We Won't Get Japan's Crash. We'll Get Japan's Double or Triple Decade.
Series note: This series examines how decisions are actually made — not to excuse outcomes, but to understand them accurately.
By Aiden Garrison
The earlier articles in this series examined an incentive structure that produces a progressively poorer state, and the way the cost of that arrangement is quietly shifted onto people who hold mortgages rather than assets. This one applies the same lens to the single largest asset in the country, and to the parallel almost nobody at the forecast table will name out loud.
There is a number that should be the centre of every economic conversation in this country, and it is treated as a curiosity. Australian residential property is now worth roughly twelve trillion dollars, somewhere around 450 per cent of GDP. At the absolute peak of its bubble, before three decades of stagnation, Japanese housing reached about 460 per cent of GDP. We are sitting almost exactly where Japan sat in 1989, and the dominant response is to explain why it doesn't matter.
The parallel is uncomfortable precisely because it is not exotic. Japan's bubble was built on cheap credit, government incentives, and a shared conviction that property could not fall. Those are not historical artefacts. They are a description of the conditions we live in now. More than half of Australian household wealth is tied up in housing — far more than superannuation, the share market, and commercial property combined. When one asset class carries that much of a nation's wealth, the entire economy becomes a leveraged position on a single price.
So the instinct to reach for Japan is correct. But the lesson people draw from it is the wrong one, and the wrongness is the point of this article.
When Australians invoke Japan, they are picturing the crash: the stock market collapse, the property values cut in half, the dramatic clearing event. And then they reassure themselves it can't happen here. Our population is growing through migration, which keeps a permanent floor under housing demand. Our banks are more tightly regulated than Japan's ever were, hold more capital, and are stress-tested rather than allowed to hide their losses. These reassurances are largely true. A sudden, disorderly crash of the Japanese kind is genuinely less likely here.
But the crash was never the tragedy. The tragedy was what came after, and why.
Japan's lost decades were not caused by the bubble bursting. They were caused by the refusal to let the bursting finish. Rather than allow insolvent banks to fail and bad debts to clear, Japan kept them alive with cheap central-bank credit and, critically, the permission to postpone recognising their losses. Those institutions became zombies, and they in turn kept funding zombie firms — companies too indebted to do anything but survive on life support. Capital that should have been reallocated to productive uses was instead frozen in place, holding up the walking dead. The economy did not begin to recover until that practice was finally allowed to end, years later than it should have.
That is the part that should worry us, because it is not an accident we are protected from. It is an outcome we are actively engineering.
Consider what every major lever of Australian economic policy is calibrated to do. Migration is set high enough to keep housing demand structurally strong. Negative gearing and the capital gains discount underwrite the investment case for property. APRA's serviceability buffers are adjusted to keep credit flowing without quite tipping into crisis. First-home-buyer schemes subsidise demand at the margin. The Reserve Bank's instincts, whatever its mandate says, run toward protecting asset values when they wobble. Each of these is defensible on its own terms. Together they form a single machine with one overriding objective, never stated but perfectly clear from its behaviour: house prices must not be allowed to fall.
This is the same structure the earlier articles in this series described. No one decided it. It emerged from the aggregation of individually rational choices. A government that presided over a real fall in house prices would be destroyed at the ballot box, because most voters' wealth — and most voters' sense of security — is the house. So the politician who protects the price survives, and the politician who tells the truth about what that protection costs does not. The selection mechanism produces a government structurally committed to preventing the one thing that would clear the imbalance.
Which means we will probably succeed in avoiding Japan's crash. And in doing so, we will build Japan's stagnation deliberately, and possibly for longer.
A crash is violent but it clears. Prices reset, capital reallocates, the economy eventually moves on. What we are constructing instead is the managed non-crash: an economy where housing is too important to fall and therefore too important to fix, where capital stays locked in unproductive bricks because that is where the policy settings reward it, where each new cohort borrows more to buy the same dwelling and calls the result wealth. That is not stability. It is the zombie outcome, chosen on purpose and described as prudence.
And the cost is distributed exactly as it was in the earlier articles. Those who already hold the asset are insulated; the price is defended on their behalf. Those who do not — the young, the renters, the mortgaged who bought late and large — absorb the adjustment through decades of stagnant real incomes and housing costs that consume the share of their pay that should have gone to everything else. The mechanism runs in the opposite direction to its stated intention. We protect housing to protect households, and in doing so we hollow out the households we claim to be protecting.
All of this is easy to wave away as the work of permabears, the people who have predicted nine of the last two crashes. And yes, you can dismiss any individual forecaster, because forecasters are often early and sometimes simply wrong. But there is a difference between a prediction and a record, and this argument does not rest on a prediction. It rests on the record.
Every time a developed economy has allowed a single asset to swell to this share of national wealth, and then organised its entire policy apparatus around protecting the price of that asset, the outcome has been the same. Japan is the cleanest case, but it is not the only one. The American housing collapse of 2007 and the dot-com unwind before it were both the bursting of exactly this kind of conviction — that a price could only go one way — and both were visible in the data long before anyone acted on them. What is instructive is not that they happened. It is that the people who saw them coming were ignored for years, dismissed as cranks right up until they were proved correct, because the system had no incentive to listen. The man who called both of those turns, Jeremy Grantham, now says the same thing about today's asset prices, including that housing in some markets needs to fall by around a third. You do not have to believe his timing, or his number, to notice the pattern he is pointing at: the warnings are always available, and they are always disregarded, because acting on them is more painful than ignoring them. The names of the forecasters change. The reception they get does not.
History is uncomfortable for exactly this reason. It does not predict the future, but it does record what happened every prior time we made this exact choice. And we are making it again, more deliberately than Japan ever did, with more levers and better data and the same result waiting at the end.
The most telling evidence is how calmly the official forecasts treat all of this. The OECD's most recent survey of Australia notes, almost in passing, that competition has weakened across the economy over two decades, that business dynamism has declined, and that market concentration and profit margins have risen — and then describes the economy as "normalising." But declining dynamism and rising concentration are not the weather. They are the early signature of exactly the kind of sclerotic, capital-misallocated economy Japan became. The consensus growth forecasts sit just under two per cent and treat that as the floor of a recovery rather than what it may actually be: the new ceiling. Nobody's central case is the lost-decades case. That is what "no one is ready" means in practice. It is not that the data is hidden. It is that the institutions paid to look at it have decided, in advance, that it describes a country other than ours.
There is one final irony worth sitting with. This year, after more than thirty years, the Bank of Japan raised its policy rate to around one per cent — the highest since 1995 — and analysts called it a milestone in monetary normalisation. Japan is finally climbing out of the hole, at the precise moment we have settled comfortably into the ratio that put them in it.
None of this is hidden, and that is the recurring theme of everything I have written in this series. The fiscal arithmetic is published. The household-debt figures are published. The property-to-GDP ratio is one tweet away. The difficulty was never information. It is that our entire system is built to reward the deferral of this particular conversation, because the conversation ends in the one sentence no government can survive saying: that the house, in real terms, has to be allowed to become worth less.
Until someone is willing to say it, we will keep doing exactly what we have asked the system to do. We will defend the price. We will avoid the crash. And we will wonder, a decade or two from now, why the country stopped going anywhere — as though it were something that happened to us, rather than the thing we so carefully arranged.
