The following article was submitted as the July entry in our Yen for Living column for the Japan Times. However, it was rejected by the editors.
One of the issues facing voters in this month’s Upper House election is the national pension system. The government received criticism after the Financial Services Agency announced that a couple would need at least ¥20 million in savings when they retire to supplement their pensions. Opposition parties are using this figure to point out flaws in the pension system, and the ruling Liberal Democratic Party is challenging the FSA, saying that current pension benefits are adequate to support people after they retire.
In a letter published in the Asahi Shimbun on July 1, a 63-year-old dentist wrote about the ¥20 million figure, saying that when he was 30 he started saving for his old age. As a self-employed person he knew a public pension would not be enough when he retired, and so he joined a cooperative that, in return for monthly premiums, guaranteed a one-time payment when he reached a certain age. Over the course of 30 years, he paid a total of ¥18 million into the fund in the belief that he would receive ¥40 million in the end. But he received only ¥20 million. He also paid into a private pension plan, convinced that when he turned 60 he would start receiving ¥280,000 a month for a limited time. As it turns out, he is only getting ¥120,000, because interest rates have plummetted since he was 30. When he’s 65, he will start receiving benefits from his national pension, but since he belongs to the kokumin nenkin system for the self-employed and others who weren’t employed by large companies, he will only receive ¥65,000 a month. So even though he basically “invested” in private plans and paid his obligatory national pension premiums, he is not going to have as much income in his retirement as he once thought he would receive.
It’s obvious many people are worried. However, there is one point missing from the coverage and the government’s position on pensions and savings: When “assets” are mentioned, it mostly refers to cash. People’s homes are rarely mentioned, and there is a reason. According to Nomura Securities, the average Japanese house loses all its value in 22 years.
An article that appeared in Nikkei Business on Feb. 23, 2016, stated that since 1969, when the government started keeping housing statistics, Japanese homeowners had lost a total of ¥500 trillion in value on their houses. That equity has just vanished, though most homeowners don’t know their house has lost value until they attempt to sell it.
Nikkei used as an example a couple in their 60s living in a suburb of Yokohama. The couple bought their house in 1986, just as the asset-inflated bubble period was beginning, for ¥55 million—¥26 million for the land and ¥29 million for the house. After 20 years, the couple noticed plumbing problems and carried out major renovations to replace the toilet, kitchen, bath, flooring and wallpaper. The total cost was ¥8.5 million. In 2014, after their daughter moved out, the couple decided the house was too big for them and would sell it and buy a condominium. A realtor told them they could get ¥26 million.
They were dumbfounded. Only ¥26 million? So they talked to other realtors and got the same estimate: ¥26 million for the land. The house was worth nothing, even though they had spent ¥37.5 million on it, meaning the original price of the house plus the cost of renovations, and that doesn’t include the interest they paid on their housing loan.
As Nikkei pointed out, this couple was lucky, because by the time they sold their house and land they had already paid off their mortgage, which for most people takes 35 years. For someone who is still making payments, selling could be a problem. Usually, a homeowner pays off the interest first and then the principal, meaning the price of the house. But in Japan the value of a house starts decreasing the moment the owner moves into it, so they are not going to receive the same amount of money that they paid for it, even though the mortgage amount doesn’t change. The money they receive for the house and land may not be enough to pay off their mortgage, depending on how long it’s been since they bought their house. In some cases, homeowners have to take out another loan to pay off their mortgage just so that they can sell their property.
By the same token, if you default on your mortgage and the bank repossesses your house, you are still obligated to pay off the remaining debt even though you have no house and land to sell. That’s because most mortgages in Japan are recourse loans. **With non-recourse loans, after a financial institution repossesses a property, the debt obligation of the former homeowner is finished. With recourse loans, it remains, so the former homeowner not only has no place to live, they also still have debt.
It should be noted that the ¥500 trillion in lost value cited by Nikkei does not include interest on the loans used to buy the homes, so the burden on homeowners is even more onerous.
In the end, unless they live in a large city, retired people cannot count on their homes to return the value they put into it the way retired people in other countries do. That is one of the main reasons for buying a home, as an investment for the future. In Japan, the benefit of buying a home is that the owner has a place to live as long as they keep up the payments, but in that sense how much of an advantage does a homeowner have over a renter? Once the house is paid for, the owner can live in it without paying rent, but given Japan’s present housing market the owner may never be able to sell their house. And regardless of the assessed value, a house that can’t be sold is financially worthless.
Valueless structures is one of the main reasons for the steady rise in abandoned homes, which now stands at more than 8 million*. Homeowners are still obliged to pay property taxes, so in many cases if they can’t find a buyer the property remains empty. There are many reasons why Japanese people do not buy existing homes—shoddy quality, changing building codes—but the main one is that Japan’s housing policy prioritizes new construction even as the population drops. Existing housing is mostly ignored.
Japanese homeowners cannot rely on their houses as sources of equity the way Americans and Europeans do. In recent years, Japanese banks have been offering reverse mortgages to seniors. According to this plan, a homeowner takes out a loan with their home as collateral, and then starts making interest payments on the loan. (This system is different in the U.S.) When they die, the spouse or child who has inherited the house has to pay off the loan in cash. If the new owner or heir defaults, the bank sells the property. With this scheme, retired homeowners have more cash to spend in their old age, but interest rates are relatively high and the lending institution decides the value of the property and the amount of the loan, so only people whose land value is high enough to make the loan worthwhile for the bank will likely be approved for a reverse mortgage. That’s why condos don’t qualify.
The tacit understanding that homes do not have any long-term value is another reason why the Japanese public has such a high savings rate. People accumulate cash over time because it’s the only thing they trust, and they haven’t been conditioned to think they can rely on their homes for financial security the way Americans and Europeans do. Consequently, this cash is not in circulation as money spent. Nor is it benefiting the economy through investment, since the government and the financial industry has been unsuccessful in getting the general public to buy into mutual funds and other financial instruments. Most Japanese people think such investments are too risky. In that regard, Japan’s housing policy of favoring new buildings is actually bad for the economy, regardless of its benefits to the construction industry. When people have no equity in homes they are paying off for 35 years, they naturally economize and spend less.
As freelancers without a guaranteed income, we decided years ago that it would be difficult to buy a home in Japan, and divided our savings betweeen a low-risk U.S. stock/bond portfolio and a Japanese annuity that went bust in the 1990s. When we eventually did buy a house, we bought one that we could afford to pay cash for, knowing that it would eventually be worth nothing—five years after moving in, it is now assessed at one-third the price we paid for it. As our twilight years approach, we seem to be in relatively good shape in that our portfolio generates a modest but steady income, enough to live off if and when we choose to stop working. We have no debt.
Our situation may be special, but to accept the government’s claim that people can rely solely on their national pensions to live out their lives requires a suspension of disbelief when the biggest purchase they will ever make, a home, could become a burden rather than an asset.
*Correction: Originally, the post said the number of vacant homes was more than 13 million. The actual number is more than 8 million, which represents 13 percent of existing housing stock.
**Correction: Originally, the post said that “most” mortgages in “other countries” are non-recourse loans.