New Real Estate Financing in Japan Exceeds Bubble Levels

By: Jeff Wynkoop

New bank financing for Japanese real estate has finally exceeded the bubble years, according to a report released recently by the Bank of Japan. In 2015 new bank financing for real estate was up year-on-year 6.1%, totaling 10.673 trillion JPY. Over the last three years new financing is up over 30%.

The above 2015 level exceeded the highest level of new real estate financing during the real estate bubble of the 1980s (1989 was the peak with 10.4419 trillion JPY in new real estate loans).

In addition to new loans for real estate, the total outstanding balance of all real estate loans in Japan (in 2015 65.7102 trillion JPY, or approximately 14% of all outstanding bank loans) has also been growing over the last few years, and last year reached the highest level in 18 years.

Nevertheless, the factors driving this growth in financing over the last several years differ significantly with what happened during the go-go bubble years.

Factors Driving Growth in Financing

The steep rise in Japanese real estate prices during the 1980s, when real estate prices in the main six cities increased many times over, was attributable to a multitude of factors.

For instance, the ultra-accommodative monetary policies of the Bank of Japan certainly played a large part. The prevailing “land myth” (tochi shinwa), i.e., the idea that Japanese real estate would and could only appreciate in value over time, led to all kinds of companies and even lay people borrowing money to buy real estate and enjoy what they considered to be a chance for risk-free asset appreciation.

Consequently, in the period from 1986 to 1989, new financing for real estate more than doubled. When the old Ministry of Finance (ookurashou) finally enacted regulations to limit the total amount of financing per person in 1990, and the BOJ changed policy and began tightening the monetary supply, the bubble was already beginning to collapse.

In comparison to the 1980s, the growth in financing over the last few years is due primarily to J-REITs growing their portfolios and using the growth in real estate values to reposition and increase their holdings of income-generating properties.

It is notable that the total value of all real estate held by J-REITs increased almost 150% over the last three years. This is a very different background from the halcyon days of the 1980s, when everyone was purchasing all available real estate because they knew prices could only appreciate, without any consideration of how to use the real estate they acquired to create positive cash flow.

Source: Nikkei Shinbun, February 21, 2016

Photo: Building in Ginza

Photo Credit: Alvin Leong