It’s one of the all-time classic bubble statistics. During Japan’s bubble of the late 1980s, which drove up the prices of everything from stocks to property to fine art, the land under the Imperial Palace was said to be worth as much as the entire state of California.
The story is apocryphal – sadly no one keeps an official ‘central Tokyo to Californian land mass’ ratio index – but it does give a flavour of just how crazy things became.
If you look at the actual historical data, as Dan McCrum noted on the FT’s Alphaville blog this week, then at the peak of the bubble in 1990 a new flat in greater Tokyo would have cost you 18 times the average annual income.
Why is this relevant? Because, says McCrum, if you look at London prices today, some prime areas of London are already far more expensive than that.
In Kensington and Chelsea, the average house will set you back a whopping 32 times median income, while Westminster is above 20.
Sure, it’s hardly comparing like with like – prime properties in Tokyo “undoubtedly went for more than 18 times income at the peak”, says McCrum. All the same, “it seems prudent to at least ponder the comparison, given that Japan’s bust was followed by two decades of falling house prices”.
London property is hardly the only expensive-looking asset out there. US stocks have now been overpriced for so long that we’re getting to that stage in the investment cycle where people start taking it for granted and making up excuses as to why it can continue long into the future.
While the surge in asset prices has unquestionably been driven – at least in part – by central banks printing money to suppress interest rates, fear about the very real fact that money printing in America is ending, and rate rises are coming, has given way to complacency.
What can an investor do? Well, what you should always do – look for value. Avoid stocks in countries where they are expensive (like the US), or where they’re not quite priced for the sorts of political risks that might be out there (at least some UK-listed stocks fall into this category).
Hold some cash. If you’re a keen risk-taker, you could invest in markets that look very cheap, such as China (I intend to invest some money here myself) or Russia (I’m giving that one a miss, but some of my colleagues are more keen).
As for the rest, buy assets in markets where prices remain reasonable – and in the present environment, it also helps if the promise of more printed money is there to underpin them. One such market is Europe, where we’re still happy to buy.
And another, of course, is Japan, which is still showing promising signs of recovering from its long, long slump. It’ll be a long time before the land under the Imperial Palace is worth anything approaching the prices seen in 1990 – and that’s just the way we like it.