A bull market in property is just beginning - but where?

published 29 August 2007

If you've heard me speak this year, you've heard me talk about Japanese real estate... I think it's the best investment opportunity for the next 15 years...

Until just a few months ago, property prices in Japan had been falling for 16 years straight. The Bank of Japan (Japan's equivalent of the U.S. Federal Reserve) even went as far as lowering short-term interest rates to 0% and it kept interest rates there for six years.

Amazingly, property prices continued to fall, even in a 0% interest world.

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Long-term interest rates are around 2% in Japan. Think about this for a moment... what do you think would happen to U.S. real estate prices if mortgage rates went from 6% to 2%?

Real estate prices would soar...

Most people don't shop for homes based on the sticker price. It's nearly irrelevant. Instead, most people buy based on what they can afford in a monthly payment.

You see, at 6% interest, a $1,500 monthly payment will get you a mortgage of $250,000. Yet at a 2% interest rate, a $1,500 monthly payment will get you a mortgage of $400,000.

In the U.S., we take it for granted that if mortgage rates fell from 6% to 2%, prices would soar.

Americans believe that "you can't go wrong in real estate."

However, after 16 years of falling prices, the Japanese now believe that "you'll never make money in real estate."

From 1990 to 2000, real estate prices in Japan fell between 50% and 90% (depending on where in Japan we're talking about, and what type of real estate we're talking about). And they've stayed down.

Put simply, the Japanese are afraid of getting burned. Their stock market is also down 60% since 1990. So the Japanese simply don't invest. They sit on cash, earning literally no interest. "At least cash doesn't go down in value," they think. It's completely opposite from the American perspective of, "I can't sit on cash, I've got to put it to work."

Now finally the Japanese are starting to buy real estate once again. Prices are just starting to rise. The bear market is finally over.

The thing that kicked off the bust back in 1990 was the Bank of Japan raising interest rates too fast. (Of course, prices had gotten ridiculous.)

The government will do everything in its power to prevent going back into bust mode. It will NOT get in the way as Japanese house prices start to rise. And it will do everything possible to keep prices from falling.

Therefore, right now, we're set up for a ridiculous bull market in Japanese real estate. It's cheap, hated, and the uptrend is just beginning.

Steve Sjuggerud is a frequent contributor to DailyWealth, a free contrarian investment newsletter focused on the safest, most profitable investments in the world.