Sunday, November 18, 2018

Japan's Residential Housing in a Multiyear Structural Uptrend?!?

I enjoy reading articles that are contrary to my viewpoint and challenge my thinking.  Thus, when I saw the article, Japan GDP - Not Bad, But No Room For Complacency, my interest was piqued (link HERE).  Given the accelerating depopulation underway in Japan, the author (WisdomTree's Head of Japan) made some startling statements I struggled with, in particular...

"Good news on the residential construction front. Here, the BOJ's adoption of negative interest rates had triggered a surge in activity as mortgage rates fell to record lows in the spring of 2016. This mini-boom turned into a mini-bust by mid-2017, with housing activity contracting for five consecutive quarters. Now we see the first up quarter, which we hope confirms our fundamental view that residential housing is in a multiyear structural uptrend, driven by rising demand for private homes and condominiums from the new middle class rising in Japan. Household formation continues to rise, with marriage rates increasing and birth rates, slowly but surely, also on an upturn. The next couple of quarters should see continued positive housing investment to help verify our structurally positive view."

A simple fact check-
-The number of households in Japan is anticipated to peak in 2018 and fall indefinitely thereafter (according to the Statistical Handbook of Japan, created by the Japanese Ministry of Affairs)
-The number of marriages in 2017 dropped to 607,000, the lowest in the postwar era and down 14,000 from the previous year...both the rate per 1000 and total # of marriages are collapsing from the early '70's peak in excess of 1 million marriages annually
-Japan produced 941,000 babies in 2017, the lowest since surveys began in 1899 and about 36,000 less than the previous year
-The only part of his statement I could corroborate is that the fertility rate has become slightly less negative at 1.44 instead of the all time low of about 1.26...but still well below the replacement level of 2.1

-Of course, the population of the Tokyo metropolitan area is still rising, but only due to accelerating rural migration and rapid depopulation among the rural child bearing population.

A quick recap of the changes that have already taken place in Japan:
-Births in Japan have fallen 65% from the 1949 peak of 2.7m to 941k in 2017 (blue columns, below)
-Population of 0 to 5yr/old Japanese has fallen 55% since the 1950 peak
-The child bearing population (ages 15 to 44) has fallen 22% since the 1989 peak, a decline of 12 million (red line, below)...all population data from UN.

What is certain to happen:

The Japanese child bearing population (red line above) will fall by another 7 million and be down 35% by 2030 (no estimate, just moving the existing population of young forward).  By 2030, the Japanese childbearing population will return to the same size it was in 1949, 36 million, and if fertility rates remain somewhat consistent, on an annual basis they will have just 30% of the births they did over 80 years ago.

But going back to the original article, I'm assuming the demand for "residential housing...in a multiyear structural uptrend, driven by rising demand for private homes and condominiums from the new middle class rising in Japan..." would come from among the working age population.  My issue is the collapsing quantity of the potential working age population (green line, below) means a collapsing potential for more workers.  By 2030, there will be over 6.5 million fewer than today and by 2040 a further decline of 8 million.  In comparison, the rise in 60+yr/olds is shown (grey line).

And to show the annual change to the "new middle class rising in Japan", the chart below shows the annual decrease in potential working age population (green columns) vs. the increase in elderly (grey columns...btw, the largest increases in elderly come among the 75+yr/olds).

Perhaps it is time to go long as Japanese "residential housing is in a multiyear structural uptrend".  As connected and successful as the author appears to be, it's hard to believe he doesn't know what he is talking about.  I certainly don't put it beyond the Japanese government to begin something like buying and demolishing existing housing stock or the BOJ going even "NIRP'ier" in order to create rising demand!?!  It's just much of what the author stated as the factual basis for this optimistic view wasn't factual (welcome to have your own opinions, just not your own "facts").

For those curious, a similar look at the US housing picture based on population growth and demographics, HERE.  Those curious to see Japan's much larger neighbor to the West, HERE.  Lastly, to bring the whole picture together of collapsing consumer nation populations and demographics versus population growth among the poor and non-consuming nations of the world...HERE.