Why Consider Japan?
Like many OECD countries, Japan became a world economic power following World War II, spurred by aggressive government-led development. Japan’s housing market, as with the rest of its economy, is grounded in a complex dynamic between the public and private sectors. This reality lends itself to direct, data-driven comparisons with the United States. Japan is distinctive in the international scene for two important statistics. First, there is a near-zero level of homelessness, which indicates effective provision of shelter for the worst-off, and second, Japan boasts a very high level of satisfaction with housing. Both enviable characteristics make Japan a useful case study.
A Brief History of Japanese Housing Policy
Facing a large shortage in available units after World War II, Japan made homeownership more attractive to citizens by lowering mortgage interest rates and extending the terms on mortgage loans through a three-pronged approach. First, the Government Housing Loan Corporation (GHLC) was established in 1950 to support the financing of housing construction and to provide liquidity to mortgage markets. Second, the Public Housing Act of 1951 authorized local government units (LGUs) to construct public rental houses for low-income people Third, the Japan Housing Corporation (JHC) was established in 1955 to promote collective construction of housing and the large-scale supply of residential land for middle-income people, mainly in major urban areas.
Importantly, Japan avoided some of the exclusionary results experienced in the United States by targeting more of the monetary benefits to the bottom two-thirds of the income scale. Interest rates were lower for low-income people and increased proportionally for the wealthy. Across the board, interest rates were capped at 5.5%, which prevented predatory lending, as it has come to be known in the United States. In 1986, Japan supplemented their homeownership policies with a tax deduction clause. Unlike the policy in the U.S., where it is the largest subsidy in terms of size and scale, the deduction is uniformly set at 1%, rather than being tied to the marginal tax rate. This structure, combined with the fact that it is income-capped at 30 million yen (about 270,000 USD) means it is much less regressive.
The most notable economic event in Japan’s housing history was the 1992 housing bubble collapse. A sharp downturn characterized by rising unemployment, a decline in income, and a chain reaction of enterprise bankruptcies, was devastating for the national economy, but had positive downstream effects on the housing market. Zoning was relaxed to drive up construction and drive down prices. The recession also induced a whirlwind of social, demographic and cultural change that led to detachment from the standard-life-course model, so Japanese homeowners became more amenable to the prospect of living in small apartments in urban centers—a reversal from the prevailing trend towards suburban sprawl. The average dwelling in Japan is 125 square meters, only a little more than half the size of the average American home at 247 square meters.
Current Policy Landscape and Key Characteristics
Japanese has rates of homeownership vs. rental and public vs. private ownership that are comparable with other OECD countries. Homeownership has long hovered in the low 60s, and currently sits at 62%. About 36% of households rent, 80% of which consists of private rentals and 7% of which is publicly operated. Renters on average have a lower income than homeowners—5.15 million yen for homeowners and 3.51 million yen for renters.
Publicly operated housing is built or rented by local governments using grants from the central government and constitutes a total of 2.17 million units. The rents for these units are set each month to flexibly align with the needs of occupants. While public units share some of the same stigmas as they do in the U.S., they were constructed with more aesthetic intention, both to normalize occupancy and to appeal to the middle-class. Currently, Tokyo boasts a 6.5% acceptance rate for public housing applicants, and a 99% occupation rate of available units—both of which reflects a high level of desirability. One potential demerit of this desirability is that residents choose to stay longer than necessary, even after they find a new higher-paying job or raise enough money to move out; people who especially need provision are thus occasionally excluded from provision by those who could afford to live elsewhere.
Lessons to Learn
- Zoning and the virtues of central planning
The focal point of Japanese housing policy is the city of Tokyo, which is one of the densest and most productive cities in the world. The 13.6 million residents of Tokyo live in newly constructed high-rise apartments that have replaced older, smaller buildings to meet rising demand. To accommodate density, Tokyo streets are narrow which discourages driving and encourages the use of public transportation, which urban planners have ensured is fast, efficient, and reliable. Compared to dense American cities like New York or San Francisco, Tokyo has managed to keep rents low. Tokyo avoided the problems of exorbitant rent that afflicts urban America with relaxed zoning and central planning.
In Japan, the central government has control over building codes and is the ultimate arbiter of construction plans and zoning proposals, which are initially crafted by localities but approved or rejected at the national level. When facing a shortage of affordable housing, the policy action plan is simple: build more in places where people want to live. In contrast, residents of American cities in homogeneously single-family neighborhoods are equipped with the power to obstruct new construction by attending local meetings to plead their case. These advocates—often affluent homeowners—seek to preserve certain qualities of their neighborhoods (such as low-density, minimal traffic, green spaces, safety etc.), but which in effect exclude large swaths of the population from living there.
While there are some anti-density obstructionists in Japan, the federal government has gradually consolidated the ability to override these interests. Half of Japanese metropolitan land allows for residential development without height limits, which leads to mixed-income neighborhoods, accelerated growth near transit, and sturdy tax bases. One lesson here is that federal oversight can, in effect, lead to less regulation, because local interests are constrained. The result is that fewer low-income Japanese residents are “cost burdened”—a measure which looks at whether a household spends more than 30% of their income on housing expenses. The ratio of housing expenditures to annual income has climbed in recent years, from around 10% in 2001 to 13% in 2018, but has remained lower than in the United States, which hovers around 20-25%.
- Environmental efficiency
In the past twenty years, Japan has experienced 20% of all high-magnitude earthquakes across the globe. Such an unrelenting natural force requires careful planning and development to armor buildings against the threat. With extensive experience on this front, Japan can provide guidance on how to manage the economics of housing prices in areas hit particularly hard by climate change. As building code imperatives change, units that fall behind depreciate in value and often come to be occupied by lower income residents. This creates a situation in which the most vulnerable individuals reside in the least protected buildings, which despite being a somewhat natural economic turnout, could be preempted by government action.
One consequence of the need to constantly update buildings is that new construction is usually outfitted with the newest, most energy efficient technology. Unlike in the U.S., where homeowners and property owners are incentivized to retrofit buildings due to the procedural hurdles of new construction, demolition is commonplace in Japan. The earthquake threat has also encouraged people to gather densely in areas, such as Tokyo, that are less at risk, and to live in taller buildings with strong metal scaffolding. The strongest and safest buildings are also the most environmentally friendly. Strong central planning has made Japan one of the most energy-efficient industrial structures, which is aided by their innovative “Eco-points” voucher, where up to ¥300,000 is given to people who buy or renovate a house to meet certain criteria.
- Tenant protection laws
The United States has weak tenant protections, and gives power and discretion to landlords. In contrast, Japan has put into place a set of laws that reconfigured this relationship. To refuse renewal or terminate a lease—to evict a resident—landlords must file a lawsuit and successfully establish just cause. Additionally, multi-year leases are standardized, whereas American landlords prefer one-year leases. This puts landlords at heightened risk, but affords some measure of stability to low-income people who face uncertainty in other economic realms. Increased protection for the least well-off flows from the fact that national laws are not subject to local variation. While the U.S. delegates landlord-tenant law to state governments, the national government in Japan sets the policies. Stronger protections for tenants, however, come with their fair share of consequences— unintended side-effects to beware of, especially those that advocate for policies like rent control and eviction moratoriums. This is because investors looking for opportunities do not constrain themselves to one type of development nor to any given industry; corporate investors in Japan have shied away from rental housing because of risks related to empowered tenants. In effect, this erodes the supply of affordable rentals. American policymakers should therefore be warned that any effort to strengthen tenant power must be accompanied with other policies to ensure the provision of affordable housing.