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If Japan Lost Two Decades From Its Bubble Popping, How Many Decades Should The US Expect To Lose?

Submitted by Reggie Middleton on 02/12/2011 11:55 -0400

The Harlem Community Development Corporation and AAREPNY hosted a
breakfast symposium on real estate last Thursday in which I was the
keynote speaker. The audience consisted of diverse cross section of real estate professionals -bankers, developers,
investors, lawyers… the usual fare. I fear I may have rained on the
optimism parade with my presentation, but I also feel a few salient
points were communicated. I have included portions of the presentation
here for the blog readers to peruse. One of the main themes of the
presentation was that of “lost decades”. How likely is it that we can
have 20 more years of housing price declines?

Let’s see if any of this sounds familiar, as excerpted from Wikipedia:

The Lost Decade (????10? Ushinawareta J?nen^?) is the time after the Japanese asset price bubble’s collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years1991 to 2000,^[1] but recently the decade from 2001 to 2010 is also sometimes included, so that the whole period of the 1990s and 2000s is referred to as the Lost Decades or the Lost Years (????20?, Ushinawareta Nij?nen).

The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s,
abnormalities within the Japanese economic system had fueled a massive
wave of speculation by Japanese companies, banks and securities
companies. A combination of exceptionally high land values and
exceptionally low interest rates briefly led to a position in which
credit was both easily available and extremely cheap. This led to
massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable, the Finance Ministry
sharply raised interest rates in late 1989. This abruptly terminated
the bubble, leading to a massive crash in the stock market. It also led
to a debt crisis; a large proportion of the debts that had been
run up turned bad, which in turn led to a crisis in the banking sector,
with many banks being bailed out by the government.

Michael Schuman of Time Magazine noted that banks kept injecting new funds into unprofitable “zombie firms“ to keep them afloat, arguing that they were too big to fail.
However, most of these companies were too debt-ridden to do much more
than survive on further bailouts, which led to an economist describing
Japan as a “loser’s paradise.” Schuman states that Japan’s economy did not begin to recover until this practice had ended... This led to the phenomenon known as the “lost decade”, when economic expansion came to a total halt in Japan during the 1990s

Paul Krugman was even mentioned in this Wikipedia article, as follows…

Paul Krugman described Japan’s lost decade as a liquidity trap,
in which consumers and firms saved too much overall, causing the
economy to slow. He explained how truly massive the asset bubble was in
Japan by 1990, with a tripling of land and stock market prices during
the prosperous 1980s

I suggest that Mr. Krugman compares his hometown to that of what he
considers to be “truly massive”, he is sure to be shocked! And as for
that myth that a booming GDP will lift asset prices, let’s see how well
that worked out for Japan over the last 21 years…

There’s a lot more to go over, but I’ll let you watch the video to
get the gist of it. I suggest that you expand to full screen and the
highest resolution that your bandwidth permits in order to see the
charts and graphs clearly…

Of course, I have laid out the shadow inventory system for paying
subscribers, so they can see what the current (as of December) backlog
and supply is, as well as estimates on how long it will take to clear
out the excess inventory. Click here to access the online spreadsheet. To subscribe, click here.

Related links:

See www.seminar.ingref.com.

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Sun, 02/13/2011 - 08:16 | 957376 AnAnonymous

It looks as you spent time working on your answer. No knee jerk answer.

You spoke of the period of time when the RE bubble was inflated. Inflated.

The period is now of deflation in RE. Now. Not three years ago. Now.

Currently, one can fish for houses at prices that would not have allowed the houses to be built in the first place.

Now is the time for cheap housing. Not when the bubble was inflating.

So if a US citizen was convinced into buying a $10M house, that cost after the bubble popped, $3M, big chances are the house you get for that price is one that could not have been built for $3M in the US because $ 3M do not even cover for the cost of construction in the first place.

Currently, in the US, houses are sold below their cost of production. That is cheap housing.

Sun, 02/13/2011 - 12:43 | 957664 Reggie Middleton

No, that is not cheap housing. That is housing that is below the cost of construction. The of construction, itself, is variable - dependent on labor, commodity pricing and land.

Cheap housing is housing that is inexpensive relative to incomes and wealth. We are not there yet, not by a longshot.

Sat, 02/12/2011 - 13:28 | 955805 Reggie Middleton

Providing US citizens with cheap and affordable houses, irrespectively of the real price associated to living in the US, was the goal of the subprime crisis.

What???!!!

How can a crisis have a goal?

Sat, 02/12/2011 - 23:19 | 956927 Freddie

The "goal" is redistribution of wealth, which really leads to wealth destruction.

Sun, 02/13/2011 - 12:35 | 957638 Zero Govt

AnAnounymous

The semantics are all yours. The root of the US sub-prime crisis was cheap throw-away credit. That's exactly the same cause (and effect) of Japans deflation. Put another way dead weight of debt, the other side of spending on the never-never.

Fund property growth with cheap debt leading to bubbles and carrying too much weight to service and the entire bubble goes pop (see Japan, US and UK) followed by years and sometime decades of deflation of that same asset bubble. Hope you're following this, it's pretty simple really, Economics 101 (see 300 years of asset bubbles fueled by cheap credit)

Sat, 02/12/2011 - 15:34 | 956014 AnAnonymous

How can a crisis have a goal?

Mere semantics. By subprime crisis, I refer to the sequence of events and decisions that climaxed with the subprime crisis.

Sat, 02/12/2011 - 14:21 | 955893 Sudden Debt

Reggie, first of all, a very good article once again.

But in compairing Japan to America, you should need to take into account the demographics of Japan. The aging and the shrinking of the population provides the country with a surplus of housing on the country side, and in the main cities like Tokyo, real estate keeps rising.

Also, Japan is a very nationalistic country and doesn't stimulate foreign workers in it's workforce.

According to the demographics, I would rather compair it to Europe's future in 5 to 10 years where we'll also start to see a slide in real estate prices. This is already very noticable in the upperclass housing prices.

So it's very hard to compaire Japan with the US and even with the EU.

I think you should rather compare the US with the UK, and you'll see a lot more links.

Also, the UK has the same history in finance and monetary reserve currency then what the US has now.

Sat, 02/12/2011 - 21:35 | 956751 SamuelMaverick

+1 on the population demographics. Reggie, in order for your analysis to be complete, you have to include the demographics of the Birth rates / population decline and the spending waves of the various age groups in Japan vs. US. Go Reggie !!!!!!

Sat, 02/12/2011 - 21:46 | 956768 ZackAttack

Japan's birthrate fell precipitously. At this point, they aren't replacing their own population. They're truly in a death spiral.

It's important to note, from 2000-10, the US population increased by <1% annually for the first time since the 30s.

On the other hand, Japan had many advantages that the US does not:

- inexpensive imported oil for most of the decade

- their crash was largely in CRE rather than RRE, the latter of which more directly affects household balance sheets

- Japan began its crisis with a huge trade surplus and a high personal savings rate. The US began with huge trade deficits and poor household balance sheets.

- Japan spent the first decade of its crisis in a backdrop of strong world growth.

I think the US will be *lucky* only to have two lost decades.

If Japan Lost Two Decades From Its Bubble Popping, How Many Decades Should The US Expect To Lose?

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