Property investing and the Japanese economy – what’s the connection!?

Are we experiencing a Lost Decade and how does this affect Property Investing?

I am always reading around the wider subjects of property investing, looking at the economy at home, through the wider world. When you are involved in property investing and in business you need to know what is happening in the wider economic and political circles as it ultimately affects us.

I read an really interesting article last week that I wanted to share my thoughts about with you.

Lord Turner, one of the gentlemen short listed to replace Mervyn King as the Governor of the Bank of England, has said that the UK economy is like 90s Japan. This headline caught my eye as we have all heard of Japan’s “lost decades” and a comparison to the UK caught my eye.

Japan’s Lost Decade

Japans "lost decade" and effects on UK property investing

Japans “lost decade” and effects on UK property investing

Japan had seen strong economic growth of the 1970s which ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a speculative asset price bubble of massive scale by Japanese companies, banks and securities companies. The combination of exceptionally high land values and low interest rates briefly resulted in heightened liquidity in the market. It led to massive borrowing and heavy investment mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable, the Bank of Japan sharply raised interest rates in late 1989. This sharp policy caused the bursting of the bubble, and the stock market crashed. A debt crisis followed and the Japanese banks and insurances were now loaded with bad debts. The financial institutions were bailed out through capital infusions from the government, loans from the central bank and the ability to postpone the recognition of losses, ultimately turning them into zombie banks.

Eventually, many of these failing firms became unsustainable, and a wave of consolidation took place, resulting in four national banks in Japan. Many Japanese firms were burdened with heavy debts, and it became very difficult to obtain credit.

The 1990s therefore was the “lost decade” when the economy contracted or grew at a paltry rate. The impact on everyday life was muted, however. Unemployment rates were high, but not at a crisis level. With the traditional Japanese emphasis on frugality and saving, an impact on an average Japanese family was quite limited, whose standard of living did not deteriorate significantly from what it was in the 1980s.

Japan’s problems are by no means easing now, recent reports show poor economic growth for the last quarter of last year. Here is a related new article if you want to read more.

Are we returning to Boom and Bust?

Boom and Bust - staying on the log with your property investing

Boom and Bust – staying on the log with your property investing

The above description of life in the “lost decade” rings true of the UK now in my opinion. Things are “chugging” along ok in the UK now and lifestyles have not altered too much, you need only visit a city centre on the weekend, to see hordes of shoppers. It always made me think, “there’s no sign of a recession here” as I queue up to buy a new top with a stream of other ladies!

Ok, back to Lord Turner and his analysis of where we are at now and how this affects us in the world of property investing…

The concerning thing about the UK economy is that from 2009 until early last year, a lot of the debate was around the need to rebalance, from being over focused on financial services and the housing market,” Lord Turner told The Telegraph.

In the last year we’ve started to grow again, but it’s all down to consumer expenditure and real estate again. In the UK we haven’t got the answers to rebalance the economy

In essence where the UK has been for the past five years is where Japan was in the 1990s,” he went on. “The interesting thing in all these debates is how little we learnt the lessons of Japan

However he went on to explain that whereas the Eurozone risked a ‘lost decade’, because it was making the same policy mistakes, the UK was in danger of returning to a ‘boom and bust’ cycle due to its over-reliance on the property market.

Already-agreed reforms to financial regulation, though undoubtedly valuable, are inadequate to prevent a future repeat of a 2007-8 style crisis.

In a wide-ranging series of comments on the UK economy, Lord Turner said that he thought the Government’s Help to Buy scheme was “a step too far” and should now be tightened by a price cap.

He said that although he supported the Bank’s original Funding for Lending scheme, he questioned whether the latest move to resuscitate the housing market – Help to Buy – was necessary.

He argued that capitalist economies’ obsession with credit meant that the cycle of boom and bust is inevitable, with crashes likely every 15 to 20 years.

Some of his most outspoken comments were reserved for the property market, and the way in which banks rely on real estate despite its role in the most recent crisis and many before it.

Where did HBoS make its losses? Where did RBS make its? It was commercial real estate

Lord Turner said that bankers were always likely to revert to lending based on property as such transactions provide assets for security and require little or no relationship with the borrower.

At this point in the cycle, people convince themselves prices are going only one way,” he said.

It’s very easy for us now looking back to say ‘weren’t our bankers lunatics? They must have been crazy and irresponsible.’ But in order to stop it happening again, we can’t point to individuals; we need to look at why the system is bound to push them towards it.

 

Return of Property Seminars

Return of the property seminar - a good sign for property investing?

Return of the property seminar – a good sign for property investing?

It is interesting to note that there has been a return to the property investing arena of a few individuals who found themselves in financial pickles and the centre of massive scandals back in 2008. Five years on, they are returning to the forefront and offering new property schemes. One event that caught my eye, that the Daily Mail covered was this. 

The return of property seminars to tempt newbie investors to the wold of property investing is a sign that people feel property is on the up again. But is this the start of another bubble, another boom and bust as Lord Turner suggests?

I recently wrote about how RICS reported a high level of property investing in the UK, another sign of the good times returning!

I still firmly believe that the system has issues, our banks are really no better than they were at the start of all this. I have had first hand experience of being questioned quite strongly by my bank when transferring money out of my account, I repeat MY ACCOUNT, MY MONEY!

I also have not experienced a great rise in house prices, the North West is no London that’s for sure.

So what does this all really mean?!

Who knows how this will all pan out, if we are in the  midst of a “lost decade” or the start of a new boom. What is clear is that we all need to be aware of what is going on around us, be prepared for an interest rate rise, it will happen. See my recent related article about interest rates here.

Make sure your properties are in good order, make sure you keep your voids low, make sure you prevent yourself from falling off the log and be in property investing for the long haul.

It is not a get rich scheme, it could be a get poor quick scheme if you don’t do it right.

 

If you would like to hear more or if you have any questions for me then please get in touch charlotte@abiodeltd.co.uk or follow me on Twitter @Charlotte_Abode

 

 

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