With constant talk of a looming worldwide recession, economic news tends to be gloomy, and each country has its own particular problems. Some financial commentators say that Japan’s interest rates remain ridiculously low compared to elsewhere, but no one seems to see it as an issue to fret about. A Nihon Keizai Shimbun article that appeared Nov. 6 tries to examine the matter as it relates to Japan’s overall financial health and the prognosis is not good.

However, the reason for Nikkei’s pessimism is rooted in a larger problem where interest rates play a part: Japan’s over-supply of housing. This blog has covered this topic every which way since it launched in 2009, and none of the conclusions reached by Nikkei are particularly fresh, but as Japan’s population continues to shrink and age they are more relevant than ever and bear repeating.

The main concern of the article is variable interest loans, which account for more than 70 percent of all mortgages in Japan. Variable interest means that the lender has the discretion of changing the interest rate during the period that the borrower pays back the loan, meaning it could go up or down at a designated time. The reason most people take out variable interest loans is that they charge lower rates in the beginning than fixed interest loans do. In Japan, housing loan interest rates are still absurdly low compared to the rest of the developed world. The lowest we could find right now is the 0.289 percent charged by au Jibun Bank, followed by Mizuho’s 0.375-0.675 percent. When people take out variable interest loans starting at these rates, they likely think that even if they go up, it won’t make that much of a difference, but actually it does. According to MFS, a service company that helps customers compare housing loan rates and conditions, a 0.1 point increase in the interest rate would lead to an increase of ¥110 billion in interest debt throughout Japan. In simpler terms, if your variable interest rate rises from 0.5 percent to 1.0 percent, your interest payments will double. 

Such an increase wouldn’t necessarily be a problem if the asset value of the home being financed remained the same or went up, but in Japan, as we’ve said here many times, that isn’t the case. Conventional wisdom says that if your mortgage becomes too much to handle you can refinance the loan using your home as collateral, or sell the house, pay off the loan, and then buy something cheaper with the money left over. But in Japan, depending on how old the house is, it may be difficult to sell it for the amount needed to pay off a loan, which means the owner is at risk of going bankrupt if their personal financial situation changes for the worse due to loss of income, sudden severe illness, or whatever.

Nikkei says the number of housing loans in recent years has increased by an average of 2-3 percent a year; especially since 2016, when the so-called minus interest rate was introduced by the Bank of Japan. As of June 2022, the debt balance on housing loans amounted to ¥220 trillion, an increase of ¥40 trillion since 2012. That’s twice as much of an increase compared to the storied bubble period of the late 1980s, when the demand for housing loans was at its peak. However, during these past ten years, the asset value of homes in Japan has remained the same, and in 2019 and 2020 it went down. Nikkei then compares this situation to that in the U.S., where the outstanding housing loan debt in June 2022 stood at $12 trillion. However, the increase in housing asset value was more than sufficient to cover this debt. 

A researcher for Daiwa Securities told Nikkei that the main difference between Japan and the U.S. in this regard is that U.S. housing functions as an asset, but that in Japan housing functions as a disposable consumer good. Eighty percent of the homes on the market in the U.S. are previously owned, while in Japan, secondhand homes make up less than 15 percent of the market. That’s because American homeowners keep their properties in good condition so as to retain their value over time, while in Japan upkeep is more or less a matter of personal preference and financial wherewithal because owners know that such renovations won’t necessarily be reflected in the resale price. Japanese people prefer new things, including homes. This tendency, says the researcher, leads to a classic vicious cycle that produces junk houses, which are often left vacant after the owner dies. It’s as if houses were subject to the marketing scheme known as planned obsolescence, where products are designed to fail after a certain period of time in order to compel consumers to buy new ones. Other factors that add to the disposability of housing include the relative ease and speed of residential land development and generous tax incentives for taking out loans for newly built houses and condominiums. 

Consequently, new home buyers in Japan are becoming younger and younger. The researcher repeats the tired admonition that the government should shift its policy to favor the existing housing stock, but they never do so because vested interests prefer that new construction continue apace, thus reinforcing the planned obsolescence theory. Housing expert Hidetaka Yoneyama told Nikkei that the whole mindset toward housing has to change first so that people think of their home as a future asset. One problem, he says, is lenders themselves. In Japan, lending institutions essentially “finance people” by looking at their job stability and how much money they make. They don’t look at the home that is being financed, which is the methodology of lending institutions in the U.S., who estimate the asset value of the purchase and proceed accordingly. Since Japanese loans are recourse loans, meaning that the borrower has to pay them back regardless of whether the lender repossesses the property owing to default, the value of the property is not really important to the lender. And nowadays, many households in Japan have double incomes, making it that much easier for banks to approve loans, which is why the balance of debt for housing loans in constantly increasing for Japanese households containing couples in their 30s. As a result, these households carry substantial debt while the value of their purchase stays the same or decreases. Consequently, if the interest rate on their loan goes up or a change occurs in their financial situation, they will be in trouble. Thanks to COVID, in the last two years there have been more than 100,000 cases where households were granted delays on their mortgage payments. 

As already stated, more than 70 percent of housing loans in Japan are variable interest (most loans in the U.S. are fixed), and that portion seems to be increasing. Moreover, the people who take out variable interest loans use them to cover larger portions of the price of the home being financed. According to MFS’s research, people who choose variable interest take out loans to cover at least 90 percent of their new home price, and 12 percent of this demographic use their loans to pay for more than 100 percent of their home price (presumably to cover ancillary costs such as agent fees and supplementary loans). 

Nikkei says that the average lifespan of a new home in Japan is 40 years, while in the U.S. it’s 55 years and even higher in Europe. That’s why homes in the West are considered assets. Japanese homes are not, which is a problem for retired people. Another expert tells Nikkei that while new housing seems more affordable in Japan than in other countries, in the long run it’s more expensive if you compare the amount of money you pay for your home to its eventual value and the money you put into it. So even after you pay off your loan, your home remains a liability if you can’t sell it, and that’s becoming more of a reality as the population shrinks and developers keep churning out new product. Even the idea of a reverse mortgage, where an elderly couple takes out a loan on their home and after they die the loan company assumes ownership, is becoming less viable in Japan. Lending institutions don’t want to be stuck with lemons. As a result, the elderly in Japan have fewer options for income in their final years than do old people in the U.S. and Europe.

Nevertheless, there is still a persistent opinion in the media that Japan’s housing situation is one of the best in the world since anybody can buy a home, and that’s true to a certain extent, but it doesn’t take into consideration the long haul. If you bought a new home in Tokyo or one of the major metropolitan centers, you will likely be able to sell it for something down the line, though we don’t think you’ll get what you paid for it.