Japanese real estate: forecasting the next 10 years from historical cycles
Forecasting something as complex as real estate even five years out is difficult because there is no way to take certain things into account, such as a natural disaster or unexpected news; both of which will cause sharp decreases or increases in value. For example, the 2011 Tohoku earthquake and ensuing tsunami was not something that anyone could have included in forecasting, nor could anyone have known during the summer of 2013 that Tokyo would have been awarded the 2020 Olympics. When forecasting, it is important to keep in mind that it is just that – a prediction and guide for what is likely to happen based on existing data.
However, historical trends tend to give individuals and businesses a relatively decent projection of what to expect over the next decade or so. For example, analysts realized that the American market in the latter half of the last decade was mirroring the Japanese housing bubble. While there were a few differences between the two, for the most part the American market followed a very similar trend that caused serious financial problems. Of course, you cannot predict the unexpected, but for the most part historical trends provide a solid basis for predicting longer-term investments.
Understanding Historical Cycles
When looking at trends, keep in mind that the duration of a trend can vary based on what you are interested in seeing. Usually the peaks and troughs are taken into account to indicate a cycle. Upturns tend to last longer than downturns, but the longer an upturn lasts generally the more unsustainable and disastrous the corresponding downturn will be. Given that there is no way to predict how long an upturn will last, there is no established number of years for a single cycle.
Also, without knowing how high an upturn will go, particularly if there is an unstable bubble, there is no way to adequate guess how high market prices will go. For example, the last housing bubble was substantially higher than could have been expected. In response, the next upturn was much more moderate.
While you cannot predict how long an upturn will last, you can get a decent understanding of how the real estate market will do over the next ten years based on the last few decades. As the last Japanese housing bubble is still very much a part of residential and investors consciousness, and given the regulations now in place, future upturns are very unlikely to be so substantial or the downturns so severe.
Historical Trends – 1980 to 2008
It is nearly impossible to separate land prices from a country’s GDP. Since 1980, Japan has seen one significant housing bubble that created a deep recession during the 1990s. The following chart shows how closely tied the housing market and GDP in Japan were between 1980 and 2005. The second graph shows the real estate price index in Japan’s six largest cities and covers both residential and commercial from 1980 to 2008. These charts show the high spike of the real estate and economic bubbles and the after effects .
The bubble was caused by over-optimism and confidence in the Bank of Japan and the monetary policy in place at the time. The steady and sustainable trend of the 1980s gave way to aggressive and unrealistic speculation in the 1990s. As it became apparent the speculation was excessive, there was little support to back the investments, causing a significant and devastating downward trend. The worst to suffer from this speculation were commercial properties, as seen in the second graph.
In 1989, the Bank of Japan moved to tighten the existing monetary policy in response to the bubble, which caused the bubble to burst. However, it was also the beginning of tighter regulations so that similar unrealistic and unsustainable growth does not occur again.The years following this have been called “The Lost Decades” because both real estate and the economy have suffered substantially. However, as seen in the second graph, the market is finally recovering.
Recent Trends – 2012 to Present
The economic and real estate recovery has been small but stable over the current decade, leading up to the summer of 2013. Then a significant temporary change in economic policy, called “Abenomics”, and the announcement that Tokyo will host the 2020 Summer Olympics created a sudden, substantial upward trend within the three largest metropolitan areas. Other areas have seen the downward trend either significantly slow or stop altogether. It is expected they will likely start to see an increase in value over the coming years. Today, the Japanese real estate market has returned to where it was just prior to where it was when the bubble started.
10 Year Forecast
Japan is currently on an upturn that is very likely to continue through 2020. Following the Olympics, it is likely that there will be at least a levelling if not a downturn. When you take into account the events following the London and Beijing Olympics, Japan is already well underway into preparing for the transition and will likely follow the same pattern set by these cities. Japan is planning for the future of facilities being developed for the Olympics, with the Olympic Village likely being converted into residential properties.
Following the Olympics, Japan is likely to see a slowing of investors in the major metropolitan areas. Small cities and rural areas may not see as much change since they will only be marginally affected. However, one very important concern is the aging population.
The average age in Japan at nearly 45 years old in 2010, there will be increasingly fewer people requiring residences over the next 10 years. Japan’s currently seen as an excessively expensive place with a very high cost of living, which could also cause problems in the future. Depending on how the 2020 Olympics go, the country may see a growing tourism industry as visitors see that the city is not any more expensive than places like New York and London.