Tokyo's property and the emperor's clothes
Dateline: TOKYOAS JAPAN'S interest rates have soared this year, so the country's stockmarkets have slumped — followingthis week's tumble, by two-fifths so far this year. Do people now expect a property slump in Tokyo? Oddly,they do not. Like London two years ago and California today, Tokyo's leap of faith is that property valueswill, at worst, stand still for a few years before the next boom begins.That faith is reinforced by pat reasoning. It is that, because of Tokyo's tight zoning and building regulations,there will always be a land "shortage" in Tokyo. These shortages have led to such anomalies as there being89,000 acres of farmland and 56,000 acres of vacant land in the greater Tokyo area, which in a free marketcould be sold for billions of dollars. It is true that these anomalies would disappear in any sensible country,and take a longer time to fade in Japan. But the theory that they will hold up Tokyo property prices forever is bunkum.These artificial "shortages" were there before prices trebled in Tokyo in 1986-89, and will presumably bethere after they halve or worse. Property prices will fall for two reasons: first, because they are nowuneconomically high; and, second, because they will succumb to the same liquidity shortage that hasalready caused the Tokyo stockmarket's collapse this year.The liquidity shortage is shown by rising interest rates and increasing rationing of credit. It was ultra-lowinterest rates and easy access to borrowed money that fuelled Japan's property binge in the late 1980s, whenland prices soared to record levels relative to rents.After a four-year boom, land should now return to more traditional valuations (ie, drastically lower ones).The question is how uncomfortable — or even fatal-this will prove for parts of the banking system as wellas for over-borrowed developers. Many of these borrowed heavily against land both to punt on shares andto buy more property. Land has not so much been traded in Japan as used as a source of instant credit.Japan's land boom encouraged banks to lend money wildly to property developers in the 1980s. They wereshort of other people to lend to, as corporate borrowers deserted banks for the securities market. Developersassumed that ever-rising land values would cover the (now rising) cost of borrowing. The resultingexposures are huge.Japan's 12 big commercial (known as city) banks plunged in relatively late. Yet in the year to March 311990 their outstanding loans backed by property rose by 22%, to ¥57.3 trillion ($365 billion). This amountsto 23% of city banks' total loans, up from 16% five years ago. Some well-known banks have even higher ratios. At end-March Sumitomo Bank had 26% of its total loans of ¥29.9 trillion (and 40.5% of its domesticloans) out to Japanese property.The country's seven trust banks have big exposures to land, because of their historically close relations with property companies, and their role as the only banks licensed to be estate agents. Most of the more than 150regional banks have been equally keen on lending against the security of land. Two extreme examples areKeiyo Bank and Musashino Bank, which at the end of March 1989 had 49% and 45% of their total loansout to property. They had enthusiastically fanned the flames of a housing boom in Tokyo's outer suburbs.The regulators' worst worries are about the hundreds of shinkin banks, Japan's version of America's creditunions. At the end of March these had total assets of ¥88 trillion. Most shinkin are small institutions withonly a handful of branches, and have had to cope with deregulated interest rates. Like America's thrifts,they felt forced to pursue higher-margin and hence riskier business. For small-town banks, this meantlending to property spivs.Japan's bureaucrats at the central bank and the finance ministry still expect lenders to adhere to theJapanese banking practice of lending against only about 70% of a piece of land's hard-to-measure marketvalue. But the 1980s saw a rash of lending for second mortgages and the like, and such extra lending wentunchecked. The Bank of Japan and the finance ministry have only 108 bank examiners between them.