Inflation.

[Bubblegun]

So, I was looking at buying a home, and investing and the share prices/stock market.
I am wondering is everything just becoming artificially inflated.
For example house prices have gone through the roof, but there is no real reason for it, apart from the investment aspect. House prices go up so I believe I can pay more, shall pay more, "knowing" the value will go up. This is fuelled further by lower interest rates, creating a loop effect. Cheap interest rates mean people pay more for a home believing interest rates will always remain the same, but people wages haven't caught up with house inflation.
But does this put the government/Bank in a bind. If inflation goes up, they can't increase the interest rates too much les they destroy the housing market, resulting in negative equity, and people can't afford a mortgage anymore.Especially a capital and repayment mortgage. So the government fuel this by giving people help to buy loans, again putting more money into something, rather than letting the market cool down, because home buyers wouldn't actually be able to buy.So the home seller has to either reduce their prices, or accept negative equity. Decades before, as the UK shifted manufacturing overseas, has the government become more reliant on the ever increasing house prices? Almost like an addiction and now young people can't afford to buy.

Anyway, it got me thinking about the stock market, IDECO, my present endowment fund, and the current passive funds that we seem to be all raving about.(after all if it was so easy, why would anyone in their right mind want to choose and actively managed fund? After all no nobody can predict anything )
If everyone just put their money into a passive fund, wouldn't this artificially inflate the value of a fund? Similar to how a CEO uses a massive tax break to buy back his companies shares, pushing up the share value which in reality hasn't made any more products, sold more products, or increased actually increased its profits, but the CEO also has one eye on his share prices/share bonus/golden parachute so thereby having a conflict of interest.

I am going to put a little disclaimer here though and that is how i have seen how the financial market mis sold products to people or at the very least misled people. We all raved about endowment mortgages years ago, We had the pension mis-selling, pay less get more deals. PPI. So forgive me if I am in the if it looks too good to be true camp then it is.

I wondered what your thoughts are though.

[captainspoke]

So maybe it was money, not agriculture, that was the worst mistake of the human race?

[Bubblegun]

So maybe it was money, not agriculture, that was the worst mistake of the human race?

Sorry,it wasn’t meant to be a dumb questions but a genuine attempt to understand something I thought I was seeing, or interpreting.
It’s not money that’s the problem, Not at all, I was actually thinking it was a behavioral thing, not a financial thing.
It just didn’t make any sense to me that house prices jumped so much that the average single person can’t buy anywhere now.
So we resort to tax payer loans, to encourage people to buy, (cause they could afford to buy) now we’re stuck with low interest rates , cause we can’t afford to increase them. When nothing had really changed.


I was only wondering if we thought all those passive funds, which seem so logical, easy, and the way to go, so psychologically, why would anyone consider say an actively managed fund? So I was wondering does this just cause a bubble too.....somewhere?




Anyway I enjoyed the agricultural read.,
But it was a genuine attempt to try and understand something which came to mind as I read.

[captainspoke]

...
Sorry,it wasn’t meant to be a dumb questions but a genuine attempt to understand something I thought I was seeing, or interpreting.
It’s not money that’s the problem, Not at all, I was actually thinking it was a behavioral thing, not a financial thing.
It just didn’t make any sense to me that house prices jumped so much that the average single person can’t buy anywhere now.
So we resort to tax payer loans, to encourage people to buy, (cause they could afford to buy) now we’re stuck with low interest rates , cause we can’t afford to increase them. When nothing had really changed.


I was only wondering if we thought all those passive funds, which seem so logical, easy, and the way to go, so psychologically, why would anyone consider say an actively managed fund? So I was wondering does this just cause a bubble too.....somewhere?
...

No worries...!

For the first part there, housing, I guess from my POV (and from reading) is that the Japanese housing market is actually on the affordable side of things. The fact that, among other things, housing is not an appreciating 'investment' has kept prices within reach of a larger segment of the population than in some other countries.

While Australia's housing market has seen a lot of appreciation, and is considered to be "strong", it's not too hard to find comments to the effect that 'the entire economy is built on housing'. The run-up there has been great for the older generation, who 'got in' some decades ago and are now property rich. But their kids, anyone up thru their 30s, and simply unable to afford housing--not only to buy, but they are also unable to afford the rents that are now common.

Something similar has happened in the US (tho the range of markets/prices is much broader). In some major cities prices are very much out of reach of young buyers, and rents are similarly often unaffordable. Prices have also been driven up by the airB&B phenomenon, where long term renters have to compete with the yields that owners can get from short term rentals. Add in student debt for a double whammy. (there's virtually no student debt 'hangover' in japan)

I know less about it, but I think that property investment in UK (discussed by people here in other threads as a possible investment, buy-to-let), has at least put pressure on the traditional buyers there.

Back to japan, property prices (and changes, by prefecture) are often summarized every so often in the local paper. Outside of kanto/kansai, I don't think prices have moved much in several decades. There's been the effect of chinese and other expat 'investors', maybe the olympic effect (along with talk of how soft the market will be after that's over).

And when thinking of cost, the number at the end matters, too. My sisters in the US have talked about how they've recently refinanced their mortgages for a little over 3%, while people posting here talk about rates that are under 1%, sometimes even a small fraction of that. I'm not good at mortgage math, but for a ¥30M property, that difference in rates makes a huge difference down the road. Additionally, here in japan (if you qualify) it's not uncommon to hear of someone getting a loan for the full value of a property (100%)--or even more--while in the US you'll need 20% down to even get the advertised rate.

I think it all adds up to property in japan being affordable. What do you think?

[TokyoWart]

It just didn’t make any sense to me that house prices jumped so much that the average single person can’t buy anywhere now.
So we resort to tax payer loans, to encourage people to buy, (cause they could afford to buy) now we’re stuck with low interest rates , cause we can’t afford to increase them. When nothing had really changed.

I don't think this has been the case in Japan. I first visited in 1990 and housing prices were much higher then in Tokyo than they are now. I bought a house in central Tokyo in 2001 and I think I have at best broken even based on current values. I also don't think there is much evidence low interest rates have been planned or manipulated to enable housing affordability. The large balance sheet of the Bank of Japan (I mean they own massive amounts of government debt) suppresses interest rates but that is mostly to the government's benefit (or taxpayer's benefit because ultimately we'll be paying the interest on government debt) which also keeps rates low for businesses and consumers.

If everyone just put their money into a passive fund, wouldn't this artificially inflate the value of a fund?

Passive fund share of the total market is still relatively small. It has grown compared to the share of the market owned by active mutual funds, but larger portions of the total stock market are owned under other circumstances (major shareholders, individual investors owning single stocks, cross shareholdings, etc.) than just that passive index fund slice. As a group we benefit when companies do well economically, raise dividends, buy other listed companies or buy their own stock shares. You would see excess demand for shares in P/E expansion (i.e. the P/E of the exchange as a whole is rising) which has happened in the US but not in the Japanese market.

Similar to how a CEO uses a massive tax break to buy back his companies shares, pushing up the share value which in reality hasn't made any more products, sold more products, or increased actually increased its profits, but the CEO also has one eye on his share prices/share bonus/golden parachute so thereby having a conflict of interest.

Share buybacks have risen in Japan but are far below the pace of, for instance, the US. A share buyback is just one other way to return money to shareholders. In finance terms it is equivalent to a dividend. I would agree that buybacks have been used to try to support stock prices but you see much less of that here in Japan and it actually doesn't work very well because it's hard to find enough funds to buyback more than 1-3% of outstanding shares and that theoretical 1-3% boost in share price doesn't do much for executive options given that the random variability in share prices annualy is on the order of 15%. I work for a Japanese company which introduced options for executives about 15 years ago, while the stock was paying a relatively high dividend (which effectively makes those options less valuable because shares lose the value of the dividend each time the stock goes ex-dividend). My company stopped all share buybacks when options were started as a form of compensation so that there were more reasons we executives were being disadvantaged (the high dividend was maintained) than advantaged (no decrease in outstanding shares through buybacks) and no question we might be working against shareholders' interests.

[adamu]

we executives

You're an executive? That's nice to hear. I read The Blue Eyed Salaryman (a few years ago, before I came to Japan) by a guy that worked at Mitsubishi (granted quite a while ago now), and he had a slightly bitter tone that made it sound like there was a limit to how far foreigners could go in a Japanese company. Could have just been his situation though, and of course parachuting in, or sarting your own business are different too.

[TokyoWart]

we executives

You're an executive? That's nice to hear. I read The Blue Eyed Salaryman (a few years ago, before I came to Japan) by a guy that worked at Mitsubishi (granted quite a while ago now), and he had a slightly bitter tone that made it sound like there was a limit to how far foreigners could go in a Japanese company. Could have just been his situation though, and of course parachuting in, or sarting your own business are different too.

I work at a very forward-thinking company and I would say I don't have anything to feel bitter about. I became a corporate officer in 2007. It makes your income more variable and removes all job security (officers work on a yearly contract and are not covered by unemployment insurance). For someone like me whose original background was more in science than business it's been a very interesting look at how a multinational company functions and especially how tough it is for companies in Japan given the country's demographic trends, labor market restrictions and the minimal growth of the economy.

[Bubblegun]

Thanks for your replies guys.

For the first part there, housing, I guess from my POV (and from reading) is that the Japanese housing market is actually on the affordable side of things. The fact that, among other things, housing is not an appreciating 'investment' has kept prices within reach of a larger segment of the population than in some other countries.

I think with Japans market, things seem affordable, I just wondered if having a mortgage for 30+ years is really that affordable.
Even the wife is of the mind, buying a new house is a bad idea here.Rather similar to buying a brand new car, drive it off the forecourt and its dropped 40%, and would rather buy a house later. Although I personally believe a house should be for living in and not to psychologically believe your richer.After all I don't think I'm poorer if my house price falls.It still provides a roof over my head.

You' rightly pointed out that some countries do seem to be a housing, consumer based economy, and I wondered if thats where the UK problem is.We have stopped producing things, moved things abroad and become more and more focused on housing, increased immigration.decreasing birth rate, increased single families and a basically a halt to social housing.The whole combination results in hi house inflation.

https://www.bankofengland.co.uk/knowled ... he-economy

Anyway this also made me think about the psychology of it all, people "believe" they are richer, because they think their house value has increased, so they sell up, buy a bigger house. But it seems more like a delusion because everyone else's home has also increased in value at the same time.As the Bank of England article points out about demographics and demand, why would a company want to build more houses, to slowly bring house prices down, when they can build fewer houses, with less costs, and gain more profit from that single plot.( resulting in a knock on effect on the second hand market).After all if you can make 20% profit why build more and only make 10% profit on each house. I am more of the mind you've only made money if you sell your home, and then "DOWNGRADE" to a cheaper property unlocking some capital. But I'm not sure most people do that.

Previously, if we applied for a mortgage, it was about 3.5 your annual earnings to show you could afford a mortgage, but since peoples earning have not kept up with house values, the banks had to switch to "affordability test". So I, (haven't been burnt by financial services before") read this to be, interest rates are low, so you can afford more.... similar to the sub prime in the US, HOUSE PRICES ARE GOING UP, so you can afford MORE, but what if interest rates take off? Maybe I am over thinking this

Thanks TokyoWart

Share buybacks have risen in Japan but are far below the pace of, for instance, the US. A share buyback is just one other way to return money to shareholders. In finance terms it is equivalent to a dividend. I would agree that buybacks have been used to try to support stock prices but you see much less of that here in Japan and it actually doesn't work very well because it's hard to find enough funds to buyback more than 1-3% of outstanding shares and that theoretical 1-3% boost in share price doesn't do much for executive options given that the random variability in share prices annualy is on the order of 15%. I work for a Japanese company which introduced options for executives about 15 years ago, while the stock was paying a relatively high dividend (which effectively makes those options less valuable because shares lose the value of the dividend each time the stock goes ex-dividend). My company stopped all share buybacks when options were started as a form of compensation so that there were more reasons we executives were being disadvantaged (the high dividend was maintained) than advantaged (no decrease in outstanding shares through buybacks) and no question we might be working against shareholders' interests.

So we agree that some companies buy back stocks and shares in the US to increase the share price, but I wonder if they effect in the US is larger than buy back shares in Japan then. I understand that it is the equivalent to a dividend, but in reality why not just pay out a dividend, if it is equivalent to a dividend? Surely taking shares out of the market causes a shortage holding up a share price. Similar to a housing shortage.

Today under all this massive stimulus packages, surely a headache has to come somewhere down the line for someone at some point
Even the UK says we should borrow massively because interest rates are so low, and that was before todays coronavirus situation, but it just seems that a government, will want to keep interest rates low, so they can service those debts, and if inflation returns due to a massive increase in money being printed, surely the current rate of interest rates can't be sustained causing a chain reaction.
If we consider Japans situation, are they stuck, between a hard place and a rock? I suppose I see simply as a credit card, so long as you keep paying the minimum payments its fine, but at some point you have to pay down the debt, and cut back on other things less it runs away with you, and those interest rates are pretty high.

https://www.forbes.com/sites/peterpham/ ... 963e4c4c6d

[TokyoWart]

Even the wife is of the mind, buying a new house is a bad idea here.Rather similar to buying a brand new car, drive it off the forecourt and its dropped 40%, and would rather buy a house later.

I own a home here but I think you and your wife may well be right about this. Renting (or buying used?) might be the economical choice.

So we agree that some companies buy back stocks and shares in the US to increase the share price, but I wonder if they effect in the US is larger than buy back shares in Japan then. I understand that it is the equivalent to a dividend, but in reality why not just pay out a dividend, if it is equivalent to a dividend?

Yes we agree that is at least sometimes the case although I might be of the opinion buybacks don’t change share prices much over the short term. The relative benefit for shareholders of a buyback over dividends is that dividends force taxes on you each year while buybacks (as they increase share prices) allow you to choose when to take the capital gain and pay taxes. This is one reason why Warren Buffett never pays a dividend, favors buybacks and incidentally is opposed to stock options.

Today under all this massive stimulus packages, surely a headache has to come somewhere down the line for someone at some point

I agree. I understand that we are in really unusual circumstances but the stimulus programs we see are astounding.

[Bubblegun]

Even the wife is of the mind, buying a new house is a bad idea here.Rather similar to buying a brand new car, drive it off the forecourt and its dropped 40%, and would rather buy a house later.

I own a home here but I think you and your wife may well be right about this. Renting (or buying used?) might be the economical choice.

So we agree that some companies buy back stocks and shares in the US to increase the share price, but I wonder if the effect in the US is larger than buy back shares in Japan then. I understand that it is the equivalent to a dividend, but in reality why not just pay out a dividend, if it is equivalent to a dividend?

Yes we agree that is at least sometimes the case although I might be of the opinion buybacks don’t change share prices much over the short term. The relative benefit for shareholders of a buyback over dividends is that dividends force taxes on you each year while buybacks (as they increase share prices) allow you to choose when to take the capital gain and pay taxes. This is one reason why Warren Buffett never pays a dividend, favors buybacks and incidentally is opposed to stock options.

Today under all this massive stimulus packages, surely a headache has to come somewhere down the line for someone at some point

I agree. I understand that we are in really unusual circumstances but the stimulus programs we see are astounding.

I was of the mind to buy a house a few years back in japan, just because I have that UK mentality that rent is just a waste of money.( and I still do),but if in the future we end up moving into the in-laws property, we would be stuck with another property in Japan. So it kinda puts us into a bind. It also seems nearly impossible for a single person to buy something in Japan, unless it's in the middle of nowhere. So if we do end up buying it will be a second hand home, as the newer homes that come online will have aged by the time we buy.

Thats a really interesting perspective on share buyback schemes, as they seem to be a kind of tax dodge then?
US$5 billion in 1980 rose to US$349 billion in 2005. Large share repurchases started later in Europe than in the United States, but are nowadays a common practice. I would have thought a company with that amount of cash, buying its own shares, wether it be a dividend or a share buy back seems like a tax dodge....or in the financial services colourful vocabulary... TAX efficient.

I have to agree the current stimulus is astounding when we think we have bought into the idea that, as a country we can't afford this, can't afford that, and debt is very bad.EG, Push costs down onto people/companies to pay health care in the case of the USA, or push debt down onto students, who may or may not benefit, and that is probably seen as good. So effectively the people become government customers. They pay the government body the money back, plus interest.
Rather than the gov seeing a highly educated work force as a net benefit. Or even in the terms of health care a national insurance policy that makes sure everyone is healthy, it seems that they see education as a way of making money, and health care as a burden.But I digress.

I wonder once this is over how on earth they are going correct this.

There is certainly going to be a second tranche of stimulus package, which is going to compound this further.
The governments could cut back on investment in say health care,( which has kinda got us into this mess), Just in time "health care" isn't something I would recommend, social services, defence, roads etc, etc. They certainly can't afford inflation to get out of control, or increase interest rates to a point it crushes people.So they will need to rely on controlled inflation to eat away at the debt over the next 50+ years, or the financial pain will be just too great.Probably similar to the UKs years of austerity.( never thought I'd witness food banks)which seems like an oxymoron.
They could increase tax, to service the debt and take money out of the system but if thats too high, it sets off a cycle of people being unable to purchase a home, and people seem to have been stuck financially in a Time Zone.
Maybe Japan has more room to manoeuvre to increase sales tax and i expect Japan to use this moment, similar to fukushima, to increase sales tax again.It will certainly need to increase it up to 20% at some point to not only service the debt but the ever ballooning demographic time bomb.


I think as I am learning I seem to be going down a worm whole where more questions pop up.