The case of having a Japan like correction in our real estate market grows stronger as each year goes by. The entire notion of zombie banks derives from the crisis in Japan. Shadow inventory and the suspension of mark-to-market accounting are part of the life support that is keeping many US banks operating. Two decades later, with low interest rates and no signs of real estate values going up, the Japanese housing market is virtually stuck in a holding pattern. One thing is now different however as Japan is now starting to run trade deficits. Japan recently posted a record trade deficit because of a strong yen and rising imports on fuel. Yet the real estate market has yet to recover and is back to 1980s values. Can you imagine housing values in the US going lower or sideways well into the 2020s? Hard to believe but let us examine a few areas where the pattern is playing out on a similar note with new data.
US versus Japan housing values
If we examine the US housing bubble and Japan housing bubble we see a similar bubble bursting format:
Source: Seattle Bubble
Since the chart was produced US home values have moved even lower. Japanese real estate values are going back to levels last seen in 1985. Two lost decades are baked in the cake. The US has already reached one lost decade. When you examine items like the above you have to ask what will be the impetus for increasing US home values. Are we seeing household wages go up? If you listen to talks of the great car recovery story, part of it had to with rising car sales but a large part of it had to do with slashing wages. How is that good for increasing home values?
Low interest rates a panacea for home buying?
Some seem to think that low interest rates are a cure all for everything ailing the real estate market. Certainly the Federal Reserve believes this. Japan has mastered the low interest rate world:
Source: Global Property Guide
The Bank of Japan has kept interest rates below 2 percent for nearly 20 years. In fact, the Bank of Japan has had a zero percent target interest rate policy in place since 1999. As you can see this has keptmortgage rates at incredibly low levels. Surely with such low rates home building has taken off?
Source: Global Property Guide
Okay, well maybe home values have increased:
Home prices have retraced two full decades even in the face of decade long zero interest rate policies by a central bank. For those that think Japan’s housing market is tiny think again:
Source: Ministry of Land, Infrastructure and Transport
Japan has one of the most valuable real estate markets in the world even after their housing bubble completely collapsed. Over the long-term housing values are driven by local demand. Bubbles of hot money can emerge like what is being experienced in Canada at the moment. But these are unsustainable and by definition will burst at some point.
The case for rising rents
The next argument we hear is that somehow low interest rates and zombie like banks will somehow push rental rates higher. Rents are mainly driven by what people can afford with their paychecks. And so far, there is no indication rents are soaring in Japan:
I find this argument fascinating in the US as well. Of course, once the bubble burst a premium was placed on renting as credit markets seized up and people switched to renting and were unable to obtain a mortgage. Yet once that short-term premium is exhausted rental values begin to find a natural equilibrium. Take a look at the Las Vegas market and you can see a tipping point in rents emerge.
When we hear about the issue with youth employment in the US we need only look at issues being faced in Japan as well:
“(CBC) It’s hard to fault Ueda for his lack of enthusiasm. This was supposed to be the year he followed Japan’s decades-long, springtime tradition that sees hundreds of thousands of students bloom into full-time workers.
“I couldn’t find a job, so I’m staying on in school for another year,” he admits with a shrug.
That makes him one of the more than 100,000 new university graduates — 20 per cent of the total — who hadn’t secured full-time employment as of May 1, according to a survey by the Japanese Education Ministry. Their ranks have been growing each year.”
Even with real estate values back to 1980s levels in Japan it is hard to purchase a home with no secure employment. People always point to the low unemployment rate in Japan but this is somewhat misleading. Japan has a giant part-time work force, nearly one third of their entire labor force. These workers operate largely like contractors and surely that cannot be a boost of confidence to take on 40 year mortgage.
Our part-time work-force has also increased in the US:
Source: Calculated Risk
There are many similarities in how the US and Japanese real estate bubbles burst:
-Massive central bank intervention to save too big to fail banks
-Ignoring bad performing loans thus drawing out shadow inventory or zombie banks
-Artificially low interest rates courtesy of quantitative easing by central banks
-Continuing price declines in the face of record low mortgage rates
-A rising part-time labor force
-Those who argued Japan only carried trade surpluses now see a record trade deficit (see rule on Black Swans)
-Decade long depression on housing starts
-Fast decline in home prices after bubble burst followed by slow and continued decline in real estate values
There are obviously many differences as well but the above is what is playing out. The US has never had a real estate bubble of this magnitude so it is hard to predict how things will play out. Yet we can analyze the data and hopefully arrive at some macro-economic conclusions. We can look at similar situations and ask why our pattern is looking very similar to the bust in Japan.
What are other similarities and differences between the two markets?