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property
This page offers context by considering real estate bubbles
and crashes.
It covers -
It
complements the discussion of property values and real
estate M&A elsewhere
on this site.
Japan
The 1980s Japanese real estate bubble is sometimes claimed
as the archetypal contemporary bubble in terms of both
immediate excess and long term economic impact.
The bubble reflected the success of Japanese manufacturing
for export (and the nation's saving regime) in the two
decades prior to the Plaza Accord meeting of 22 September
1985 at the Plaza Hotel in New York.
At that meeting the G5 nations agreed to increase the
value of the Yen against the US Dollar in order to rebalance
US-Japanese trade. By late 1987 the Dollar had ceased
falling, settling at around half its value relative to
the Yen. That fall meant appreciation of the Yen, allowing
Japanese consumers to buy more goodies from overseas (Impressionist
paintings, Vuitton bags)
and to acquire overseas trophies (landmark office towers
in Manhattan, resorts in Hawaii and Queensland).
As imports soared in 1986/7 the Finance Ministry and Bank
of Japan, concerned about the impact on domestic manufacturers,
reduced interest rates - ultimately down to 2.5%. The
conjunction of sustained low interest rates, the hollowing
out of industry (particularly SMEs squeezed by major manufacturers)
and a history of increasing real estate prices - particularly
in major urban centres - encouraged investment in land,
increasingly on a speculative basis, and generation of
revenue among companies through zaiteku ('financial engineering')
rather than manufacturing.
Land values in central Tokyo had increased in every year
except two since 1946, with double digit increases since
1983. They tripled in 1986/7 and were forecast to more
than triple in the coming decade.
Collapse of the Tokyo stock market and land bubble in
1990 followed back of the envelope calculations that the
grounds of the Imperial Palace in Tokyo were worth more
than the state of California and that if the Martians
could be persuaded to buy Tokyo the residents would be
able to buy all of the US, one of those claims that would
delight Mackay or other tulip connoisseurs.
Japanese investors lost billions in the collapse at home,
with write-downs of inter-company loans and shares, forced
consolidation of both major banks (some highlights feature
here) and the demise
of a range of smaller lenders. In Japan there were 15
years of falling real estate prices.
A 2003 paper (PDF)
by the Bank of Japan attributed the bubble to -
- Aggressive
behavior of financial institutions
- Progress
of financial deregulation
- Inadequate
risk management on the part of financial institutions
- Introduction
of the capital accord
- Protracted
monetary easing
- Taxation
and regulations biased toward accelerating the rise
in land prices
- Overconfidence
and euphoria
- Over-concentration
of economic functions on Tokyo
-
Tokyo becoming an international financial center
perspectives
During that land bubble Japanese corporations and individuals
paid premium prices for art
works, trophy buildings and golf courses from New
York to Los Angeles. In Manhattan for example they acquired
US$7.4 billion of real estate over three years ending
in 1990, including Rockefeller Center, with an often visceral
reaction over the "sale of American patrimony".
The interrelationship of major economies through globalisation
was evident in the impact of the Tokyo crash on other
economies, with substantial pain in art markets and an
initial decline in Manhattan property values. That decline
saw Japanese investors lose hundreds of millions of dollars;
many of the US buildings found their way back into US
hands.
studies
Works on Japan include Christopher Wood's The Bubble
Economy: The Japanese Economic Collapse (London:
Sidgwick & Jackson 1992), Peter Hartcher's The
Ministry: How Japan's Most Powerful Institution Endangers
World Markets (Boston: Harvard Business School Press
1998).
Aaron Sakolski's The Great American Land Bubble: The
amazing story of land-grabbing, speculations, and booms
from colonial days to the present time (New York:
Harper Bros 1932) and 'Land Speculation and Other Processes
in American Historical Geography' by Donald Holtgrieve
in The Journal of Geography (1976) suggest that
real eastate speculation is as american as apple pie,
motherhood and state support for particular vested interests.
For the UK see Alexander Hamilton's 2005 dissertation
'Asset price bubbles and manias: How much was the property
boom driven by collective psychology and herding behaviour?'.
The Australian bubble of the 1880s and 1890s is profiled
in Cannon, Michael Cannon's The Land Boomers
(Carlton: Melbourne Uni Press 1967)
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