past decades.

As shown by Noguchi and Poterba on the Tokyo housing market, but extrapolated to the entire Japanese market, the relationship between the cost of community, productivity at the CBD and the size of the city is that "the higher the productivity at the CBD, the lower the cost of commuting and the larger the city size" (Noguchi, Poterba, 1994).

This relationship has a distinct and direct impact on the housing market, in that the authors can conclude that "the nonmonetary costs of commuting, time and fatigue, are the only reason why the land prices in Tokyo fall as the distance of a location from the CBD increases" (Noguchi, Poterba, 1994). This certainly makes sense, as the elements that feed into the land price will… READ MORE

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