Japan
Wall-to-wall worries
May 9th 2002 | TOKYO
>From The Economist print edition
The housing market shows just how deep Japan's economic troubles run
THE battered market for commercial property, whose values have fallen by 82% in city areas since their peak in 1991, remains the most notorious symbol of Japan's economic troubles. Depressed commercial land prices belie the creative maths on firms' balance sheets, and threaten the solvency of the banks that have lent to them. That is one reason the government of Junichiro Koizumi, like those of his predecessors, is toying with ideas for propping up prices of commercial real estate. Yet for all the well-known troubles surrounding commercial property, the pall hanging over Japan's housing market may be even more disturbing. To see why, consider the "affordability index" compiled by Goldman Sachs, an investment bank. The index weighs everything from mortgage-interest rates and construction costs to wages and savings, and thus gauges how easy it is for Japanese to afford new homes under current conditions. Rie Murayama, Goldman's property analyst in Tokyo, says with a chuckle that when she first began using the index in 1996, and saw how well it matched housing starts over the previous two decades, she got excited: "I thought, wow, for the first time I can predict what's going on in the housing market." Then the bottom fell out of it.
Since peaking in late 1996, owner-occupied housing starts have fallen by 43%, reaching an 18-year low in the fiscal year that just ended. Yet as the chart shows, new homes are just as affordable now as they were five years ago, since low mortgage rates and cheap land prices continue to offset stagnant wages. The reason demand collapsed, argues Ms Murayama, is that the arithmetic no longer matters as much to potential homebuyers, who are increasingly worried about their future. The widening gap between her index and the housing market serves as an index of economic confidence-and it is looking alarmingly negative. Many of the ideas that reformers champion, though laudable, will do little to boost urban property prices in the near term. Efforts to improve efficiency, such as by further relaxing zoning rules, would simply increase supply. If anything can spur corporations to disgorge their property holdings more quickly, it will have the same effect. The only steps that might bolster urban land prices would be tinkering with the tax code, or (less sensible but always possible) using government funds to buy real estate. Despite these excess-supply problems, growing demand for office space and centrally located flats could start to pull Tokyo around. The paralysis in the prefectures, by contrast, will be far harder to solve. For a start, the government is already constrained by high public debt and the need to keep banks afloat. By 2005 it plans to eliminate the Housing Loan Corporation, which offers fixed-rate, long-term mortgages, in competition with banks. It is cutting the corporation's budget by 20% this year, which is bound to hit demand. Other ideas mooted by Mr Koizumi's advisers might help a little. Efforts to make home appraisals more sensible might encourage people to buy and sell houses far more readily, as they do in the United States. But if it is really to have an impact, the government needs to tackle the confidence crisis much more directly. Unfortunately, instead of dealing with the problem of collapsed demand, Mr Koizumi seems content to carry on addressing the symptoms.
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