Europeans See the Japanese Housing Market as Topsy-turvy

J. Sean Curtin (Fellow, GLOCOM)

In a recent well-argued article, Professor Haruo Shimada analyzes the current state of the Japanese housing market, concluding that it is one of the key factors prolonging the country's current economic woes. Professor Shimada states that the basic problem is, "a house is not an asset with durable value." Basically, the older a Japanese house gets, the less value it has. After about 30 years it is practically worthless. From a European or American perspective, the Japanese housing market appears completely topsy-turvy, confirming professor Shimada's observations.

In most EU countries, the value of your home increases over the long-term. Thus, if you buy a house in your thirties, by the time you retire its value will probably have substantially increased. In many EU countries, sales tax on homes is relatively low and in the UK you do not pay any tax at all when selling your own home. For these reasons, many Europeans see home-ownership as a major form of retirement investment.

Americans and Europeans who come to live in Japan often find the Japanese property value system difficult to comprehend as it is the complete reverse of those found in their native countries. Once people grasp it, many are deterred from residing in the country long-term as they feel that in Japan it is difficult to build up substantial assets for a secure retirement. Those who do permanently settle exhibit almost identical anxieties to their Japanese neighbours. They worry about how they can build up a strong investment portfolio to ensure a financially trouble-free old-age. In Europe, an important component in the retirement formula is purchasing your own home, which is many people's greatest financial asset upon retirement.

Of course, European house prices fluctuate in the short-term and national housing market trends diverge significantly across the EU. Countries like the United Kingdom and Germany seem to experience periodic property booms followed by spectacular busts. Others countries like France have more steady growth patterns. However, regardless of the country, analysis shows that despite short-term fluctuations, in the long-term value goes up. Over several decades, steady housing-growth equilibrium is visable across EU countries.

A brief look at one of Europe's most volatile housing markets will illustrate this point. If you had purchased a ₤50,000 house in London during 1983, by 2003 it would be worth about ₤210,000. In other words, in twenty years its value would have more than quadrupled. However, on the road to this handsome profit, the property-owner would have experienced some amazing ups and downs.

Thanks to a British property boom in the mid-eighties, by 1987 the value of our London house would have almost doubled to about ₤95,500. Then in 1989, the house price would hit an astonishing ₤136,259. In 1990, a downturn came which lasted for about eight years. By 1991, our house was worth about ₤118,000 and in 1993 it had slumped to ₤98,500. Even so, despite the sharp correction, the property had still managed to almost double its value in ten years. A decade later in 2003, it had doubled again. A great many Londoners retire to the countryside where property prices are much lower. They often invest their house-sale profits into pension investments.

The current Japanese housing market offers none of the long-term financial benefits of its European counterparts and helps explains why a great many Japanese feel so financially insecure about retirement. Reforming the Japanese property system will be an immensely difficult task. However, unless the government attempts substantive reform of the housing sector, it will be difficult for the Japanese economy to escape from the long shadow of the current recession.