Housing Market Reform a Key to Japan's Economic Recovery
Haruo SHIMADA (Professor, Keio University)
The engine of Japan's economic recovery, personal expenditure, is still in low gear. The reason for this is often explained as people being anxious about the coming of an aging society while feeling insecure about their pensions. Accordingly, people are spending less and saving for the future which, some say, should change as people begin to see signs of economic recovery. But this is arguing in a circle.
The real reason for people's anxiety lies in the housing situation, which, strangely enough, not many people have come to realize yet. People feel insecure because they think they have no asset to buffer the risk of lower income flow as they age. This is in a way odd in a modern society such as Japan where many people already own their houses, normally considered to be significant assets in other countries.
The fact is that a house is not an asset with durable value in Japan, and this is the real cause of the slow recovery of personal expenditure. People know there is virtually no value in their houses after 20 to 30 years of purchase, and are neither salable nor rentable, and this is causing the anxiety.
It is a phenomenon unique to Japan that used houses have practically no value, but this had not always been so in the past. Before WWII only about 20% of people owned houses, and existing houses were bought and sold without losing much of their value. There were property owners who would build houses for the purpose of leasing, and there was an adequate market for well-maintained used houses. It was also not unusual to live in a house hundreds of years old. The common practice of constant building and demolishing of houses began only after WWII.
Post-War Housing Policy
Such a practice, which has now become a problem as explained below, is, ironically a result of a very successful policy realization by the government, which has lasted decades after the war, to encourage people to acquire their own houses.
Houses in cities and towns in Japan were destroyed during the war, and providing housing to people was one of the top agenda items for the government upon rebuilding the country. The public housing program was devised and executed initially to provide shelter to people. Then after a few years, as income levels of people increased in line with recovery of the economy, housing policy shifted from providing public housing to promoting the building of private residences. Eventually, by 1968, 23 years after the war, the number of existing houses overtook the number of households. This was a proof of the phenomenal success of the policy.
A background factor to the success of the policy was the hike of land prices. Appreciation of land prices would increase the hypothetical value of land, making it possible to take out larger mortgages. Taxation policy was another element. Especially after 1970, the tax system was revised a number of times to make it advantageous to borrow money to build new houses. On the other hand, relief of taxes was never considered for existing houses, and acquiring, registering, and selling used houses were taxed heavily.
In such an environment where new houses could be easily built and existing houses were traded only with great difficulty , people as a matter of course opted for building new houses of their own. It became natural to simply demolish a house older than about 20 years to make way for building a new one. By the same token, the selling price of an existing house would be heavily discounted, making it an unattractive option to seriously consider.
It also became very difficult for people to move to another residence by purchasing an existing house. This was because legitimate values of used houses were unable to be assessed, as there would be no reliable method to evaluate them properly, and because virtually no market existed for them there was no time or need to develop such means.
A very successful policy to have people acquire their own houses thus turned out to make it difficult for them to sell their houses and move to another in accordance with their change of life styles as they age.
Result of the Housing Policy
While there are 1.2 to 1.5 million houses newly built each year, the number of existing houses bought and sold is only about 10% of that, about 150 thousand annually. This is only 0.3% of existing houses estimated to number over 51 million, and this percentage figure is 1/12 (one-twelfth) that of the US. This means there is virtually no market for existing houses, which makes used houses unsalable--in other words, worthless.
This is the reason for Japanese people to build up seemingly huge savings, as owning a house would only have value as a living space for the present owner, and that cannot be considered a significant asset.
For people seeking a residence, they have no choice but to build a new one because there is no market for existing houses. It is also risky to buy a used house, as there is no way to legitimately evaluate the quality of the house.
Leasing a house is not really a viable option in Japan. The rental housing market in Japan has remained underdeveloped because it was difficult from a business perspective to provide such facilities. There are many farmers owning a bit of extra land in the suburbs who would build a house on it to rent, expecting only so much cash flow. And developers operating under tight cash flow and seeking a reasonable margin would not be able to compete with them. Financing is difficult, too. For houses to be sold, funds invested could be recovered quickly, while recovering the investment through leasing the houses would take decades. Another consideration is that since tenants customarily consider leasing a house to be only a temporary measure before they can build one for themselves, they expect only so much quality for these leased houses in exchange for less expensive rents. This results in few rental housing of good quality where families could live comfortably.
The same logic applies for the stagnant renovation market. There is no point in upgrading a house for the purpose of increasing its resale value, because it is virtually none anyway. As such, existing houses cannot be expected to be taken good care of, which makes it risky to purchase them, and thus the market never evolves.
Advantages of Investing in Houses
It the past, land price was something that always went up, beating by far the pace of general inflation. From 1950 to 1990, while nominal income multiplied by 50, land prices soared 330 times. In a society of industrialization and urbanization, acquiring land quickly was an intelligent and necessary strategy in planning for one's future. In a society where the population is decreasing, however, land need not be considered a limited resource for people to scramble after.
As Japan transforms into an aging society, people will begin to realize that it would be more convenient and comfortable to change their residences following their change of lifestyle. In order to accommodate this, the present system related to housing needs to be adjusted.
In the society to come, houses, as well as land, should be evaluated by their utility values, and not by asset values. Accordingly, there would be systems necessary to support trading of good-quality existing houses, and rental and leasing markets must be developed. Also, viable formula of evaluation, methods for distribution of information, and other basic elements to support an active market for houses needs to be addressed.
A number key issue needs to be assessed in establishing a sound market for buying and selling houses. First, a reliable system of evaluating used houses must be devised. Development of effective and easily understandable criteria for professionals to base their assessments is required. Then, transparency of information upon evaluation of a house must be guaranteed, so the public could purchase a used house knowing what they are buying. Standardization of parts and components, and method of construction are required, which would form the basis for building houses with a minimum level of quality. The tax system also must be changed from the present structure where new houses are treated favorably while used houses are charged heavily to a more equitable one. In addition, relaxing the tax burden on gifts during life is also important so that houses could be handed over to children in a timely manner.
Sparking Rent and Lease Markets
There are a few suggestions for development and vitalization of rent and lease markets. One is to recognize that the Land and House Lease Law, which grants significant advantage to the lessee over the lessor, has been the major culprit for suffocating the market. Therefore, further promotion to utilize term leases, which regulate both the length of the contract and excessive right of lessees are required. Adopting means to make it easier for funds to be invested into rental housing projects should be effective, as opposed to the current system where financing for sales of houses is easier to come by. And providing assistance to those living in rental accommodations should be considered, at least to the level equal to the tax breaks and other benefits being enjoyed by those building new houses.
From a broader perspective, additional policy measures could be conceived, such as securitization of land and houses, or favorable provisions for houses with special care and considerations for the elderly. Urban developments and redevelopments may need to be reassessed so that a system could be established that allows for building, maintaining, purchasing, renting, and selling good-quality houses, in search for better lives for people, because a place to live is a fundamental element in that quest.