Historically there is a strong relationship between the availability of credit from banks (loans) and asset prices. When loans are easy to get and cheap to repay everyone takes advantage of the cheap money to buy assets and make money with investments and expansions in their businesses. When loans are harder to come by and the cost of the loan increases, fewer people are able or willing to take them, and as such asset prices do not get bid up as much. In the event that liquidity (again- loans) dries up and people cannot repay their existing loans (particularly those who over-leveraged by taking on too much debt), they will likely sell their assets to release the necessary funds to pay back the bank. This has the opposite effect on the way down as asset prices get beaten down with each and every sale. Simply supply and demand. When lots of people compete to buy, the price goes up. When lots of people compete to sell, the price goes down.
In Japan we have had an extremely friendly lending environment for the past five years. Banks sit on a huge amount of cash deposits bearing little, and in some cases, negative interest. Inflation in Japan remains low. Interest rates in Japan are still not much changed from their 2009 lows following the GFC. Banks want to lend money. People want to buy houses to live in. Some want to buy houses to rent out to other people, and make money from doing it. Each bank has a different profile when it comes to lending and some will lend for things others will not. This aside, I have yet to encounter a bank that will not lend for a real estate purchase in Tokyo. Why? Because it’s Tokyo, and it is unlikely to become a barren wasteland anytime soon.
The final question I will leave with you is this- what happens to the price of an asset when there is an abundance of cheap credit that can only be spent on one thing?
Editors Note: Martin King is a UK-born, long-term Japan resident Financial Adviser who works with investors from all over the world to help protect and grow their wealth.