Why Are Japanese Homes Disposable? A New Freakonomics Radio Podcast

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(Photo: Jacob Ehnmark)

(Photo: Jacob Ehnmark)

In most countries, houses get more valuable over time. In Japan, a new buyer will often bulldoze the home. Why? That’s the question we try to answer in our latest Freakonomics Radio podcast, “Why Are Japanese Homes Disposable?” (You can subscribe at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript, which includes credits for the music you’ll hear in the episode.)

Jiro Yoshida, a professor at Penn State University who specializes in real-estate economics, tells us that, per capita, there are nearly four times as many architects in Japan as in the U.S. (here’s data from the International Union of Architects), and more than twice as many construction workers. There is also a huge demand for new homes. When you put all those numbers together, it sounds like a pretty typical housing boom — and yet Japan has a shrinking population and a long-stagnant economy.

It turns out that half of all homes in Japan are demolished within 38 years — compared to 100 years in the U.S.  There is virtually no market for pre-owned homes in Japan, and 60 percent of all homes were built after 1980. In Yoshida’s estimation, while land continues to hold value, physical homes become worthless within 30 years. Other studies have shown this to happen in as little as 15 years.

Does this make  sense? Not according to Alastair Townsend, a British-American architect living in Japan, who is perplexed — and awestruck — by the housing scenario there:

TOWNSEND: The houses that are built today exceed the quality of just about any other country in the world, at least for timber buildings. So there’s really no reason that they should drop in value and be demolished.

In the podcast, we look into several factors that conspire to produce this strange scenario. They include: economics, culture, World War II, and seismic activity.

Richard Koo, chief economist at the Nomura Research Institute, has argued in a paper called “Obstacles to Affluence: Thoughts on Japanese Housing” that whatever the rationale behind the disposable-home situation, the outcome isn’t desirable:

KOO: And so you tear down the building, you build another one, then you tear down the building, and you keep on building another one, you’re not building wealth on top of wealth…And it’s a very poor investment. Compared to Americans or Europeans, or even other Asian countries where people are building wealth on top of wealth because your house is [a] capital good. And if you do a certain amount of maintenance you can expect to sell the house at a  higher price. But in the Japanese case once you expect to sell it you expect to sell at a lower price 10 or 15 years later. And that’s no way to build an affluent society.

All that said, economists continue to debate whether a house is such a great investment in the U.S. One more burst bubble and maybe we’ll all start thinking about the Japanese model.

(Special thanks to Gavin Hayes and Paul Earle at the U.S. Geological Survey for helping us sort through earthquake data.)


Lord

Structures depreciate, even in the US. Maintenance can slow this, but functionality still suffers. The illusion is that homes appreciate in the US. They don't. Land appreciates and remodeling adds value and without these they would be less valuable. Population decline reveals this as stable or falling demand eliminates land appreciation. Tell anyone in Detroit housing appreciates. The most expensive homes of an era will generally hold their value better but even these suffer. The real difference is likely two items, the cost between remodeling and rebuilding, and availability of new land to build on. Remodeling is often more expensive and leads to less satisfactory results than rebuilding but can be done in smaller chunks and as necessary. Most homes can use remodeling after 30 years or so. Much of the US has new developments on the outskirts that often make moving less expensive than remodeling. This is less true of metropolitan areas where commuting becomes too costly though Americans are probably more likely to migrate in and out of metro areas over their careers. Japan is more urban and I expect move less. I expect land is probably held within families for much longer periods there.

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James

Nor is this practice unknown in the US. In Silicon Valley, for instance, it's not uncommon to buy a 'scraper' house built in the '60s or '70, demolish it, and build something fancier on the lot.

Indeed, when I consider the amount of work I've done upgrading insulation, windows, and HVAC of my '60s house to reasonable standards, I wonder if I wouldn't have been better off scraping it and putting a modular home on the existing foundation.

steve cebalt

In my experience, the older US housing structures are such a money pit that the notion of creating ones that meet current standards and replacing them every 20 years or so seems appealing. More like we do with cars. As an example, a couple could get married (or not) and raise kids, then 20-25 years later doze their larger, increasingly inefficient home for a brand new smaller one that is 20 years newer in terms of technology and efficiency, and which matches their evolving shrinking space needs perfectly. I am not sure that the fact that Japanese homes lose resale value is such a bad things economically when one factors in all the dynamics of new vs. secondary markets in an economy. People buying their own home as an investment vehicle are often disappointed.

The factor that is often a wildcard in US housing is often sky-high property taxes, though! Because those are bundled in with mortgage payments, many people pay little attention to a tax cost that is often 25% of the mortgage payment (in my city). But I digress, just a little. ...

For those reasons, I now rent a very small low-rent apartment in a low-tax rather downscale area. Four walls and a roof and low crime. Life's much better than it was in my big old house, since I have my face in front of a screen or a book most of the time anyway -- like many Japanese, I would guess.

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Lord

One other thing is Japanese housing is so much smaller, space is a premium, leading to less flexibility to adaptation to change and less cost to replace. Larger spaces can more readily be adapted to new uses but are also more expensive to replace.

Jim

I think London has a higher population density than Tokyo. http://www.weather.com/health/worlds-most-densely-populated-cities-20140225. Outside the great urban areas of the Kanto and Kansai plains, much of Japan is quite rural.

valar84

Even rural Japan is much denser than you'd expect. They may be mostly single-family housing, but they're built compact, with 30 to 50 dwelling units per hectare (12 to 20 dwelling units by acre) and 6 000 to 10 000 people per square kilometer (15 000 to 25 000 per square mile) in residential areas. I calculated these myself using Google Maps and official population statistics.

Note also that half the Japanese population lives in the three biggest metropolitan areas (Tokyo-Yokohama, Osaka-Kyoto-Kobe, Nagoya), of which half (so 25% of the population) just in the Greater Tokyo region. Yes, Japan has a lot of undeveloped areas, but that's because it's a very mountainous country and the Japanese largely do not live on the hills and mountains, they stick to plains and valleys, when there is a hill in an urbanized area, expect it to have a shrine on it and nothing else.

So Japan is a very urbanized country. The parts of the country that are inhabited tend to be densely inhabited, the parts that are not inhabited have mostly untouched forests. That's what urbanization is: concentrating people, leaving much of the country free for agricultural reasons or as natural preserve.

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Paul Wujek

Originally Japanese housing was made from paper and bamboo. A typical house built that way would be riddled by termites and other insects after a few years.

Because those houses were so simple and cheap to construct they would be replaced often.

Current houses last much longer but the culture persists.

Al

Another explanation that wasn't discussed is the spiritual aspect. The Japanese are famously known for being a widely atheistic population but what I've seen in over 14 years of living here is that many people have some sort of belief in the soul or spirits which exist after death. From my conversations with people about housing and used cars one thing that is mentioned a lot is that they don't want to buy used because of the "bad luck" the property might have from the previous owner or their spirit. For example, if someone dies in an apartment, the landlord is required by law to disclose that information and since most people don't want a place like that, the room is heavily discounted, around 50% I've heard. If something bad occurred in a house, like child abuse or alcohol abuse, these "spirits" would also pass on to the next owner.

So I think all the other aspects that were discussed are relevant, but I wouldn't leave out the spiritual one.

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Hiroko Bretz

Very true. I grew up in Japan and when I first moved here in the US, it was a huge culture shock for me that people live in 100-year-old houses like it's completely normal. It was just way too spooky to think the original owners must be dead by then but their spirits might still be around in the house. After living in the US for 16 years, that spiritual aspect of me is gone and now I can clearly see why it was an irrational feeling. But at the same time, I understand why Japanese people prefer new houses for that reason.

Joseph

And yet plenty of Japanese families have > 100 year old homes. Sure it's nothing like San Francisco but there are plenty of Japanese families that have houses that have been passed down 5-10 generations. I'm not saying it's common. I'm only pointing out that having an old house isn't strange. In fact all my friends' families that have old houses are basically considered rich.

cainsian

But think of all the jobs for architects and builders! Quick! Break a window so someone has a job!

CdrJameson

Coming from the UK, I'm pretty sure nobody here would buy a house that wasn't expected to last literally forever.

Which is odd really as it's buying the land, or rather the permission to build on the land, that actually represents most of the value.

I think we tend to think of new houses as somehow shoddy, whereas with older houses if it's been standing there for the last three or four hundred years its unlikely to fall down now.

FDUK

Who would buy a new house in the UK. they are much smaller, with smaller gardens and cost 10-15% more than an old house. Old houses have more cachet too, especially those over 50-100 years old.

In my town the best houses are over 100 years old, with poor insulation but they have premium prices.

moichigaijin

maybe another small factor to consider is that in japan, people tend to keep more money in savings

in the US there may be a small illusionary influence, that keeping a house is a sufficient means of keeping savings

perhaps it is also good to keep in mind that most families don't live in houses, rather in apartment buildings. many of which are quite old

anecdotally, when i searched for a new home, my friends strongly encouraged me to get the newest place possible, so ensure earthquake safety. and getting an older place was generally not desirable

Joe Dokes

I would disagree with the architect. Although Japanese building codes might be among the highest in the world, the quality of their actually their tradesman is often substandard and as a result much of Japanese home building is shoddily constructed.

http://weilongwang.wordpress.com/2012/12/20/why-cant-the-japanese-build-decent-houses/

Clearly that is simply an anecdote, but I believe that this is closer to reality.

As to other comments about a house depreciating and it being the land that appreciates. This is certainly true to some extent. But clearly homes built during certain periods and in certain styles increase in value simply to their unique characteristics or style.

The same is true for cars, the right car well cared for will under go a depreciation for a while and then if it becomes desirable will begin to appreciate in value because of its rarity and desirability. The same is true of homes, yes the underlying ground will also appreciate but a Frank Lloyd Wright home next to a 70s tract home will have a higher value (all other things being equal).

Living in a historic home has its own unique set of challenges. Yet, building poorly is an environmental waste, and it's in society's best interest to build durable and efficient homes.

Finally, one thing not mentioned in the article is the Japanese regulation structure that encourages consumption. I don't know if the same applies for homes but for autos there are a variety of laws that encourage Japanese consumers to replace cars more frequently. This is why used engines for Japanese cars are readily available at very low rates in the US.

Regards,

Joe Dokes

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Chris

There is another major reason for this which was left out. Many banks will not give you a loan for a second hand house. This was clearly explained to me when I bought a house in Tokyo about 7 years ago. I think the explained in because I was applying for a standard 35 year mortgage and the house would need to last that long.

Matt Fisher

In the much of the U.S., we constantly build whole new neighborhoods and abandon old ones. Old neighborhoods are demolished prematurely, because everyone who can afford to left. The outcome is not different, except that they tear down and rebuild more immediately, rather than abandoning homes and neighborhoods, which become problem spots and just stand there, not really functioning to the full capacity they were intended for. Maybe we should take a hint and remove some of our homes and replace them with more efficient, sensible, better suited ones that will be more sustainable in the future.

Akinyele

Houses in Japan are built sh*tty!

Weilong Wang

>TOWNSEND: The houses that are built today exceed the quality of just about any other country in the world, at least for timber buildings.

Sorry, but has he actually seen a Japanese house? Building standards are meaningless because they are not enforced. Even good designs are poorly executed.

I was a bit surprised to learn that Japanese houses lose their value in a very short time, until I went and looked at a lot of them. Now I agree with the assessment that most Japanese houses are completely worthless fifteen or twenty years after they were built. A house that was built poorly in the first place and has never been maintained, after twenty years is nothing more than a worthless pile of crap.