Thursday, August 19, 2010

Japanese real estate boom or a bubble

The US sub prime crisis in several ways is reminiscent of the property bubble that took place in Japan in the 1980s. The two events, though separated by almost about two decades, share several striking similarities. Both bubbles were inflated by heavy speculation which, in turn, was fueled by a combination of easy availability of finance and an explosion in new, complex financial products. At its dizzying height, property prices in Tokyo’s Imperial Palace valued more than the entire land in Florida. During the 1980s, Japan’s economy experienced rapid surge in asset prices, increase in money supply and credit, and an expansion of economic activity. What further led to the emergence and expansion of bubble were factors like protracted monetary easing, taxation and regulation biased toward accelerating the rise in land prices, progress of financial deregulation and aggressive behavior of financial institution. During the bubble period , Japan implemented policies that facilitated easy credit Japan and organized large trades through loans from banks. The most famous economic bubble lasted from 1986 to 1990 and it has taken Japan over a decade now it recover from that crisis, although banks are still grapping to clean their balance sheets while land prices are on a journey down south.

While such atrocious valuations may be missing from the US real estate scene, the fact is that the US housing prices kept pace with and even outpaced inflation consistently till 2005.

Between 2000 and 2005, the housing pieces in the US leapt up from about 5% to close to triple the digit. The mortgage lenders dearly with many of them, including Citigroup and Merrill Lynch, writing off billions of dollar question is there any lesson to be drawn from the Japanese assets bubble?

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