Home Truths column for March
Share houses the latest real estate investment scam in Japan
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taxes & financing
Home Truths column for August
Last resorts redux
Several times on this blog we’ve written about the collapsed market for resort condominiums, which are conveniently called “rizoman” (for “resort mansions”) in Japanese. The majority of these apartments were built during the asset-inflated bubble period of the late 80s and the hangover from that period in the early 90s. Many, but not all, were attendant to the ski boom, and after the bubble burst and people’s interest in skiing deflated, more and more of these condos were abandoned by their owners, the result being thousands of empty units in vacation areas throughout Japan. More importantly, however, it also meant huge losses in property taxes for local governments and the deterioration of condo complexes that were no longer collecting management fees from absent owners, most of whom lived in major cities. These specific circumstances led to an unusual phenomenon. The units themselves dropped dramatically in price on the resale market and could be had for a song (or even a verse), but they could hardly be sold because even if the market price was only a million yen or cheaper, whoever bought them would also have to cover the back taxes owed, not to mention the unpaid management fees, and together these two debts could run into milions and millions of yen.
At the end of last month, Asahi Shimbun ran a series of articles about a turnaround in Yuzawa, Niigata Prefecture, which is the closest town to one of Japan’s most famous ski and hot spring resorts. (It’s also where the Fuji Rock Festival is held in July.) Yuzawa has been for years the poster child for the crippled rizoman market, a place that saw a huge amount of construction in the late 80s/early 90s and which later stood as a symbol of pointless extravagance. According to a realtor quoted in one article, there are some 15,000 empty condo units in Yuzawa, accounting for 20 percent of all the empty resort condos in Japan. During the bubble period, when these units were new, they were so popular they could be sold at auction, and many went for as much at ¥100 million. Now, many are going for less than ¥500,000, depending on the size. Management fees, however, are still high owing to the fact that many buildings have large communal baths, swimming pools, recreation rooms, and exercise facilities. Read More
Three’s a crowd
A model Hebel House “nisetai jutaku” by Asahi Kasei
In the Japanese government’s neverending quest to realign the economy through tax incentives, a new proposal is about to go into effect with little fanfare. On the surface, this scheme seems both harmless and inconsequential. Starting in April, families will receive tax breaks when they remodel their homes to accommodate “three generations,” meaning grandparents, parents, and children. In order to qualify for the deduction, the renovation has to incorporate a doubling of household functions–at least one additional bathtub, toilet, kitchen, and foyer. The amount of the deduction would be equal to 10 percent of the total cost of the renovation up to a maximum of ¥250,000, which means if the total cost of the work is ¥2.5 million you get a ¥250,000 deduction, and if the work costs more you still get a deduction of only ¥250,000. Still, that’s quit a bit since this amount is subtracted from the total tax owed to the government. Moreover, if you take out a loan for the renovation, you get another tax cut for that. In addition, there’s talk about a subsidy system, much in the same vein as the subsidy system for home improvements that incorporate barrier-free functions and energy conservation measures.
What’s interesting about this scheme is that it doesn’t follow the usual Liberal Democratic Party thinking when it comes to consumer-oriented tax breaks, especially those involving homes. Usually, the purpose of such schemes is to prop up the housing market or the construction industry, but according to the Asahi Shimbun, a representative of the Housing Renovation Promoting Council said that while the council “welcomes” the tax cut and hopes it will stimulate sales, it had nothing to do with it and, in fact, didn’t know anything about it until the media reported it.
The government, specifically the cabinet office, which is handling the wording and implementation of the directive, says that the purpose of the tax break is to “reduce social welfare.” By encouraging extended families to live together the government hopes to relieve some of the burden on social welfare functions related to nursing care for the elderly and daycare for preschool children, two issues that require immediate attention. Read More
“Semi” isn’t in it
The construction company in Shiroi, Chiba Prefecture at the center of the Amari scandal
The Feb. 21 Media Mix column in the Japan Times, which we also write, is about the money scandal surrounding Liberal Democratic Party member Akira Amari that forced him to resign his cabinet position. The scandal involved a construction company in Shiroi, Chiba Prefecture, which wanted to shake down the Urban Renaissance Agency for a large amount of compensation, since part of the company’s “offices” had to move due to a road construction project that UR was carrying out with the Chiba Prefecture authorities. Takeshi Isshiki, ostensibly an official with the construction company, told various media how he had paid money to Amari and his secretaries so that they would use their influence to get as much money as possible out of UR. One of the themes of the column is that UR, which is called a “semi-private” or “semi-public” organization, depending on which angle you look at if from, is an entrenched bureacratic entity beholden to the government for its very existence. It started out as the Japan Housing Corporation, a clearly entrenched bureaucratic entity, which built lots of housing developments in the years after World War II with government money. Since the end of the bubble era, it hasn’t done much of that and has sunken deeper into debt. Without much purpose in life except collecting rent on UR apartments, UR is seen as a pointless enterprise now and several administrations have tried to privatize it, but UR has resisted because being in the government guarantees incomes. Thrown on the mercy of the market, most of its employees would lose their jobs, or make less money.
The information we used to make these points in the column was taken from an article in Gendai Business written by Yoichi Takahashi, a former finance ministry economist who knows a thing or two about how bureaucracies work and bureaucrats think. His point is that the scandal would never have happened if UR weren’t involved. Had the road construction project been carried out by a genuine private concern, or even by the Chiba Prefecture government by itself, it would have been more difficult for the construction company to extort money, and, in any case, Amari wouldn’t have had as much pull in any related negotiations. But because UR occupies a shaky position vis-a-vis the government, it easily bends to pressure from that government, especially a cabinet member. Read More
More Than Enough
Pamphlet from local government explaining how property is assessed
We’ve written about Japanese property taxes a few times and in our JT column we once mentioned that the system for assessing property values and calculating the amount owed is complicated. Consequently, local governments, who do all this work based on laws implemented at the national level, sometimes make mistakes.
Apparently, the problem is even more widespread than we thought. According to a survey conducted by the Ministry of Internal Affairs, between 2009 and 2011, 97 percent of local governments reported at least one case of overcharging for property taxes, though, of course, that would indicate there are probably many more cases. A recent issue of the tabloid-style weekly Friday interviewed an official from a support network for “asset preservation” who pointed out that property taxes are very different from income taxes in that they are completely determined by the authorities. With income taxes, at least the taxpayer can see how his taxes are calculated since he has the documents with all the pertinent information. But property taxes are determined by the local tax office and the property owner simply receives a bill every year saying how much he owes without any explanation of how the bill was calculated, and unless the taxpayer has knowledge about the property tax laws and how they may apply to his particular circumstances, he won’t know whether or not the amount charged might be wrong.
The extent of the problem was illustrated in a feature in the Oct. 5 Asahi Shimbun, which cited a number of recent high-profile cases. Last May, the owners of apartments in a complex in Isehara, Kanagawa Prefecture, found out that they have been paying too much property tax for their units since the complex was built in 1972 by the then national housing corporation. Condominium values are assessed according to floor area, and almost all of the 600 units in the complex are about 63 square meters, but they also have verandas. The city tax office was including the verandas, which are about 8 square meters, into the assessment, but verandas are considered kyoyo, or common property, meaning they don’t belong to individual owners, but rather to all the owners, just like corridors and building foyers. The assessment for common property in a condo is divided up among all the owners but taxed at a much lower rate than property that is owned individually. Read More
Sub Standard
Last year we wrote a Home Truths column about real estate schemes being promoted to property owners whose legacies would be subjected to higher inheritance taxes under new government rules. Since the government also is in thrall to the construction industry, it offers tax cuts and deductions to people who build on their property or improve it. The focus of our report was on rental apartment buildings that property owners could have built by companies that would then manage them for the owners, thus killing two birds with one loan: greatly reducing the inheritance tax burden for the owners’ children, and bringing in income from the property itself.
However, according to a special report that NHK aired a few months ago, these schemes have turned out to be a great deal of trouble for property owners. Typically, a real estate company gets a landowner to build an apartment building on his piece of land and helps the landowner secure a loan. The company then guarantees a certain amount of “rent” to the landowner for the next thirty years and subleases the apartments. The company does all the work: solicting tenants, maintaining the building, collecting rents, etc. The owner simply pays for the structure and sits back and collects money. Or, at least, that’s how the scheme is sold.
The NHK program profiled an elderly farm couple living in Gunma Prefecture. Though both are in their 70s, they continue to work the land, but don’t have the energy to work all of their land any more. However, if they let part of it go fallow, the property taxes for that portion will go up. And then there was the inheritance taxes to think about when they died. Ten years ago they were approached by a real estate company who had a plan that would solve all their problems and set them up with a monthly income for the rest of their lives. All they had to do was take out a ¥100 million loan to build an apartment building on the unused portion of their land. They took the offer. Read More
