WHAT'S THE WORST?

Being the paranoid person that I am, I always ask: What’s the worst that could happen? We apply the same mindset to real estate investments.

Now, to be clear—I DO NOT believe the real estate market will crash. I’ve outlined my reasoning in past reports.

But what if it did? What if a black swan event (e.g., World War 3?) triggers another global economic meltdown that drove asset prices underwater?

To explore this, let’s turn to the history of Japan.

Three decades after World War II, Japan emerged as an economic powerhouse, dominating the global electronics industry. As its economy boomed, the government deregulated financial markets, allowing banks greater freedom in lending. With low interest rates, Japanese conglomerates borrowed aggressively to invest in real estate, fueling a property boom. In 1987 alone, Tokyo’s real estate prices surged by 62% (Takagi, 1989).

At its peak, prime properties in Tokyo were 350% more expensive than comparable real estate in Manhattan (Colombo, 2012).

With soaring property values, companies recorded hefty paper gains, enabling them to borrow even more. The cycle continued—until it didn’t.

By 1989, the government, alarmed by the growing bubble, tightened monetary policy, raising interest rates by 3% within just three months. This sudden shift triggered widespread defaults, a stock market crash, and a sharp decline in real estate prices.

By 2004, Tokyo property values had plummeted to just 10% of their 1990 peak (Barsky). More than three decades later, residential prices still haven’t fully recovered.

Let me be clear: I’m not saying this will happen. But understanding "what could go wrong and how bad can it get" is a crucial part of investing. And as history shows, real estate prices DO NOT always go up.

So, to answer my question—wait 34 years and still end up losing money from your "investment". But if the property was purchased for end-use, those 34 years might be a bit more manageable.