Thanks to the upcoming snap election, which is being called a referendum for the government’s economic policies, everyone is aware that Japan’s GDP has worsened since the consumption tax was raised last April. A large portion of this drop is being attributed to declining sales of new houses and condominiums.
A lot of people signed contracts for new homes last year so they wouldn’t have to pay the increased tax, and it follows that fewer consumers than usual bought homes after the raise went into effect. However, the government anticipated this drop and offered expanded tax breaks for housing loans, even subsidizing some homes after the tax increase. Experts therefore thought that new homes could end up being cheaper after April 1 than they were before. Moreover, the interest rate for mortgages is now even lower than it was a year ago.
It’s not as if people don’t want to buy new homes any more. Last January, in conjunction with Japan’s Coming of Age Day, electronics company Panasonic conducted a survey of 20-year-olds and found that 80 percent said they “wanted to own a home some day.” In contrast, 67.5 percent said they wanted to own a car. Eighty percent is larger than the portion of homes in Japan that are currently owned by their residents, which is around 60 percent, though in some prefectures, the home-owning rate is almost 90 percent.
The sales decline that has occurred is partly demographic in nature. More young people are opting to remain at home longer and aren’t as compelled to buy homes, a situation likely caused by the nature of the job market. More young people are not being hired as regular employees and thus don’t have the kind of job security their parents enjoyed. Also, the average salary for non-regular employees is dropping year-by-year. It was ¥2,000 less in 2013 than it was in 2012, which isn’t much of a drop but does point to a trend that could make potential homeowners put off their purchase.
This type of thinking was apparent in the results of another survey conducted last year by the Housing Finance Corporation, which asked average consumers if they thought it was a good time to buy a home. Three-quarters replied yes, citing the upcoming consumption-tax hike, low interest rates that may not remain that low in the future and various government incentives. Only 5 percent, however, ticked the box that said it was a good time because “my pay will increase in the future.”
Conversely, the 25 percent who said it was “not a good time” to buy a house cited living costs that would go up after the consumption-tax hike and incentives that weren’t very appealing as reasons. However, 27 percent of the naysayers also said they were “worried” about their salaries.
Because a home is the most expensive purchase a person is likely to ever make, that person’s view of the future is central to their decision to buy one, and it’s easy to see from the above survey that income is a prime determinant. Consequently, the government, which remains dedicated to promoting new-home buying as a pillar of its economic policy, needs to make consumers believe their incomes will rise in the future. Lately, this has become a difficult goal to achieve, and so the administration is trying other means to get people to buy homes.
In addition to existing subsidies and tax breaks, the land ministry, at the urging of the real estate and home-building industries, has asked the finance ministry to retain the special gift tax-exemption for older people who want to give their children or grandchildren cash for the express purpose of building homes.
In a study done by the housing magazine Suumo, many new homeowners surveyed with incomes of less than ¥4 million have said they made their down payments with money from their parents.
The current gift tax-exemption expires on Dec. 31, and according to the real estate industry newsletter Fudosan Online, the ministry wants it to be extended another three years, since 16 percent of people over the age of 65 have savings of more than ¥40 million. The ministry also want the maximum amount of the gift increased from ¥10 to ¥30 million, and conditions for the exemption eased (presently the money has to be for environmentally friendly homes).
Housing companies are also pressuring the government to exempt new homes from consumption tax, since housing is a “necessity,” like food, which the ruling coalition is also thinking of excluding from the tax. The Japan Federation of Housing Organizations estimates that this year Japan’s GDP will lose ¥10 trillion in housing and related revenues due to the consumption-tax hike
Lending institutions, too, are trying to make it easier to purchase new homes. When we were canvassing banks several years ago about terms and conditions, we found that most would only lend money to individuals who made at least ¥3 million. But real estate agents we have talked to since then have said that they can make arrangements with a bank if the buyer’s income was less than that. Of course, it would mean higher interest rates, bigger down payments and other costlier terms, but it was possible.
The median income in Japan is ¥4.32 million, which means half of the working population makes less than that amount. The majority of those above the line probably own homes already, and the average house price in Japan is ¥35 million, about eight times the median income. Experts often advise that the purchase price of a home shouldn’t exceed the buyer’s annual salary multiplied by five.
The question thus becomes: Should everyone take advantage of these incentives? The benefits for the private sector and the government are apparent, but will consumers be better off with homes that, under normal market conditions, they wouldn’t have been able to afford? One of the reasons Japan’s existing housing stock is in such poor condition is that in order to encourage as many people as possible to buy new homes during the 1970s, ’80s and ’90s, the government allowed for the use of inexpensive materials and designs. Now, many of those properties are unsellable.
The focus on new homes exacerbates the abandoned house (akiya) problem, which is becoming more widespread. Japan builds about 800,000 new housing units a year, compared to one million in the U.S., which has three times the number of people and an ever-burgeoning immigrant population.
The housing industry and the government will have to change their thinking about housing policy.
Philip Brasor and Masako Tsubuku blog about Japanese housing at catforehead.wordpress.com.