Real Estate News & Commentary

Interest Rates and The Big Lesson To Learn from Japan

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Besides bringing Sushi to North America – which I give thanks for on a weekly basis at least – the Japanese have shared many lessons with us. In the 1990’s when I was taking my undergraduate degree in business I spent some time studying Kaizen (the Japanese principle for continuous improvement) and JIT (just in time inventory management – which has revolutionized how many retail stores handle their inventory). I wrote a paper about TQM (total quality management) looking at case studies from companies that had implemented Kaizen and TQM into their businesses. They taught North American companies a lot of great strategies.

Unfortunately the great strategic lessons we learned from Japan in the past are now being clouded by examples of how poor government policy decisions can alter the course of a country’s economic future for a long and sustained period of time.

I’m not going to bore you with a big economic discussion. I was absolutely elated when I did my MBA and was exempt from taking micro and macro economics because I had taken them in my undergrad. I enjoyed learning basic economic fundamentals but the deeper economic models and mathematics that get utilized in economics absolute hurt this Broad’s brain.

What I did want to share with you is the key lesson I hope all real estate investors understand from today’s Japanese economic situation.

Interest Rates do Not Drive an Economy They Influence It

In 1992 when Japan entered a recession, the lost decade began to really take shape. The boom times of 1980s fueled a large amount of speculation by Japanese companies, banks and securities companies and a run up in real estate and stock prices. Low interest rates meant credit was cheap, and it was also readily available to just about anyone. I think we all know the problems that can arise when that happens. A bubble had formed and to stop it the finance minster abruptly and without warning cranked rates up. The bubble burst and the lost decade began as everyone in Japan had to tighten spending and focus on their debt levels which they’d run up in the boom times of the 80’s.

But the lost decade was not caused by a single policy decision. The lost decade was caused by a series of poor policy decisions by the Japanese government and a dramatic shift in other economic fundamentals in the country (decreasing exports and low GDP for an example). The result was a decade of deflation despite interest rates of nearly 0% for many years.

And that decade has been followed by another decade of troubled times for Japan. I read yesterday that Japan has once again cut their already low interest rates of 0.1% to 0% after quantitative easing failed to stimulate the economy.

What difference can that possibly make?

The lesson:  Interest rates influence what is happening in an economy but they don’t drive it. Jobs, incomes, population, economic growth (GDP), and consumer confidence all work together to drive an economy. It’s not a single factor like interest rates that will propel house prices or an economy into or out of a recession.

That lesson could not be any more clear than it’s come from Japan. And in fact, Kieran Trass, author of several must read real estate books like The Housing Bubble and Grow Rich with the Property Cycle, has extensively studied interest rates around the world and concludes that:

Interest rates can (and do) move either up or down at any phases of the real estate cycle.

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Interest rate do influence the market but more because of the fear and greed reaction created by them than because of any real economic fundamentals. As a result, any blip up or down in house prices or house demand can often be attributing to a fear or greed response from inexperienced investors but is not a sustainable change in the economic conditions.

In other words an interest rate rise can slow the economy for a short period of time by invoking fear in inexperienced real estate investors who believe the rise in rates is a sign that the tough times are ahead. A decrease in interest rates can cause inexperienced investors to believe that house prices will rise so they run out and buy more property gleeful with greed.

Influencers that Affect Perception But Don’t Drive the Economy

According to Kieran Trass there are a handful of market influencers that can cloud real estate investors judgement and affect perception about where the market actually is in a housing cycle.

Hopefully the Japanese example helps you understand that interest rates is one of these things that influences the perceptions of people but does not, ultimately, drive the underlying economic condition of a market.

Some other influencers to watch out for?

  • General feelings around real estate as an investment – what the media is saying about buying real estate on a daily basis
  • Availability of finance – On it’s own it’s an influencing factor but not a driver. If there is plenty of money available but the rate is 15% I’m pretty sure borrowers would be few and far between.
  • Government rule changesThe HST introduction in BC and Ontario in Canada is a prime example of this. House sales slowed as a result but it didn’t change the underlying economic fundamentals behind the markets. And, now that we’re into October, the market in our area in BC is picking up again and people are talking less and less about HST.
  • Alternative Investment Options – In the tech boom of the late 90’s the smart people put their money into real estate and smiled as the dot com bomb blew up and real estate prices sky rocketed. But nobody was talking about putting money into property at the time – it was all about the latest dot com IPO that was going through the roof making some 21 year old kid a multi-millionaire overnight. You see, the alternative investment option influenced the market but it didn’t drive it.

Understanding what drives the housing market versus what is causing a blip up or down will make you an excellent investor. It will also help you spot opportunities to buy or sell at a great price because of a temporary change in demand as a result of an influencer not a driver.

Japan is an extreme example, but one I hope you remember next time an interest rate increase or decrease dominates the media headlines. When that happens, you may have a small window of opportunity ahead thanks to the fear or greed of that change – but the underlying market is not changing. Look past the temporary change and remember the interest rates aren’t driving the economy, jobs and people are. More jobs, more money, and more people inevitably means housing growth. Less jobs, less people, and less money inevitably means housing shrinkage.

Thank you Japan for sushi, Kaizen, TQM and this valuable interest rate lesson.

First Image Credit: © Flycat |
Second Image Credit:
    Rachel Aka Mobile Home Gurl
    Replied over 9 years ago
    Interesting topic, Julie! I think you’re right on. What really stood out from this article on what really drives the economy is true – the people. And, that is one thing that cannot be changed – the behavior of people and their culture. The thing about Japanese culture (as many Asian cultures around the world) is that the majority of them are savers. I think I read an article one time that said it was something like 30% of their take home income they saved. That’s a big %! So, even with interest rates at an all time low in Japan it’s extremely hard to change the behavior of an entire culture that is built on savers. However, I know this can easily change with the younger generation. And, that is what many American companies have been trying to do (of course in the U.S.) and other countries around the world. The thing about America (and I’m not saying we’re the best country at all) is that America has such a strong influence on other cultures around the world – I can think of so many Asian countries right now where the younger generation just wants to be American. And, that is powerful. I think the reason why the interest rates with the housing boom and the tech boom created such a frenzy in America is due to our culture – we are a culture built on consumerism and convenience. And, that is why we consume so much of the world’s products and goods. (Though, I think this will change in the future. I hear China is set to be the next big power consumer. The American companies have such a great influence over there on the younger generation). Combine our culture of consumerism with the notion of easy credit – it’s a no brainer for most Americans because we are a culture built on consumerism and convenience. And, I find so many Americans would much rather buy something or do something due to convenience. There are so many American companies I can think of that are built on the notion of convenience (i.e. frozen foods, packaged goods, etc). Our consumerism mindset started with the “Baby Boomers” and has evolved with every generation after it. It’s only those from the Depression era (for the most part) who have a different mindset (aka the savers and being practical). So, the reason why consumerism has worked in America is heavily due to our culture and the way we are heavily influenced through emotion. It’s that powerful. Will history repeat itself? I think it will. It’s so hard to change an entire culture and mindset. America was built on consumerism. And, the notion of convenience and doing things easier have even crept into the world of finance. Everyone wants to make money fast and without much work. It’s really hard to change the way people think, even an entire culture. Just my thoughts. I enjoyed the article, Julie. Sorry this is a long comment (of course). Thanks for sharing! p.s. I may have to check out that book you mentioned. I actually have a book on my shelf that has been sitting for years, “The Art of Japanese Management.” I haven’t been able to get to it but skimmed over it a few years ago and bought it (the consumer in me!). I may go back and visit it after reading this article! 🙂
    Julie Broad
    Replied over 9 years ago
    Rachel – thank you so much for your comment! It’s a blog post in itself! Culture is such a powerful thing … I hadn’t even thought about that when writing this but you’ve brought up such an important point about what is behind an economy, business and buying decisions. I just finished reading “Delivering Happiness” by Tony Hseih (Zappos). I’ve been wanting to read the book ever since I saw him speak last year at Engage Today. Culture – the culture at Zappos – is the main reason for their tremendous success as a company. The same, perhaps could be said for a country I bet … so long as the leaders in charge foster a good culture and not enable a bad one I suppose. This is pretty heavy thinking for a Saturday morning though so I will leave it at that. Thanks, again, for your great comment.