Why Are Japanese Homes Disposable? (Ep. 157)
(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.)
Brian
I hope the Freakonomics crew read these comments, all very interesting.
The Japanese used housing market is perfect; demand and supply determine the price and is much closer to being a pure, open market than North America.
This will be "shocking" to must Americans who believe that they live in the freest country in the world but when it comes to the housing market, they live in a government controlled, planned economy that grossly distorts the free market.
By far the biggest distorter of the free housing market in North America is big inefficient government control. Municipalities in Japan are not reliant on property tax revenue for income; people pay a residency tax. However municipal governments in North America rely on property tax for revenue.
Japanese governments do not give a hoot what the housing market does but North American governments need to drive up housing prices to bring in more dollars. Increasing the mill rate is seen as a tax increase by voters in North America but higher taxes based on higher property values is not viewed as a tax grab by voters.
Municipal governments in North America also control the supply of housing by issuing permits and ride roughshod over property rights by dictating what can or cannot be built and (zoning) and pass bylaws requiring me to cut my grass.
With government limiting the supply of houses and benefiting by higher house prices the result is predictable; a distorted market with huge inefficiencies that costs buyers a lot of money.
I know roughly, how much an acre of land costs, the material and labour costs to build a new house and the cost of purchasing services like water and electricity cost. In my old home town in rural Canada the municipality has a monopoly on the housing market. Besides reams of government regulations on handrails, the only new houses that are allowed to be built are on municipal developed land. The local government only rezones farmland it owns as residential and includes a long list of codicils attached to the property that purposely makes housing expensive and drives up the price of existing homes. People who already live in the town don't complain because they can sell their houses to a bigger sucker and retire to Costa Rica.
Japanese governments, having far less to gain from high house prices let the free market take care of itself.
In addition Japanese people enjoy a much higher level of property rights than in North America.
Except farmland, which is linked to food security issues, people can do more or less whatever they want to do with their land. If my neighbours don't like my unmowed lawn or the colour of my house they can buy me out or shut up. If people want to built a big condominium or a convenience
store on their land or want to park their old car on their front yard and leave it there for 30 years, that is their right. And if other residents don't like it they are free to make an offer to buy the land and then they cannot build a condominium.
Likewise if people want to tear down an old house and put up a new one, they are free do to so without facing a daunting governmental series of hurdles to do so.
Your story should have been about how a the free market results in low cost used housing in Japan and how government monopolies drive up the cost of housing in North America and the huge cost that it has on consumers.
Abdullah
And you don't see any trouble with the "freedom" of to do whatever you want with your land? Stylistically speaking, walking around Japanese streets, you'd never guess you are in a first world country. As a friend of mine, seeing panorama pictures from high floor restaurant in Roppongi asked me "what is the ghetto you are in?"
Vincent Oles
I would like to see our housing stock rebuilt every 30-40 years. This would provide for homes that reflect new codes and sensibilities. It would provide a huge employment opportunity and might change how we build/recycle our homes. Providing the economic model to make this happen is key.
Nestor Gismondi
I think that in the best Freakonomics spirit we should add some more quantitative analysis in all this before asserting that "that is not a way to build an affluent society". And this analysis will not be easy with all the variables to be included.
In Paris where I live, a big part of the buildings are between 100 and 150 years old, but the waves of renovation they have gone through are many and very significant as a percentage of the value of the property, if you think that with the changes in technology in this period you had to change several times: 1) all the heating (from chimneys to central heating to individual heating, air conditioning) 2) all electricity network (from nothing, to only lighting, to high consumption high safety standards) 3) all the plumbing 4) the expensive copper/zinc roofs 5) cleaning and renovating the especial stone of the façade every 10 years (compulsory) 6) changes in internal distribution of rooms to adapt to the changes in society (we don't have anymore the full time "servant" living in the top floor as at the beginning of the century, kitchen and rooms are rearranged) 7) adding elevators, cable, fiber, now the environmentally friendly insulation standards.... To this you have to add around 10% cost every time you transfer property and let's say 30% inheritance taxes. I think in 100 years we pay the equivalent to rebuilding them from scratch at least a two or three times... If you want to buy and renovate a non-renovated flat, you easily have to add 20-25% in transaction costs and renovation.
Prices go up because demand grows and supply is almost constant, Paris surface is limited by a "ring" and there is very little new constructions, but that is a different thing.
Twitchit
You totally failed to mention the albeit niche recent rise in interest in rennovated historical homes. Some areas have government preservation incentives whereby the tenants or owners of historical homes in designated areas can receive as much as 90% of the rennovation costs in the form of a government grant. These homes are rennovated to high standards using traditional methods and the areas then attract tourists. This being quite a recent and small scale phenomenom it remains to be seen whether attitudes will at all change, but surely at least these homes will rise in value once rennovated and the area becoming an attraction, no?
mag
"especially in the US" older homes gain value?? Are you unaware of the prices of 14 Century buildings in Europe's historical capitals?? Check your facts.
Ryan
Thanks for the great podcasts. I just downloaded this older one since I spend way too much time in my car and I love the thought process that you put in these.
I really think that the points you brought up in this podcasts are true but it is just skimming the surface. I have lived in Japan for 20 years, own my companies and some houses and I fully understand the tax codes and bank depreciation rates. It is way more cynical than you would imagine. I have many, many friends who are investors and large construction company owners. The easiest way I could frame it is a kind of land restructure plan able to be pulled off by a well groomed consumer economy. Land rules change a lot. So let's say the city sees a larger growth in one area, the will change the law to state that a structure on a certain land can only take up 30% of the property. Well, the land was sub divided too small to do anything with it, now you have hundred of little lots no one can buy. Only large investors can buy, combine and put a condominium or shopping center. So, over time, the house is your style, your item and your taste.
It is really complicated but the tide is shifting. There are more and more people that are demanding longer values for their properties. I believe it will change and it will shift the economy.
Gracie
American homes should depreciate like the Japanese. Home owners in America are not building wealth on top of wealth, they are building debt on top of dept and tax liability on top of tax liability because the cost of "depreciated termite ridden wood homes" in American are taxed for more property taxes if they increase in value instead of decrease in value. The Japanese got it right. Americans are foolish to buy a crappy wooden house built with compressed sawdust boards and flimsy frames and think they will all appreciate....Americans have to refinance many many times to repair the sub floor the roof, the studs, the leaky bathrooms.... Termites don't go away and they can tent the house all the want and they will still be back and are always going to there eating the stupid houses. Americans are very poor in math and logic and they will pay a high price for a depreciated old wood structures. Japanese are smart and they know better.
Charlie Zekanovic
I think japanese people are very nice