Last spring, when the effects of the American sub-prime loan disaster were being felt but the world economy was still relatively OK, there was an article in the Asahi Shimbun written by one of the paper’s financial reporters who recalled several years earlier a visit from a friend living in the United States.
The friend worked for a real-estate company and he told the writer just before he returned to America that he and his colleagues appreciated the Japanese people, because they were investing in U.S. mortgages as securities, and therefore helping poorer Americans borrow money at low rates so that they could buy better houses.
The writer mentioned this episode to point out the irony of the situation, since it was the failure of those securitized mortgages that led to the burst of the U.S. real-estate bubble and the current worldwide recession. However, there’s a deeper irony to the story: The Japanese people, whose housing is, for the most part, inferior in quality to that of American housing, were making it possible for Americans to purchase nice homes. But who is helping the Japanese buy nice homes?
The Japanese government would like everybody to think that they are. Last week, they announced new tax deductions for people who take out housing loans. It’s the biggest-ever tax cut for homeowners and encourages the construction of “long-life” structures that will supposedly improve the housing market. This latter idea, which is being called the “200-year housing plan,” has been around since May 2007, when it was formulated by a research panel set up by the ruling Liberal Democratic Party and headed by Yasuo Fukuda, who would become prime minister later that year.
At the time, Fukuda explained something everybody knew at least intuitively: Japanese homes were not made to last. After the war, the government promoted affordable housing so that everyone could own a home, with the result being “cheap, poor quality” structures that had to be replaced after 30 years. Since the houses themselves lost value quickly, people only invested in land, which invariably became over-valued. With the price of land so high, people couldn’t afford better quality homes, and cheap, poor quality structures became the norm.
What Fukuda didn’t mention is that the housing industry was addicted to this cycle, which is referred to as “scrap and build.” The average new house loses its value completely 15 years after it’s occupied. Consequently, Japanese people only want new houses and condominiums, because they believe that previously owned ones are junk. In order to change this mind-set, the Fukuda panel came up with the idea of promoting the construction of homes meant to last a long time, so that the structures themselves can be worthwhile investments.
But it wasn’t until these latest tax cuts were announced that the plan moved toward realization. According to current tax rules, a person who borrows money to buy a home can deduct up to ¥1.6 million of the loan from his or her taxes over a 10-year period after moving in. The new rules, which go into effect Jan. 1, increase the maximum tax deduction to ¥6 million over 10 years. And people who buy homes that qualify as long-life structures can deduct up to ¥1 million more from their taxes.
These figures are maximum amounts. The majority of home-buyers will receive lower tax cuts, because they are based on the balance of the loan, and every few years the ceiling for the maximum balance allowed for the deduction drops. Moreover, many homeowners pay relatively low taxes because of their income and other deductions, and regardless of the balance left on their loan, they can’t deduct more than they actually pay in income tax.
The cuts are being touted as a benefit to citizens, but just like the scrap-and-build strategy, they mainly benefit the housing industry, which is stuck with a huge inventory of unsold new homes that grows larger every day. And this new long-life housing rule also applies to condominiums, so don’t be surprised if, in the spring, the government announces the criteria for long-life housing and all those new, expensive and very vacant high-rise “mansions” looming over Tokyo’s waterfront qualify.
There’s less largess for people who already own homes, almost half of which were built before earthquake standards were introduced in the 1980s. The new tax cuts don’t apply to them. If they want to add energy-saving or “barrier-free” features, 10 percent of the construction costs can be deducted, but they don’t get deductions for home-improvement loans. In 1988, the government set “durable housing” standards to evaluate homes for resale, but almost no one takes advantage of them. According to the Asahi, right now only 543 houses and 1,063 condos on the market have been evaluated.
The long-life housing scheme will probably have a minimum effect, because only the rich will be able to afford such homes. The plan could hold promise over time if the yet-to-be-determined criteria optimize people’s desires. The reason homes in the West keep their value longer is that most were conceived as places to live, not consumer goods, which is what they represent in Japan. Designs for affordable housing in Japan are determined by the developer’s potential profit margins rather than the potential customer’s comfort: Just think of the boxy, impractical layouts of most condominiums, which allow developers to squeeze more units into a limited space.
In the long run, these policies will make little difference. According to the Population Research Center, if the current birthrate persists, 100 years from now there will be 45 million people in Japan, which is fewer persons than there are houses right now. It’s impossible to say whether the quality of those houses in 2108 will be good or bad, but they sure will be cheap.