Download RES327Week 3 AssignmentReal Estate Economics (RES327) The au and more Lecture notes Accounting in PDF only on Docsity! RES327 Week 3 Assignment Real Estate Economics (RES327) The author of the paper tries to determine whether bank credit had an effect on the asset prices. In the 1980’s Japan loosened the regulations in the financial sector. That deregulation caused keiretsu to obtain financing publicly and did not have to rely on banks as much anymore. That change in keiretsu’s activities caused banks to find another way to make profit and they did that through lending of real estate. In turn, that caused more and more people to buy land and real estate in Japan since there was so much bank credit available out there. By studying several graphs, tables, and statistics, the author comes to the conclusion that the data he looked at “suggests that prefectures whose banks experienced a greater loss in their proportion of keiretsu loans experienced a larger increase in real estate lending, which fueled land inflation” (Mora, 2008). However, the problem was that the lending was done and mostly focused on making profit. The banks that were lending money in order for people to buy land and real estate did not do well at-risk management and did not truly evaluate the value of land properly. In the end, that caused oversupply of loans on real estate, which increased real estate prices drastically, which caused a bubble to form, which then caused a lot of people to lose money when that bubble burst. The scope of the problem is complex and caused the Japanese economy to suffer for almost 10 years until the government was able to get the economy back up to where it was before the bubble burst. First, we have to understand how everything functioned before the deregulation of the financial system in the 1980’s. The term keiretsu “refers to the Japanese business structure comprising a network of different companies, including banks, manufacturers, distributors, and supply chain partners” (Twomey, 2020). The Japanese banks relied heavily on business by providing loans to the keiretsu. However, in the 1980’s, Japan decided to deregulate its financial sector which allowed Keiretsu to obtain financing in other ways besides the banks. Well, the banks did not want to just go out of business and looked elsewhere for business and tried to find ways to put their money to work. Banks decided to go with real estate loans. The supply of bank credits for real estate started increasing drastically which incentivized individuals to borrow money and buy land and properties in Japan. That movement caused lots of inflation and real estate pieces kept rising and rising and a bubble was slowly forming. Eventually, that bubble burst and lots of people ended up paying too much for their land or properties and ended up under water when the market fell drastically. The issue with what happened in Japan is that banks, lenders, and borrowers who were buying up land and properties were way too optimistic about the economy and pricing going up. Maybe it is obvious to individuals in 2021 that there is always a cycle when it comes to real estate and the stock market which directly affects the economy, but maybe it was not so obvious to the Japanese people back then. One who lives in a country that is prospering, the economy is growing, more international business is happening, there are lots of banks willing to give you loans for you to invest in real estate, most likely, that individual will blindly go for it and use that bank financing to buy land or a property. However, the problem with that is neither banks nor investors truly evaluated the deals. Banks only cared about making a profit and individuals let their emotions rule, instead of using ration. It is important to point out another key player in this whole story and what caused Japan to lower its interest and deregulate the financial sector in the first place. During the first five years, the U.S. dollar appreciated fifty percent. That inflation caused imports to be very expensive and exports to be very cheap. The United States, being concerned with major U.S. companies starting to sell their products to other foreign countries, put pressure on Japan, Germany, France, and the United Kingdom to make an agreement and to devalue the U.S. dollar.
