Japan Earthquake’s Impact on Real Estate Securities Industry

Earthquake in Japan (reportingasia.com)

As the disaster in Japan, caused by the 8.9 earthquake that stroke the north of the country and was followed by tens of aftershocks and by a tsunami, captures the mind and hearts of people all over the world, who watch in terror and compassion apocalyptical images of entire cities destroyed to the ground or washed out completely of the map, relief activity is paralleled by an economic evaluation of the effects to the national economy and to the world economy, provided that Japan is one of the most powerful economies of the entire planet.

Entire neighborhoods will have to be rebuilt, large areas will have to be brought back to civilization after all services have been disrupted by the terrible event. Bridges, roads, railways, houses, electricity lines will have to be replaced.

Latest reports coming from the Miyagi Prefecture say that the authorities had no information about the 10,000 inhabitants of the port city Minamisanriku, considering them missing after the tsunami hit the zone.

Fortunately, unlike most of the nations in the world, Japan has a special training for fighting the consequences of such events. Maybe not such catastrophic events, but earthquakes can never catch Japanese by surprise.

One more asset for Japan is that it has a population committed to make a new beginning and surviving the darkest hours of its own history, of which what’s been happening for the last 48 hours is no doubt a substantial chapter.

Geological plates causing the earthquake in Japan (georesources.co.uk)

The event is expected to have a serious impact on the economy, in spite of the fact that the Japanese national bank pledged to support it from falling into chaos.

Economists like Carl Weinberg, chef economist at NYC High Frequency Economics, is quoted by the New York Times to have assessed that the effects on the third economy of the world, that had been stagnating for the last two decades and decreased in its gross domestic product by 0.3 over the fourth quarter, would be felt beyond Japanese shores.

It is considered, however, that since most of the industrial centers have been spared, the damages can be overcome, in spite of how terrible situation looks right now.

Miyagi Prefecture, the one to bear the brunt of this earthquake is home to 1.7 of Japanese population and as much of the gross domestic product.

There will be, consequently, microeconomic disruptions in the area, known for cultivating rice, but they will not be that dire as to dramatically impact on the rice market all over the world, for instance.

What is the effect of this catastrophic natural event on the real estate building?

Earthquake in Japan (dawn.com)

Like everybody can figure out and as professional survey applying the hedonic pricing method confirm there is an impact on real estate business even before such events occur. People will always pay more to avoid the consequences of such disasters.

If they cannot avoid the quake areas, it is natural that they expect a compensation for placing their lives in jeopardy, and in cases like the one we discuss, even lose it.

The effect of earthquakes in Japan has been documented annually by a scientific survey conducted by the Ministry of Education, Culture, Sports, Science and Technology.

One of the purposes of such survey is to assess whether after major earthquakes the subjective perception of individuals is being altered in relation to buying houses or living on rent in a house that is situated in a risk area.

The result of the survey shows that in the post-quake period, there is a 0.2 percent increase in the annual earthquake probability, which is a third of the average probability, and that that leads to 10,000 yen discount in monthly rents, and a 3.8 million yen discount in housing values, that is 16% of the average rent and 13% of the housing value.

Earthquake in California (chattahbox.com)

Household buyers are thought to be unaware of the quake risk, or at least underestimating it, but they become very much alert after they see what the quake can do.

In cases like Japan, the value of the house increases if it is anti-seismic equipped and guaranteed.

The price of buildings can vary because of the difference between objective and subjective perception of the risk.

Other concerns that must be taken into account are: the age of the building, the time distance to the nearest public transportation, the number of rooms, and so on.

Surveyors advise Japanese government an increase of the campaign of making aware of the risks an earthquake poses on the life of the people, and on their housing choices.

According to Japanese law, a building cannot go beyond the age of 50, after which it is toppled and built again using the latest technological enhancements at the moment.

Japan has developed in the field of real estate securities industry a concept established by earthquake insurance industry in the United States, and called Probable Maximum Loss. The concept focuses on the maximum of damage the quake can cause to a building.

In their own terms, PML is “the expected maximum loss with a 10% chance of occurring in the 50-year lifetime of a building.” The method is ascertaining both probability and the amount of money lost in the event of an earthquake of great magnitude.

After the PML is calculated, it is used as a guideline for purchasing real estate; if its values go as far as 15% or 20% insurances are attached to the real estate in question; if it goes beyond 20%, earthquake-resisting construction is being engaged.

Earthquake in Iran (news.bbc.co.uk)

Measures of security against earthquakes are employed in all zones of the planet where there is such a threat. Tehran, the capital of Iran, for instance, is a city exposed to seismic activity, where anti-seismic standards have been in place.

According to a survey conducted in 1994, the average price of a quake resistant house was in Tehran of 161.16 million Iranian rials ($59,855), with prices varying from 63 million to 400, while one without such improvements was of 135.99 million rials ($50,370).

The difference in price between the resistant house and the nonresistant was of 25.17 million rials, showing that the price of a house in such an area clearly reflects the danger its location presents, whether the awareness in highly stimulated by public campaigns or not.

When asked whether the earthquake zone has an impact on real estate business, Tehran appraisers responded by 46.2 percent affirmatively, with only 7.6 percent saying it had none.

A similar survey shows that most investors and mortgage lenders consider a zone like San Francisco bay area a risk zone reflected in the reduced stock values for the firms operating there.

The survey shows that information about earthquake zone is a very important factor in valuation and financing real estates.

The prospect of catastrophic loss could restrict the ability of lenders to sell San Francisco bay area in the secondary mortgage market given that it may require a risk premium or earthquake insurances, which would have as result the reducing of return the initial lenders obtain when the sell mortgages.

The series of earthquakes in the Christchurch area of New Zealand has brought a decrease in the prices for residences in the entire country soon after the quake in 2010, and the consequences after the one that hit the same spot a few weeks ago are still being evaluated. The same can be said about the Chinese real estate in earthquake-prone zones, and a specific behavior of the market in the post-quake eras can be seen all over the world, where there is a seismic risk, varying from country to country based on the economic differences or the frequency of such occurrences.