Since 1991, for over two decades, Japan experienced a ‘Great Stagnation’. In 2013, nominal GDP in Japan was the same as in 1991 – due to the bursting of the asset price bubble in the early 1990’s, recession in 1997-2002 following an increase in consumption tax and the GFC which dramatically reduced exports (for example, exports fell by 27% in 2007-8).
Nowhere is this stagnation more evident than in Japanese home values – average prices are 70% below their 1991 peak. An estimated $9.3 trillion in national wealth was wiped out during the worst of the asset price drop between 1990 and 2002, according to the Nomura Research Institute.
Why is it that people cannot sell their homes?
There are many reasons. The most intriguing is that unlike those in Australia and the West, Japanese homes are considered ‘disposable’! The average Japanese home has a ‘half-life’ of 38 years. That is, half of all Japanese homes are demolished within 38 years of being built. In the US it is closer to 100.
Why are Japanese homes so disposable?
Japan has 20% of the world’s strongest earthquakes (over 6 on the Richter scale). Following the Great Kanto Earthquake in 1923 which destroyed over 500,000 houses in Tokyo, the building code introduced earthquake-resistance standards. These standards were updated in 1950 after Fukui earthquake, in 1971 after Tokachi earthquake, in 1981 after Miyagi earthquake and in 2000 after the Hanshin-Awaji earthquake.
The regular upgrading of these regulations combined with real estate marketing techniques have increased the rate of demolitions. Real estate marketers spruik the latest (often quite unnecessarily ‘advanced’) ‘earthquake-proofing’ technologies and engender fear in home purchasers to spur demand for new homes. Consequently, new home demand has skyrocketed over the years, with demand for old or ‘pre-used’ homes minimal. However, these two factors are not the only cause of the high demand for new homes.
Following the devastation caused by bombing in WWII hundreds of thousands of new homes had to be built quickly. Standards were relaxed and the resulting homes were of very low standards. It is understandable that, especially as wealth increased, that this first wave of homes was replaced.
Furthermore, there are more architects in Japan per capita than in any other country. For every architect in the US, there are 3.8 in Japan. As demand for new homes has soared, so has demand for unique, personalised homes. Why worry about the tastes of others when the resale value of your home may be zero in another 10-20-30 years? Compounding this are relaxed building codes (outside of the earthquake safety regulations). It can seem that in Japan, anything is permissible; for example, stairs and balconies with no handrails and homes with no windows.
Above is an illustrative example of ‘disposable’ Japanese architecture, the Nakagin Capsule Tower. Built in 1972 from prefabricated capsules manufactured in a factory that normally made shipping containers, it was completed in just 30 days. It also contained the latest gadgets of the day and housed small offices and pieds-a-terre for Tokyo workers. Since 1996 the tower has been listed as an architectural heritage by DoCoMoMo. However, in 2007 the residents voted to tear the tower down and replace it!
Primary homes are subject to similar life cycles: architects have to satisfy the many avant-garde demands of Japanese homebuyers looking for their ‘perfect’ home. As keen readers will realise, this has created another circular function, as home buyers aware of minimal resale values demolish properties to build their own highly personalised homes, they further reduce the likelihood of resale with their individualistic demands.
Whilst the quality of Japanese homes, albeit commonly being wooden, can be high, because of their short lives they are generally not built to last, creating another circular function.
With the life expectancy of their dwellings in mind the Japanese do not maintain their homes to last beyond their usual short existences. They will clean them inside but not repaint and maintain them in the way that most Westerners do. Consequently, after 30-40 years they are not attractive for resale.
It is relatively easy to see the huge implications for the Japanese economy of its housing depreciation. Replacing homes at two to three times the rate of other countries is a huge burden on resources. The microeconomic impact is no less significant. Unlike countries like the US or Australia where mortgages are only secured over the property, Japanese banks can seize other assets in the case of a default, especially when one’s home is relatively worthless after only 20 years. Thus Japanese home buyers must often save a huge amount of their income to pay off their mortgages, for fear of repossession of their property. This is significantly contributing to Japan’s savings culture that has stifled investment and growth over the past few decades.
Richard Koo of the Nomura Research Institute recently labelled the Japanese housing market “the largest discrepancy in the free world”. If Japan wants to reverse decades of poor investment and growth, it needs to halt the waste of huge resources on home replacement. This need will only become more urgent as its population ages and birth rate declines. Without a paradigm shift away from the ‘disposable home’ mentality, Japan’s economy may just go the way of its home prices.
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