The Housing Market and Regional Banks in Japan

By Ichiro Suzuki

In the second decade of the 21st century, an unconventional monetary policy in the name of QE ruled the financial markets. Extremely low rates boosted house prices everywhere in the world, in Hong Kong, Sydney, London, Vancouver, Toronto, San Francisco, New York, etc. House prices in Tokyo did not rise as fiercely as in other major cities. Nonetheless, construction activities were undoubtedly brisk in Tokyo due to super easy money. Outside of Tokyo, especially in regional cities, construction essentially was the only game in town in the region’s economy, often concentrated in condominiums and apartment buildings. Rates are low but demand for money is even lower regardless of the price of money (interest rates), and hence the price keeps going south. Japanese corporations, carrying abundant cash on their balance sheets, didn’t have to borrow even before the outbreak of the novel coronavirus. Today, under the virus’s assault, they are too scared to borrow amid a darker outlook of the economy, and banks don’t want to lend to those who want to borrow, due to deteriorated creditworthiness of such clients. So banks, regional banks in particular, have pushed the retail market hard, soliciting landowners to build apartments on their property so that owners can collect rents from the land they already own. Here is a catch, however. Japan is a country of declining population. In theory, the last thing the country needs is more houses. Let’s talk about a hypothetical case of a man who is the only child of his parents marrying a woman who is also the only child. The couple takes over a house each from the two sets of parents, upon their deaths usually, while this couple needs only one house. New houses and apartments are still built whether the society needs them or not, solely driven by low rates. Thus, low rates are creating a housing glut, which is making more houses vacant.  According to government statistics, there were 68.4 million houses in Japan in 2018, including apartment units. Of these, 8.4 million houses were empty. This is one out of eight houses in the country, and the number is rising steadily. Vacant and dilapidated houses are already creating a social problem, becoming a threat to security in the neighborhood. Owners of vacant houses leave them as they are, letting them decay, instead of knocking them down. Property tax on flat land is a great deal lower than on houses. This tax treatment difference gives owners  little incentive to demolish old houses they don’t live. In the case of condos, ownership structure is sometimes too complicated for the owners of units to do anything about it. Hence, they are left to decay. According to some forecasts, a stunning 30% of the houses in Japan could be vacant by 2050. Regional banks keep lending to build apartments, because that’s the only business they could possibly think of. Outside of Tokyo and the vicinity, demand for money has been scarce already in the first two decades of this century, and got even lower, of course, after the outbreak of the pandemic. Small and medium-sized businesses in their area have been struggling for some time. Regional banks, regardless of where they are, almost uniformly talk about a corporate strategy of staying close to businesses in the region, providing them consulting. This is a pie in the sky since many of these businesses are in dire financial health.  There are more than enough regional lenders in Japan, and they don’t have any particular skill other than plain vanilla lending against a collateral that is real estate in most cases. Being aware of the glut of banks, the authority is trying to consolidate regional lenders. However, such a move is blocked by the Fair Trade Commission, which argues that consolidation reduces competition in the region. Therefore, banks are left to compete on a field where there are scant profits. Ruthless competition drove some banks to fraudulent schemes. For the landlords who built apartments on ultra low rates, rents are coming down pressed by greater supply, clouding a rosy original picture of future cash flow painted at the inception of the project. Worse, their buildings could be nearly worthless when it is fully depreciated and the loan is fully paid back 30 years later. Houses and apartment buildings in Japan lose economic value notoriously quickly, over a few decades. Their value rarely rise and value is always underpinned by the price of land, not the structure. After 30 years, landlords, or their children, would face a choice of building a new structure on newly borrowed money or sell the property. Proceeds from the sale would not be great since the building has little value, and it costs no small amount for the buyer to demolish it. Short life of houses have been ‘contributing’ to housing starts numbers. In 2019, there were 880 thousand housing starts in Japan. This compares to 1.4 million in the U.S. where population is growing and its population size is almost three times as large as that of Japan. On top of short economic life, Japanese people’s penchant for new houses makes housing starts numbers high, too. People who buy an existing stand-alone house often knock it down to build an entirely new one that suits their preference. While this boosts economic statistics, it comes only with grave environmental costs. This does not look a sustainable business practice. About the author: Mr. Ichiro Suzuki is a retired banking executive based in Tokyo, Japan.