The Investment Scientist

Real Estate: Recovering or More to Lose?

Posted on: May 28, 2007

price chart downOn a recent air trip to China, I found myself sitting next to a Japanese. As our conversation turned to real estate, I opined that the Japanese real estate market had finally turned the corner after 16 years of falling prices, and it might be a good time to buy. He immediately disagreed with and went on to give me a litany of reasons why the Japanese real estate prices would keep on falling. His reasons include that no Japanese nowadays would think that the real estate prices will ever go up again.

In 1991 when the Japanese market was at its peak, banks were lending to home buyers without any down payments, people were taking out interest only loans, and everybody was expecting the real estate prices, already the most pricey in the world, to keep on rising. Does that sound familiar? Was it like what we saw two years ago in some hot markets in the US?

The excess in their real estate market took the Japanese 16 years to unwind. During this time, their real estate prices fell by an average of 60%. Counting inflation, real values have fallen by more than 80%.

Could the US real estate market experience a long recession like what had happened in Japan? I can’t give a definite answer. However, judging by how relatively optimistic people are with real estate, I believe there is still a long way to go before the market turns around. I think when I don’t see real estate investors around me, when I don’t see people talking about real estates as the best investment, better yet, when I see people in the US speak like the Japanese I met on the trip, I can then reasonably conclude the bottom has been reached.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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