Is Japan our future?

Wednesday, 24 July 2019
Melbourne, Australia
By Selva Freigedo

  • Japan is dying…
  • We may have good demographics, but…
  • It’s not all doom and gloom

Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.

Russell Sage

You can’t lose money investing in real estate. It’s likely you have heard this often.

But people in Japan probably don’t see it the same way.

You see, back in the 1980s, Japan went through a period of record low interest rates that fuelled an asset bubble to record highs. It pushed the stock market and real estate prices to record highs…only to collapse in 1992.

Needless to say, the effects were devastating.

According to Richard Koo from Nomura Research Institute in Tokyo, the crash wiped out three-times more wealth than one of the worst crashes in history, the 1929 Great Depression.

And then came years of deflation.

So much so that Japan is now known as the country of the lost decades and the real estate market has yet to recover.

More on this after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed 177.29 point higher, or 0.65%.

The S&P 500 gained 20.44 points, or 0.68%.

In Europe, the Euro Stoxx 50 index finished up 42.95 points, or 1.23%. Meanwhile, the FTSE 100 was up 0.56%, and Germany’s DAX closed up 201.34 points, or 1.64%.

In Asian markets, Japan’s Nikkei 225 is up 107.99 points, or 0.50%. China’s CSI 300 is up 1.03%.

In Australia, the S&P/ASX 200 is up 50.37 points, or 0.75%.

On the commodities markets, West Texas Intermediate crude oil is US$56.99 per barrel. Brent crude is US$63.97 per barrel.

Turning to gold, the yellow metal is trading for US$1,421.50 (AU$2,026.10) per troy ounce. Silver is US$16.49 (AU$23.50) per troy ounce.

One bitcoin is worth US$9,662.36.

The Aussie dollar is worth 69.80 US cents.

Japan is dying…

Japan went through a boom and then bust in real estate. And as you can see below, prices haven’t recovered to the bubble levels.



chart image
Source: Torontocondobubble.com
Click to enlarge

They may never recover, because of demographics.

Japan is ageing and the population is shrinking. People are getting older and dying faster than children are being born.

The trend is getting worse, too.  

As The Nippon points out, Japan’s latest Housing and Land survey showed that the number of empty homes has increased by 3.2% between 2013 and 2018. 13.6% of all homes in Japan are now empty. Many of them abandoned by owners.

The importance of demographic trends and the effects on economics is something Harry Dent talks about often in his Boom & Bust Letter.

Here is how Harry described Japan’s predicament in the latest Boom & Bust monthly issue:  

Today, swaths of communities in Japan stand like ghost towns, and the situation will only get worse because the country is dying. There are more people dying from old age than younger ones buying homes. The most recent numbers we have are from 2017, but rest assured things have only gotten worse: the country’s population growth is -0.21% per year with only 7.7 births per 1,000 people and 9.8 deaths per 1,000 people!

And when someone dies, what happens to their home? It hits the market as an estate sale, where price isn’t as important as just offloading it to wrap everything up neatly. Supply outpaces demand. Prices stay depressed at best, go lower at worst.

Japan has more homes than people, and Japan’s demand for homes has gone negative.

Japan is giving us an extreme example of the devastating long term effects that a property bubble and poor demographics can have on an economy.

We could be getting a glimpse at our economic future with Japan…and it doesn’t look bright.

We may have good demographics, but…

Much of the developed world is ageing.

One of the largest cohorts, the Baby Boomers, is starting to retire and Millennials don’t seem too keen on property after seeing the 2008 bust.

With less young people coming into the property market and boomers getting older, we could very well see real estate demand fall.

To quote Harry, ‘real estate may never be the same, again’.

In the case of Australia, we have seen property prices go up with lower interest rates, easy credit, high immigration and investor demand.

The younger generations are priced out. But the latest census showed that there over a million empty homes in Australia, or 11.2%.

Harry thinks Australia has one of the best demographics in the developed world, but our net demand for property could have very well be passed its peak.

As you can see below, according to Harry’s research, net demand could have peaked around 2015, and real estate prices around 2017. Harry believes that property could be overvalued by about 42%, and prices could see a 50% plus fall.



chart image
Source: Dent Research
Click to enlarge

Even though Harry sees net demand getting higher around 2025, we never get higher than the peak in 2015. In other words, prices may never see the highs they saw during the real estate bubble.

But for Australia, compared to other developed countries, there is a silver lining, because of its demographics. As Harry put it:

The big difference in Australia is that demand never gets even near negative, so there will be demand for new homes and continued homebuilding, just not at the rates seen in the last two decades. This is a country, along with Singapore, New Zealand and Israel, where you could buy real estate for the long term after prices crash ahead. But we will still not see bubbles and appreciation like we saw in the last boom.

Ageing Baby Boomers, credit tightening, debt at record highs and property prices dropping, may mean that borrowers are more hesitant to borrow to enter the property market, even at low interest rates.

It’s not all doom and gloom

As you may have noticed, Harry has a unique voice.

Harry likes to study cycles and data to predict demographic trends. And let me tell you, demographics can be a powerful economic force.

Demographics are how Harry predicted Japan’s economic collapse in 1989, and the dotcom bubble, well before either of these happened.

It is also how Harry predicted that Harley Davidson’s sales would peak in 2006…and then decline.

By looking at demographic data and household spending behaviours, Harry can predict what could happen to a country’s economy, an industry and even an individual company, like Harley Davidson.

That’s what we do at Harry Dent’s Boom & Bust Letter. We try to predict trends by looking at today’s consumers.

Harry’s ideas may sound bearish to you, but trust me, they’re not.

While the days of buying a property and watching it appreciate may be well and truly behind us, there are still ways to make money from property.

And it’s not just property.

As our population ages, Harry has identified several sectors and opportunities that could thrive.

I hope that by now you realise how powerful demographics can be as an economic prediction tool.

If you want to find out more about Harry Dent’s Boom & Bust Letter, click here.

Best,
Selva Freigedo