The Japanese real property story is significant in a variety of ways. The majority of stories about the property market that you will hear contain times of booms and busts. The property market is under for a while, but then it recovers after a couple of years. But, the experience in Japan is quite different. The Japanese market experienced a record-breaking bull market, which was not seen before; the period lasted until 1991.

Then came the collapse! In the years since 1991, Japan is experiencing a massive drop in value. The value of the property has significantly decreased and has remained there for more than two decades despite the relentless attempts of the Japanese government to bring it back.

In the article, we’ll look at the history of the Japanese crash and the ramifications of which are still being seen within markets like the Japanese marketplace.

Three Decades-Long Economic Miracle

Following World War-2, the Japanese economy was basically destroyed. They were engaged in battles for years, and their economy was impacted significantly. Additionally, two of their main cities, Hiroshima and Nagasaki, were bombed by the United States. Thus, morale among workers was low as well.

In the postwar economy, Japan saw a boom in its economy. Japanese companies began making significant progress in the automotive and electronics markets around the globe. This resulted in an increase in growth in the economy. This led to the creation of jobs for a lot of Japanese employees. This, along together with the notion that Japanese companies consider their employees as members of their families, i.e., they do not let them go, led to a higher purchasing capacity.

In the late 70s and into the 1980’s Japan was a nation with a smaller area than that of California and was continuously shaken by natural disasters such as volcanic eruptions and earthquakes had grown to become the second largest economic power in the world. The country was gradually closing following the United States. For many observers of the economy, this was nothing less than an economic marvel that Japan achieved within three decades.

In the past three years during which time during these three decades, the Japanese property market saw an unstoppable rise. The costs of real estate were increasing at roughly the same pace as economic growth, and no one was aware that any bubble was forming.

Tax Laws Modified

Around the mid-80, The government in Japan began to open the previously conservative property market. The Japanese market for property was governed by a strict tax system that prevented any property ownership changes. For example, when a home was sold within just two or fewer years following the purchase, taxes would account for a majority of the capital gain! If the property was sold for more than two years, but less than five years from the date of purchase, approximately 75 percent of capital gains earned by investors were remitted to the Japanese government in tax. If the investors decided to sell the property at any point after five years, 50 percent of the appreciation was due in tax.

In other words, the cost of transactions in the Japanese real property market made it impossible for any other person besides legitimate home buyers to purchase an investment property. The situation changed around the middle of the 1980s when Japan’s government Japan removed a number of these laws to establish an open real estate market that could meet the requirements of the modern Japanese economy.

Stock Market and Real Estate Market Loop

In the wake of the economic miracle as well as the liberalized laws regarding the real estate market, a scenario was created where the real estate market and the stock market began feeding off one another. A lot of people sold their most valuable stocks in the market to purchase real property. This led to a surge in the need for properties, which were growing in value. In turn, numerous property investors were able to take their money out and then purchase shares of Japanese companies. Both of these asset classes of the Japanese markets outperformed all other investments in the world. This meant that they were attracting ever more investors, and the worth of these asset classes soared! In 1991 the real estate values in Tokyo were several times more than the comparable values in wealthy cities such as New York and London.

The 90’s: Real Estate Crash

The 1990s marked the beginning of the end of the real property market in Japan. In the 90s, Japan’s Bank of Japan raised interest rates to combat the rising inflation caused by its loose monetary policy, which it had been pursuing for many years. In the wake of these increases in interest rates, the supply on the market began to shrink. Additionally, mortgages became costly to maintain. Thus, it was evident that the demand for Japanese real estate was able to go down. This caused the ultimate downward spiral of property prices that dropped by up to 64 percent in Japan within the comparatively short span of 10 years! Homeowners and investors, the majority of whom were dependent, suffered a substantial loss of an amount of their capital as the prices continued to plummet.

2015: Worth Half the Price!

In 2015 it is clear that it is 2015, and the Japanese real estate market has not regenerated. This is despite it being discovered that Japan has maintained its interest rates at or below zero for several years. Additionally, Japan has also implemented an easing program that was quantitative. However, it has also proved to be unsuccessful at boosting the price of real estate yet again.

The current average value of real property in Japan is more than a 50% discount when compared to the highest prices observed in 1991. The prices are roughly at an amount that they reached in the year 1985, i.e., at the time when the bubble had only just begun.

To summarize, if you had made a bet on Japanese properties in 1985 and wished to cash out in 30 years, you would not have any growth in your capital! This is what makes the Japanese real estate industry so fascinating and fascinating for anyone who is a student or an investor in real estate.