Politicians of all hues across Asia have one major issue to agree on, and that is the futility of land reforms. That’s a pity, because this failure to address the most important factor for economic growth all too often produces distortions that transcend immediate economic and social issues to create longer-term demographic issues. Japan’s experience should serve as an eye-opener to both South Korea and China, but it might well be too late already.
Fancy a steak?
The world’s most exquisite piece of meat is arguably a medium-rare porterhouse cut of Wagyu cattle reared lovingly in the plains of southern Japan – what the cognoscenti refer to as Kobe beef. An expensive delicacy this may be for the average American or European, but it is even more so for a Japanese person. That’s not a function of what it costs to order a plate in Tokyo, but rather what its economic cost truly is.
An expensive delicacy serves as a visual – given what it costs, literally just that for most people – reminder of how large tracts of farm land co-exist in a country with among the highest property prices in the world. During the 1980s, as the Japanese economic miracle came of age, severe restrictions on the end use of land persisted across the country, as the government sought to preserve both food security and the livelihood of its farmers. In a previous article,  I argued that true food security is a function not of growing one’s own produce, but of freeing up the trade in food items.
A corollary to the zealous guarding of domestic production of food emanates from the assiduous cultivation of farmers by the Liberal Democratic Party over the 1960s and 1970s. As Japan’s postwar nationalism faded and more youngsters started questioning the role of the LDP, the party became increasingly reliant on two interest groups, namely farmers and the construction business.
From a pure economic perspective, the fit couldn’t be any better – protecting the livelihood of farmers demanded the continuation of their access to cheap land, while the construction lobby needed the exact opposite, namely land scarcity, to improve its fortunes. While Japan is hardly the place where the idea of restricting land usage arose (that dubious honor belongs to England), it is certainly where it became enshrined as a way of life because of the political exigency of the LDP.
The success of the LDP’s arrangements became apparent in the soaring price of urban land, and stable if not rising farm incomes. The mix was, however, to have a less than salutary consequence on Japan’s demographics over the 1970s. Unable to afford apartments, Japanese increasingly stayed with their parents, ending up with late marriages in many cases. The sheer pressures of living in Tokyo meant rampant compromises on the quality of life, particularly in terms of buying apartments far away from the city center. The daily ritual of enduring packed subway trains added to the deliciously boring rubric of life, sapping reproductive instincts.
Thus, as Japan’s property prices starting falling at the beginning of the 1990s, avaricious property barons came up against the uncomfortable demographic that made price cuts pointless given the sheer inelasticity of falling demand.
The echoes of Japanese policy making are to be found in other countries, most notably South Korea and China.
In much the same way as Japan, the two countries have skewed demographics, with Seoul accounting for a fourth of the entire South Korean population, a strange choice in the best of times that was made more perilous by the proximity to a dangerously deranged dictator next door in Pyongyang. As with Japan, the obduracy on land usage meant that many companies seeking to move away from Seoul were simply dissuaded from doing so by the lack of available local talent, a function itself of fewer residential areas. Second-tier Korean cities, including Pusan, suffer growth pangs from time to time due mainly to the skewed distribution of population.
It is probably too late from a strictly demographic perspective for the South Korean government to do anything about the forthcoming crash, except to ease the path for foreigners to own property in the country. The second is to redistribute the risk of property loans for the country’s banks by pursuing aggressive securitization aimed at foreign buyers. The third policy plank arises from my earlier article on food free-trade agreements, by making it easier for Korean farmers to sell land for urban uses such as residential townships.
Rapid urbanization has also been a feature of China’s growth, with Shanghai and Shenzhen leading the pack initially, followed closely by other cities around the country. The system of controlling residency,  along with the concentration of foreigners in the big cities, has prompted an unsustainable boom in the prices of property across urban China. Even as media focus increases on the sheer scale of Shanghai’s gleaming skyscrapers, less attention is paid to the economics between prices and rental yields.
The recent experience of the US economy shows that a prolonged dichotomy between the two is not possible, therefore either rental yields have to rise, which is unlikely given the large volume of new property being constructed, or property prices need to fall. It appears to me that the latter is the more probable alternative, albeit one with a potential twist given the Chinese government’s meddling role.
In a previous article, I wrote about the Chinese government’s ineffectual control of stock markets that has produced frequent policy flip-flops.  A similar series of contradictions is probable for the country’s property markets in coming years as reductions in the Chinese population are likely to coincide with the rapid expansion of property supply. Echoes of the Japanese crisis are hard to miss at this stage.
Free markets are painful
The Chinese government cannot afford a significant property-market crash in any of the country’s cities, especially given its experience of having to fire Hong Kong’s chief executive, Tung Chee-hwa, before his term ended because of the significant deflation foisted on the city’s residents over an eight-year period from 1997. The fact that the world’s freest economy could not adequately absorb the political impact of a free decline in asset prices has served notice to Beijing that the continuation of the Communist Party’s rule depends much on the sanctity of the iron rice bowl.
In the new economic climate, the iron rice bowl isn’t so much the literal meal as it is people’s perceptions of their own wealth. Thus Beijing has learned an important lesson, which is that just because people know that prices can go up as well as down doesn’t mean they will absorb years of declines quietly.
This would tempt the mandarins in Beijing to intervene in the operation of property markets, especially in the context of any revaluation of the currency against the US dollar in coming months. Any rise in the local currency must be “compensated” by a decline in local asset prices if overall factor competitiveness is to be maintained. Thus the potential crash of property prices across urban China on the back of currency revaluation complicates the government’s response to the gathering media storm in the US, which will only intensify going into that country’s presidential elections next year.
The Chinese government has more time than South Korea, but not a whole lot more. In addition to the steps outlined for Korea, the way out for Beijing is to accelerate land reforms, with a view to gently deflating the gathering property bubble. This would entail a sharp reduction in the importance accorded to the major urban centers, particularly Shanghai, while removing other barriers to free mobility of people. A formal rejection of the one-child policy would also save the property market from its inevitable demographic wobbles, even if those are still some way off.