Japanese Property Market

Western property markets have nearly exhausted themselves. You know this is the case when even the `no growth` markets are even growing, and sometimes rapidly. Consider NZ and Tasmania (Australia). These are areas with no population growth and few jobs, but a rapacious property demand driven by dreamers in far-away cities who hope to profit or retire there in 20 years. A crash always shakes out those types of investors, and if that doesn`t the prospect of declining property values is the clincher.

But what of other markets? The Czech property market is booming because of economic reforms, a huge influx of tourists. And I dare say its the same in many of these countries. My guess is that neighbouring Europeans (seeking a cheap holiday house) or ex-pats Czechs living in western markets are reinvesting in their home market boom.

We have seen property booms in Thailand and China....but I can`t say I`m familiar with other Asian markets except the Philippines and Japan, so I will comment on those markets.

Japan
The problem in Japan is that suffering is a virtue. And people are likely to suffer longer because they have low expectations of what constitutes the good life, not to mention a fairly narrow concept of what constitutes `their` responsibility. They are functional people, but its a narrowly defined identity, much like you have `worker ants` and `soldier ants` in your typical ant hill. Those Japanese that have retired are on a much better deal and I guess they can help their children to some extent - if they are still living with them. The whole system is geared to keep companies profitable, and those levers are wearing this, not because Japanese companies are not profitable, but because they are not profitable manufacturing in their home markets. Japanese job growth is flat - and service orientated. There is not the income growth to justify higher levels of spending or a property boom. They are increasingly having to move their manufacturing offshore, where the high tech robots can`t compete. That paradigm still works in Japan. But with so many developing countries opening up, such opportunities are less common.

One might be hoping that the Japanese consumer might relax - overcome their stress about the economy - and just start spending, but the consumer knows that something is amiss. There are few Japanese who are prepared to take things easy....except retirees. This is just not a culture where you can enjoy yourself without being sossed. Consider that the demand for holiday houses was huge back in the 1980s when you could buy a basic Swiss-style chalet in the mountains, with onsen (hot spring), next to a golf course for Y25million ($US250,000. Today, 20 years later that same holiday house is not used, overgrown by shrubs, and selling for Y1million. I looked at one such foreclosed property in the mountains, just 4km from a train station and the coast and 2hrs from Tokyo.

I was thinking Japan might once again regain a better balance between work & play, but this seems less likely, at least for the Japanese. Fortunately, I'm not Japanese, so there are no such expectations on me. For the Japanese, there is just too much virtue in suffering, and there are just too many inefficiencies in the market to permit the high levels of productivity growth required to get this economy back on the rails. The `sufferance` virtue stems back to their childhood education, and its deeply entrenched. Those that would reflect tragically on it will leave the country, substitute it with a feeble `national pride` or decline into a state of cynicism, saying things like `shouganai` (It can`t be helped` or `that`s life`).

That`s not to say there are not opportunities in Japan. I am less positive about a great change in lifestyle which might result in a huge demand for holiday houses, but consider the following opportunities:

1. Growth propositions: There are just a few prefectures and metropolitan areas in Japan which are growing in population - Tokyo, Kanagawa, Saitama, Nagoya, Osaka and Okinawa. The reason is that this is where the jobs, convenience and income growth is, but it will remain feeble income growth as long as there is no substantiative reform of this highly regulated economy. On a promising note, historically when Japan has changed, it has changed a great deal. But Koizumi, despite being enormously popular, has not achieved anything, except improved his dance steps with Richard Gere and restyled his hair.
2. Lifestyle propositions: For those with money, or care little for it, this creates a great `lifestyle opportunity` in the houses vacated in rural cities. eg. Sendai, Fukushima, Niigata. The more remote - the cheaper the house. Mind you some of these cities are buried in snow during winter, so choose wisely (east coast). Many Australians have bought houses in the northern island of Hokkaido because its close to an international airport and its skifields are empty, and its complimentary to their skiing interests, and its great snow. The benefit is that rural population has fallen, so the quality of infrastructure remains good. The hospitals, shopping centres, etc are still there. And the internet may just allow those salarymen to return.....if they dislike the `buzz` of Tokyo. The lifestyle alternative seems to make sense to retirees, but Japanese are shy and value friends and family, so they are more inclined to move into a new apartment close to services. Poorer elderly will tend to patch up their existing 40yr home and hope they aren`t engulfed in fire and collapsing debris in the next earthquake. The other alternative is:
3. Combo lifestyle: There are opportunities for a combination of city and rural life. Wealthy Japanese can live in the rural fringes of Tokyo and commute on the `very fast` shinkansen train service to Tokyo at 32okmph. Tickets are about Y2800 ($US35 each way), but there are monthly discounts. Some have the good fortune to be able to live & work in these fringe areas of Tokyo, whether on the very average beaches or enjoying the harmony with mountain streams. Areas around West Tokyo like Hanno, Ome, Takou are very close to the West Tokyo satellite cities of Hachioji, Tokorazawa, and to the north there is Kawagoe and Kumagaya, though further away from Tokyo. West Tokyo has the better train services, but they are crowded, and can feel crowded even if you have a seat.
4. Lifestyle change: Eventually the internet will bring considerable changes in our lifestyles. No longer will people have to concentrate themselves in cities. Already there are certain jobs where you can work from home, eg. graphic designers, computer programmers, traders, writers. The list is slowly expanding, but these people will still want services/infrastructure, and will want proximity to Tokyo. There are considerable benefits for businesses to contract employees to work from home in terms of lower overheads. The problem is getting Japanese motivated to work from overseas. They are not self-directed people, so a cultural change would be required. Another approach by some businessmen is to buy a very small (15-18m2) apartment in Tokyo for overnight stays.

Yields on property in Japan are very good because of the dfeflationary 1990s. That trend appears to be turning, though there are still alot of costs that are inflated, eg. utilities, food. These are not dollar inflated, but plausible structurally inflated costs which can offer future productivity benefits. The higher yields are in the countryside, but the population growth is in the city centre, but I wonder for how much longer. I think Hanno/Ome offers a rare lifestyle combination which is reflected slightly in the higher property values there. Might its values be the cause of its own destruction (ie. over-population?).

The best opportunity to buy property in Japan is in the distressed (foreclosed) property market, as properties are sold at deep discounts compared to foreign markets. There is a suspicion that the yakuza (Japanese mafia) control the sales, but in fact the process is strictly controlled by the Japanese local governments through the courts. My girfriend and I have bought to properties at near minimum bids on the fringes of Tokyo where the market is less liquid. Its important to seek strategic opportunities as the 'conventional' properties in the city are well bid.

Philippines

The Philippines property market has long been recognised as a great story, but maybe always will. Its a beautiful tropical island paradise. Populated by litter and fumes in the city, that is not the case in the countryside. Unfortunately foreigners are only allowed to own condos there, but they are cheap at $40-200,000. I steared away from the Philippines because it seemed too risky to undertake any of the adventure activities I like doing. Didn't want to risk encountering bad people in remote areas.

Since foreigners are generally not able to raise finance domestically, and interest rates are very high at 19-29%pa (bank to vendor finance), cash is king, but its not alot of cash. Despite the high interest rates the property market is doing very well. Most popular of all are semi-rural estates, condos and shopping malls. The industry is supported by expat Filipinos and those at the top of the pecking order - making alot of money at others expense, because the Philippines is not yet making much money. Terrorists have suppressed tourism and dubious mining law has undermined investment, but that is changing. There are 3 sectors which will help the Philippines:

1. Mining - rural based
2. Tourism - rural & city based
3. Property - rural 6 city based

There is a pro-reform agenda now in the Philippines with talk of constitutional reform. But is changing the constitution enough? Is it a distraction? Certainly President Arroyo has recognised the path of thailand, and is keen to follow it. Will the vested interests gathering against her - share it. Its a market to watch over the next few years. Little Indonesia - it could be another growth story. But it might take a little time yet. They are really quite rapaciously immoral people. Blatant hypocrites really!

US Property Market - Sept'05 Outlook

The peak in US equity markets peaked long ago, but since the property market is booming, and about 30% bigger than equity markets, and much more alligned to the consumer perception of wealth creation (ie. wealth effect), its inexstricably tied to consumer spending. I have always said that the US economic boom will collapse when US property prices peak. That point is not far away for the following reasons:

1. Sales of existing houses in the US dropped by 2.6% in Jul05
2. The Fed Reserve is increasing short interest rates, though they are not yet flowing through to long rates for reasons mentioned in another essay. It will ultimately be inflation that drives interest rates higher.
3. Oil prices are continuing to defy economists arguing that oil prices fill fall back soon. They said they would fall back to $28/bbl about a year ago, now they are saying $50/bbl. Its all double-speak....`watch the cards, not my hands`. Oil prices were never supposed to go above $50/bbl and now they are $68/bbl and heading for $US75/bbl. This is having a big impact on US and global consumer spending.

Mind you housing prices in the US have not ceased to rise, but one does get the impression that its not far anyway. Some economists argue this will be a soft landing because of the strong economy and full unemployment, but they are the conditions that precede a fall. ie. Pride before the fall so to speak.

Recently I have been considering the prospects for a housing-led recovery in Japan....but this seems less likely as the US slows because the Japanese economy is still in low gear. There was always the promise of high property yields and record low interest rates stimulating the housing market and consumption, but incomes are not rising significantly, and its mostly tied to export growth (US & China). They are also being hit by high oil prices. Economic reform was always a possibility, but for the short term, it has died with the LDP party`s internal opposition to Postal Savings privatisation. This is perhaps the least contraversial reform that the government could make, so being stalled on this issue pushes back any likelihood of productivity-based stimulus to the Japanese economy, but it will come eventually. There are encouraging signs of a pro-reform agenda developing which will see significant structural reform over the next 5 years - and this will feed into the next economic boom. During this period Japan, China, India and the rest of Asia will be leading consumption - with or without the EC. The US will be replacing its bandages - recovering from its indebtedness, but after 5years, higher savings levels will mean its better positioned to recover. The early part of the cycle will be slow....until the US and EC join. The EC is also running a reform agenda but because it encompasses many governments - it will be slower, but the Eastern EU bloc should perform well.

US Property Market
Due to fierce competition, banks are under tremendous pressure to lower their mortgage lending standards. If they don’t, they will quickly lose market share in the mortgage business and that means lower earnings and falling stock prices (for the banks), which they don’t want. The banks don’t mind easing the lending requirements for new mortgages because after writing up a new mortgage they turn around and sell it to an investment bank that packages similar mortgages into securities (called mortgage backed assets) that are then sold to pension funds, hedge funds and other investors. As interest rates on government and corporate bonds declined the demand for mortgage backed assets has increased, thereby supplying more capital to fuel the real estate boom. But during all this the systemic risk has increased dramatically.

Its questionable how long this can last since there are other compelling reasons for property markets to fall. And there is little scope for US government stimulus after recent tax cuts, rising interest rates on debt (40% owed offshore - causing alot of money to leave the country), declining tax receipts (due to softer economy), not to mention a deficit-burdened public and private sector. Consumption will need to be cut GREATLY in favour of savings and eventually tax increases.

Latests Statistics
The US property bubble appears to have come to an end – or is it just a pause in the face of poor economic data and natural disasters. Home construction fell for the 2nd consecutive month and new building permits declined in Aug’05. The National Association of Home Builders’ New Home Sales Index for single family homes fell in Sept’05 reflecting a decline in sentiment among US home builders. Of more concern, the 30-year fixed mortgage rate rose again and the supply of new houses for sale increased suggesting an overhang in the market. The median price for a new home fell in July’05. Does this all suggest that the US market has topped?
Change in sentiment is a big concern because rising home prices have driven corporate earnings as well. Bonds and equity values are highly priced at the moment. Its not an easy call to pick the top of the market – but rest assured its going to correlate with home prices or contraction in money supply. In as much as money supply requires the liquidation of credit, this indicator requires a rise in bankruptcies, so is likely to be a lagging indicator.
According to the Fed, interest rates need to be raised to a point where economic growth is neither promoted nor hindered. US consumption is financed by credit – but the money supply only grows because:

1. Chinese & Japanese creditors are rewarded with higher import penetration into the US market.
2. Chinese & Japanese creditors receive a high yield on their bonds, ie. They feel they are receiving an adequate risk premium.
3. US households believe property is a good investment because sentiment is positive, incomes are rising, employment levels are stable, interest rates are low.

Certainly households are likely to stop buying property if prices start falling…..but will Asian central banks stop financing US consumption? It might be expected that central banks will buy more gold and diversify away from new US treasury issues causing global interest rates to rise. Higher interest rates will cause US consumption to slump, reducing the need for foreign financing as well. Asset values will fall – gold will remain strong as a safe haven against bursting asset values and a lower $US. A falling $US will eventually be inflationary since imports become more expensive, but eventually losses will be absorbed by Chinese exporters and US distributors (corporations), since they will lack pricing power.