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Housing bottoms, Japan comparison

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June 25, 2008 – Comments (11)

I just realised I had no idea what wages were relative to housing costs in Japan, and I still don't.  Japan is repeatedly held up as an example of a place where housing prices fell for 18 years, or something like that and there is little information on what affordability was through that period, which is a huge ommission, imho.

So, I did a quick search.  This link has a few Japanese properties.   The prices still seem very high by my standards, about $300k for something in the range of 400 sq ft.  I still don't know what the average wages are, but $2.5 million for about 1500 sq ft. 

A quick search of wages I found if you wanted to teach English in Japan you could expect to be paid from $2700 to $4000/month, so it seems housing is still unaffordable in Japan for many people. I suspect due to over population it will remain unaffordable, but it does also help explain the degree of unaffordability.

11 Comments – Post Your Own

#1) On June 25, 2008 at 8:24 PM, binv271828 (< 20) wrote:

Whoa! That is a huge disconnect. I have heard that some people in Japan have 50 or 100 year mortgages on their houses. Basically it would paid off by your grandchildren ... ???? Talk about an inheritance. :(

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#2) On June 25, 2008 at 10:43 PM, abitare (36.90) wrote:

That is one reason why they stopped having kids, it is two expenisive, same thing going on in Italy.

Have you seen the movie Into the Wild? About the kid, who wonders off into Alaska? 

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#3) On June 26, 2008 at 1:25 AM, dwot (66.58) wrote:

Housing is down to about something like 1/4 of where it peaked so it really makes you wonder how unaffordable it got.

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#4) On June 26, 2008 at 1:26 AM, dwot (66.58) wrote:

And I did see that show "Into the Wild."  I thought the "kid" was really irresponsible to his family.

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#5) On June 26, 2008 at 4:12 AM, talkingdog (89.57) wrote:


Comparisons to Japanese real estate are only useful on a big concept basis, as in “housing prices can fall.”

Despite the headlines, Japan’s real estate is still falling, nationwide, with the exception of primo areas in certain metro areas. The astronomical prices for these primo areas tend to skew the average upward, but the mean price for ground is still falling, and expected to continue to fall for some time. Most homeowners are still knee-deep in negative equity.

The bubble in the primo areas is primarily the indirect result of BOJ quantitative easing, which resulted in sloshing liquidity over the globe via carry trades, which was then picked up by hedge funds and reinvested back in Japan. This scenario is now ending.

Moreover, there are now signs of softness in condo prices even in Tokyo, due to oversupply. Japanese housing is primarily the condo market, as detached house development is on a much smaller scale, due to the lack of land.

Anyway, they say that you get half the house for twice the price in Japan. My experience in building a largish custom house (2200 s.f.) is it is possible even to build custom for under $200 s.f.

Now, a typical new house is going to be 1000 s.f. and range somewhere between $320K and 370K, with a 35 year fixed mortgage at 2.95 percent. This would include parking for one small car and maybe a small flowerbed in front of the house and that’s all.

Anyway, home ownership has been out of fashion for some time now, as people have had a tendency over this past 18 years to flee home ownership in the suburbs to the high rise rentals in the urban centers. This is where the earnings have been made in J-REITS in recent years, and where continuing growth is expected.

Incidentally, one other related area of growth in real estate has been in mini storage. I saw a profile of an American guy on TV who seized an opening in the market for storage, and has been profiting from highly automated, American style mini-storage buildings.

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#6) On June 26, 2008 at 8:00 AM, DemonDoug (81.58) wrote:

This is partly what I invoked in my housing correction: 12-22 years to the bottom.  Even if housing in nominal terms bottoms in 2011 or 2012, if it stays flat for the next 10 years in real terms it will be falling due to inflation.  all of these bailout measures intended to restart the process will do nothing but continue to delay the inevitable and cause further inflation in the production/consumption economy.

deb, are you familiar with Dr. Michael Hudson and his concept of the FIRE economy?

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#7) On June 26, 2008 at 11:15 AM, talkingdog (89.57) wrote:

To answer the OP, Japanese median household income back in '90 was around $72K, and today it's fallen to around $56K.

Back in '90, housing had risen to over $720K in Tokyo, so with 20% down, the mortgage on 580K at the 5% of the time over 30 years is $3117 monthly, or 43% of the then monthly income of $6K. To entice buyers, there were various bubble payment schemes that brought people to ruin, just like now in the US.

In 2008, on a typical $370K property, with 20% down, the mortgage on $300K at 3.0% over 30 years has a monthly payment of $1264 or around 25% of monthly income of $5K. 

So, in short, Japanese housing has become a lot more affordable, despite the fall in wages. So why the rush from ownership in the suburbs to rental apartments in the urban center?

The answer is simple, and it's why you can't compare Japan with the US. Negative equity and the fact that housing loan operators have full recourse to hire some gangster to reach right in and take your bodily organs, if necessary, to pay off the note. And those of your parents and children.

Negative equity in Japan is especially vicious because the building itself always depreciates at 10 to 15% per year, over 15 years.  So, just to break even on the property, the land (assuming the land is 50% of the value of the whole property to start) must appreciate at a similar rate in compensation. If both the land and the building depreciate, you go very deep underwater.

How deep? Well, imagine a typical upper middle class condo which you bought in Tokyo in 1990 for $1.2 million, on a 30 year note. Today that condo, since it is an obsolete and "used" property, is worth only $240K. You are halfway through paying for it, so you are now over $300K underwater. Moreover, since the condo only has about 150 s.f. of real estate entailed to it, even if land prices go up steeply, you are still only treading water.

This is why the Japanese consumer has been so depressed. No way out. Even bankruptcy is not a very good option, since you need to go into the Japanese version of witness protection to avoid having Furio show up on your doorstep.

 

 

 

 

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#8) On June 26, 2008 at 1:08 PM, dwot (66.58) wrote:

Doug, I am not familiar with Hudson.

I think housing will end up being flat for a long time when it bottoms because many will have either learned from this directly, or indirectly.  We had a huge bubbled decline in Vancouver in 1980-81.  For some reason our prices took off way out of line with the rest of the world and then interest rates went to 20%.  We saw about a 30% price correction very quickly, about 1-2 years.  That was probably the price increase from 78-80.  And then Vancouver was flat for about 4 years. 

Attitudes about not getting in prevailed in the late 80s even when the prices were taking off and attitudes that the prices would come crashing back down were abundant, yet prices increased until around 93-95.  What turned our market around was not the local people, but foreign buyers.  Vancouver in an international port city with strong ties to the Asian communities.  Hong Kong was going back to China in 97 and we had enormous immigration from there as people were uncertain about what the change would mean.

Unfortunately, the money coming over priced housing above affordability levels for the local people.  We did see a 10-15% decline from the 93-95 peak by around 2000-2002, but it was very slow.  You could say the market was almost flat. 

Having bought at that 93-95 peak, which also made housing fairly unaffordable for first time buyers, I can attest that it was a very high burden.

I doubt that the Vancouver housing market would have taken off the way it did without the rich foreign buyers coming to our market.  Certainly local attitudes were far more cautious.

I suspect with a world wide housing recession and housing market decline, or at least almost world wide, the cautious attitudes will prevail for a very long time and that will hold housing down for a generation.  Housing will reflect costs, not speculation.

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#9) On June 26, 2008 at 1:11 PM, dwot (66.58) wrote:

talking dog, I found your contribuition very interesting. 

I just looked up the one site and looked at the first 3 properties I saw, and I did not discriminate if they were in a highly expensive area or anything.  It just seemed to me that prices in the range of $1000 sq ft meant that there was still very high prices in Japan despite the years upon years of price declines.

The prices you are giving seem a lot more reasonable.

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#10) On June 26, 2008 at 8:18 PM, talkingdog (89.57) wrote:

To answer the OP, Japanese median household income back in '90 was around $72K, and today it's fallen to around $56K.

Back in '90, housing had risen to over $720K in Tokyo, so with 20% down, the mortgage on 580K at the 5% of the time over 30 years is $3117 monthly, or 43% of the then monthly income of $6K. To entice buyers, there were various bubble payment schemes that brought people to ruin, just like now in the US.

In 2008, on a typical $370K property, with 20% down, the mortgage on $300K at 3.0% over 30 years has a monthly payment of $1264 or around 25% of monthly income of $5K. 

So, in short, Japanese housing has become a lot more affordable, despite the fall in wages. So why the rush from ownership in the suburbs to rental apartments in the urban center?

The answer is simple, and it's why you can't compare Japan with the US. Negative equity and the fact that housing loan operators have full recourse to hire some gangster to reach right in and take your bodily organs, if necessary, to pay off the note. And those of your parents and children.

Negative equity in Japan is especially vicious because the building itself always depreciates at 10 to 15% per year, over 15 years.  So, just to break even on the property, the land (assuming the land is 50% of the value of the whole property to start) must appreciate at a similar rate in compensation. If both the land and the building depreciate, you go very deep underwater.

How deep? Well, imagine a typical upper middle class condo which you bought in Tokyo in 1990 for $1.2 million, on a 30 year note. Today that condo, since it is an obsolete and "used" property, is worth only $240K. You are halfway through paying for it, so you are now over $300K underwater. Moreover, since the condo only has about 150 s.f. of real estate entailed to it, even if land prices go up steeply, you are still only treading water.

This is why the Japanese consumer has been so depressed. No way out. Even bankruptcy is not a very good option, since you need to go into the Japanese version of witness protection to avoid having Furio show up on your doorstep.

 

 

 

 

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#11) On June 26, 2008 at 8:37 PM, talkingdog (89.57) wrote:

dwot, the English language site you found is oriented to expat professionals on company expense accounts, not representative of the way that Japanese live. 

Those listings are generally for special, in many cases oversized, properties located in an area equivalent to mid-town Manhattan.

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