Could Japan see a new property boom?

Japanese property prices have been stagnant for 20 years. But with the country in a 'demographic sweet spot', that could soon change, says John Stepek. And if the housing market takes off, the economy and stock markets could soon follow.

When the subject of Japan crops up, the dreaded word demographics' is never far behind.

The make-up of Japan's population is often seen as the key factor behind the country's long period of stagnation.

There are too many old people, and not enough young people being born to support them. Indeed, Japan is a nation on the road to extinction, at least if you extrapolate some estimates far enough.

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That's the accepted wisdom.

So it may surprise you to hear that right now, in fact, Japan is in a "demographic sweet spot".

And that could be great news for the country's stock market.

Believe it or not, Japan is in a demographic sweet spot'

Japan's economy looks set to get a boost from its favourable demographics, Jesper Koll at JPMorgan tells newswire Bloomberg. That's not usually an argument you hear associated with Japan.

So what's he on about? It's all to do with the phenomenon of echo boomers'.

Echo' boomer is the catchy name being used to describe the children of baby boomers. Around 15% of Japan's population falls into this category, which covers those aged between 35 and 44.

That's a significant chunk of the population. And it's an important demographic for the housing market, accounting for around half of homebuyers in Japan.

Demand for houses shot up when the original baby boomers (those born between 1947 and 1949) hit home-buying age in 1987, reports Bloomberg. Housing starts (the number of new homes being built) hit the third-highest level in history.

You might argue that times were different back then, back in the Japan bubble era. However, despite years of falling house prices residential land prices remain about 50% down on their 1991 peak Japan remains a nation of owner-occupiers. Home-ownership remains at least as popular as it is here.

So given that the new batch of echo' boomers, is "roughly double the size of the post-war baby boom generation," that should bode well for demand for Japanese houses.

Indeed, it seems the echo' boomers are already being tempted into the market. Japanese lending costs remain extremely low, while the Bank of Japan is planning to print even more money.

The government has also extended tax breaks on mortgage payments, and made it easier to buy with a low deposit. Mortgage sales grew in 2011 for the first time since 2007, according to Credit Suisse. Meanwhile, housing starts (the number of new units being built) rose for the second year in a row.

And with the country's banking system far more healthy than that of most developed nations, Japan's banks shouldn't need much encouragement to lend to anyone looking for a new house.

How housing booms multiply out through an economy

As it stands, the housing market is vital to the economy it accounts for about 15% of Japan's GDP. And it could become even more important.

We all know what happens when you get a housing boom. People buy more stuff to put in their houses: white goods, TVs, furnishings. So you get a consumer boom too. And builders build more houses, so you get more activity in the construction sector.

In short, a housing boom carries a lot of leverage. Economists would say it has a big multiplier' effect. As Koll puts it, "nothing gets the economy going as [much as] housing". (It's also why, on the flipside, a housing bust is so catastrophic for an economy).

Of course, all of this would be good news for Japan's domestic companies, and thus for its stock market. The Japanese market has already performed well this year the Nikkei 225 is up more nearly 20% since the start of 2011. But given that last year it touched its lowest point since the early 1980s, it's hardly as if the potential good news is all now in the price.

The prospect of a housing recovery is just one of the attractions of the Japanese stock market right now. The yen has weakened sharply against the dollar since the Bank of Japan set a formal inflation target and promised more quantitative easing earlier this year. This makes life a lot easier for the country's hard-pressed exporters.

You can read more on the case for Japan in James Ferguson's recent MoneyWeek magazine cover story. James also has some more tips on the best ways to buy into Japan in the next issue of MoneyWeek, out on Friday. If you're not already a subscriber, subscribe to MoneyWeek magazine.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.