Of Interest


Sunday, October 10, 2010

Why is there so much interest in Japanese real estate? 

Prices vs Rents
On Friday, The Economist revisited its 'fair-value measure for property' based on the ratio of Real Estate acquisitions to rents, which is similar notion to the price-to-earnings ratios used by stock market analysts to value companies.

It found that prices looked cheap only in Japan, where steadily falling property prices mean the price-to-rents ratio is 34% below its average since 1975. Switzerland's ratio is also less than its long-run average and possibly also in Germany.
It also estimates that even American Real Estate prices are now 3% below their fair value by the third quarter of 2009 - based on the S&P/Case-Shiller house price index - following big falls from the peak of 2006.

But it said that in Britain, where prices are increasing again, Real estate still looks 'expensive':
Overvalued property markets
Spain - 55%
Hong Kong - 53%
Australia - 50%
France - 40%
Sweden - 35%
Ireland - 30%
Britain - 29%
Canada - 20%
Italy - 15%

Undervalued property markets
US - 3%
Switzerland - 9%
Germany - 15%
Japan - 34%
As The Economist admits, 'no valuation measure is perfect'. The data goes back different lengths for each country:  'If the average price-to-rents ratio is calculated from 1990 onwards, Spain's market is overvalued by 24%, rather than the 55% shown in the table (based on figures from 1975),' the report said. 'That would make both markets similarly overpriced.'
It's also worth noting that rents, which recovered slightly in 2009, are also likely to come under pressure in 2010 unless a strong economic recovery materialises.

Source: The Economist 


  1. There is no question that Australian property is over-valued. But we need to acknowledge that it is for structural reasons, and just as the Chinese govt is keeping its currency artificially low, the Australian govt is keeping its property prices artificially high. The Chinese govt using currency regulation; and the Australian govt uses land use regulation. So much for the communist-democratic dichotomy. Near-perfect synergy if you ask me....so we will meet somewhere in the middle, but since we will end up selling our individualistic souls in the process...engaging in moral relativism or moral scepticism if you prefer...we will end up with global collectivism...with govts working in synergy to control your lives. This is probably reason enough to have property or other assets dispersed all around the world. You know about having a diversified asset portfolio...well this is reason enough to spread your exposure. Governments are playing lottery with your money...and lives. The reason they hardly persecute anyone anymore is because you are drowned out by PC-compliant media and organisations, and because they have your money. Is there a conspiracy...its not centralised....and certainly not so conceptually well-planned. Its an alignment of economically and politically compatible interests. They don’t even realise what they are doing to their national values.
    So back to the Australian property market. The IMF says the Australian property market is overvalued....Duh! It has been for a decade. The issue is whether its going to fall. The answer is no...at least not nationwide. They might do a few ‘strategically’ placed land releases to the poor, but expect the Australian govt to control prices. You might think they cannot do this. They can so long as they control interest rates (and they do) and the China has a requirement for our commodities. This will be the case for 20 years so no problem. We cannot therefore expect huge increases in Australian property, but you can reasonably expect good growth. Probably bubble? Not likely...at least not for the next 10 years. Strong commodity prices are going to demand interest rate increases. Expect a strong currency too as property prices rise. The AUD is going to break parity with the USD, and do even better. Yep we are probably looking at 1.15. Why? Paradoxically because of high property debt which will give Australians some sensitivity towards excessive consumption. The problem of course is greater import penetration. In a weak global market foreign enterprises will be targeting Australia. So in the long term, we might expect import penetration to balance out those currency gains. Govt spending will also have an impact. The high prices can be expected to remain in the cities because of strong population growth and employment.

  2. Rental costs vs. cost of ownership is one comparison that is academic at best. When the cost of owning far exceeds the cost of renting, yes, it is a bubble. But this rule ignores the fact that ownership of real estate is not a cold, economic decision but a supercharged, personal goal people all over the world. Pure investors aside, and in most markets they are fewer in number than end-users, real estate prices are driven by intangibles that cannot be explained through cost vs. value (i.e. rental vs. ownership) analysis.
    Real estate ownership in Australia is even more emotional and culturally driven than in the east.