By Jeff Wynkoop
One of the most striking differences in the housing market in Japan when compared to the US or UK markets is the importance of new home sales. Typically transactions in existing homes outnumber sales of new homes by about 10 to 1 in the US and the UK, but in Japan the situation is almost exactly opposite. According to the Ministry of Land, Infrastructure, Transport and Tourism (“MLIT”), in 2013 85.3% of all residential sales in Japan were sales of new homes.
Promoting New Home Sales Over the Existing-Home Market
The Japanese government has long promoted the market for new homes over the market for existing homes to benefit from the greater macroeconomic effects gained from new land development, the design and construction of new buildings, etc. (generally resulting in higher employment, stronger GDP figures, etc.).
Further, at the end of WWII it was imperative for the government to support new construction due to the scarcity of urban housing. This scarcity continued through 1945-1980 and the almost 63% growth in population over this period. The continuing shortage of good housing has also been exacerbated by well-established societal trends such as the steady influx of young people migrating from the countryside to urban areas, and the slow breakdown of the Japanese nuclear family from three-generational (or more) to two-generational households.
Some Japanese commentators even point to the Buddhist belief in impermanence and reincarnation as providing a philosophical underpinning for the short building lifecycle. Thus for a variety of reasons, housing in Japan has been more about ‘fast and inexpensive’ than ‘steady and sturdy’ for the last 70 years.
Loss of Wealth and Abandoned Houses
Nevertheless, there is a growing recognition that the current system causes an enormous amount of waste in the economy, creating a conspicuous loss of wealth for the average homebuyer (for a variety of reasons, newly-built homes in Japan lose value quickly and are rarely used for longer than 20-25 years before being demolished).
The growing number of abandoned, dilapidated houses is another side effect of this policy. In view of Japan’s long-term population decline, the government publicly recognized in 2006 that future government policy should focus on promoting housing quality (rather than quantity), and in 2010 the government formally announced its goal of doubling the size of the market for used and/or renovated houses in the next ten years.
Since real estate values and prices are oftentimes a matter of perception, the government has a real Catch 22 problem here.
Because everyone expects new residences to lose value so rapidly (due to the lack of a secondhand market among other reasons), for many years developers have had little incentive to build houses that would retain quality long term.
Those wishing to design and build their own homes have been relatively free to have their houses designed and built to their tastes, without worrying about how design decisions may affect resale value.
It is important to mention that land values are so high compared to building values in Japan that even for Tokyo skyscrapers, the land of the building site is often 80% of the value of the entire project. For those wishing to design and build their own homes, usually the most difficult hurdle is locating and acquiring the right parcel of land.
Issues for the Market
- How can builders be incentivized to construct houses that will reasonably last longer than 25 years, if they can’t be sure to convince consumers that such value will be largely retained for resale?
- How can buyer attitudes be changed so they are willing to buy secondhand homes?
- How can existing stock be renovated and revalued so that future purchasers of used homes have comfort that the house is a good buy?
- How can appraisal, accounting, and tax rules be amended without taking too much steam out of the new home market?
- How can real estate developers and the Japanese construction industry remain buoyant while reducing the total number of new homes sold?
Photo: Houses in Miyakojima Ward, Osaka