Real Estate & Currency

Maranuchi

QUESTION: 

Hi Martin,

Re: Is Japan Real Estate a Taboo subject?

Thanks for all your writings – FANTASTIC. Spot on with the DOW & gold. What inspiration and enlightenment. As they say down under – you are a living legend mate! Out of pure interest only, I was wondering if you could do a blog on Japanese real estate 1989 to present day?  I would be interested to know what has happened to their real estate prices since their 23 year depression (possibly heading into 26 years). Seems to be a Taboo subject that no one wants to talk about for whatever reason hence the more reason it would make a ‘good read’.

Cheers

JS

Australia

ANSWER: Japan is starting to turn around. The decline in the currency actually revitalizes the economy. It was a trick that George Warren convinced Roosevelt to do when his Brains Trust said no way and preached austerity as is taking place in Europe now. Even lunch in the center of town for the Japanese businessman fell to 1000 yen. Another question came in about UK property and the collapse of the pound.

concorde

 

I was living in London in 1985 when the pound fell to $1.03. To the domestic player, he saw nothing. The attitude was property was way too expensive and everyone expected a crash. But with the pound at par, to anyone dollar based, London was on sale like at Harrods. The Concorde tickets when it began were 2,000 pounds. At $2.40 that was about $5,000 in 1980 when a first class ticket on TWA was $3,000. At par, I walked into British Air and asked them how many open pre-paid tickets would they sell me? They looked at me like I was nuts or a drug dealer or something. Reluctantly, the manager came back and said 25 would be the maximum. I bought them at $1.03. Because the pound crashed, they raised the ticket price to 5,000 pounds a couple of months later. Then the pound moved back to nearly $2 and it was a $10,000 ticket when first class was $7,000.

ferrari-328

I bought a 328 Ferrari in London at the same time. In the States, this was a $50,000 car in 1985. In pounds it had been priced at 25,000 pounds. I bought one, drove it around London for two years, then sold it for $50,000. How? Ferrari could not afford to sell the car for $25,000 when the pound was par. So they raised the price to 50,000 pounds. But the pound rallied to almost $2 and it became a $100,000 car.

This is what currency-inflation is all about. Warren was absolutely correct. What appears to be overpriced in London to the Brit, let the pound crash and burn, and it will be a spring sale at Harrods and hell, I may buy a home there! Welcome to the dynamic world of International Capital Flows.

These experiences have helped to shape my understanding of the global economy. It has helped me restructure corporations changing how they price their product. If they price their product in the local currency of the target sale, then manage the currency risk at home. This creates a stable market for the consumer. If they price their product based upon their cost of production in their local currency as did the Germans, then cars will continually rise in the local currency of the consumer when their currency declines. A 911 Porsche in 1971 was $10,000. By 1980 it was a $50,000 car and now $100,000+. Was that rise really the cost of production rise in labor and materials alone? Or was it first driven by the currency whereas the DMark rose against the dollar creating the image that German cars were better and held their value more than American cars. It was a great sales-pitch in the 1970s and early 1980s and the Ferrari and Porsche became the new “yuppie” cars for show rather than true sports enthusiasts like myself.

Currency is – E V E R Y T H I N G!