taxes & financing

Planned Obsolescence

Posted on by catforehead

Variable interest housing loan campaign from early 2020

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.

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Money out of mind

Posted on by catforehead

As with many families, my partner and I contribute to the living situation of an aged relative, who is currently living in a facility for seniors. We share this contribution with other members of her family, and in addition to paying directly for things like laundry service and supplemental meals, we also manage her pension and other social service income, which are directly deposited into her savings account. Another member of the woman’s family has the bank ATM card, with which that person can make money transfers to cover her care. In our case, we have the passbook, which can also be used to transfer money but not to withdraw cash from the account. Often we make necessary payments on her behalf and then transfer money from her account to reimburse ourselves.

This system is not uncommon, but it isn’t really legitimate, either, since we are not registered proxies for the woman. Because she has a cognitive disability owing to her age, she cannot handle her assets herself and thus relies on family to manage her finances, but legally speaking we—meaning not only my partner and I, but the other members of her family—should have registered as proxies with power of attorney well before she started losing her mental faculties. Now it is too late, and we are basically gaming the system. No one has prevented us from doing this because no one has complained, but recently banks have started phasing out passbooks in order to save money and paper. All records are being transferred to online systems, so we are afraid that once the current passbook fills up, we will not be able to get a new one, and thus will not have access to her account, since we can’t apply for an extra ATM card without her written compliance, which, legally, she can’t give because of her mental state.

A recent article that appeared in the Asahi Shimbun discussed this problem in more general terms, and it appears that our dilemma is one that many families also face. In principle, cash savings, real estate, and other assets owned by people who lose their cognitive functions cannot be touched except by people who have been granted such access by a court. The Civil Code says that if a person has no ability to make judgements regarding legal actions, those actions are not recognized. According to Mitsui Sumitomo Trust Bank, as of 2020, the amount of cash in Japanese bank accounts that has been frozen because their signatories have lost cognitive faculties amounts to ¥175 trillion. In terms of real estate and other assets, ¥80 trillion. That’s the equivalent of 8 percent of all household assets in Japan. By 2040, frozen assets are projected to reach ¥349 trillion, or 12 percent of all household assets. “Frozen” means that this money cannot be spent or otherwise circulated in the economy, which will slow down even further as a result. 

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Renting in the plague years

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At the moment, the government continues to debate a plan to give families with younger children whose incomes are below a certain line payouts of ¥100,000 per child as a countermeasure to the continuing financial strain brought on by the COVID-19 pandemic. One point of contention is that the government would like to pay half the funds in “coupons” that can only be used to purchase items at offline retailers, preferably within the municipality where they live. The obvious reason for this scheme is to stimulate businesses that are suffering due to the pandemic. Reportedly, the government has said it is up to local governments, who would prefer coupons since the money would likely be spent in their bailiwicks. However, the coupon scheme automatically limits the recipient families’ discretion with what they can do with their handouts. Many would obviously like to use that money for things other than purchases.

Like rent. In a front page article that appeared Dec. 15, Tokyo Shimbun reported that there is a good possibility that the rate of evictions nationwide will increase “rapidly” in the coming year. Actually, the newspaper doesn’t use the word “eviction” since there is really no exact equivalent in Japanese. The word that’s used is “taikyo,” which means “leaving” in various senses of the term. In principle, it is difficult for a landlord legally to evict a tenant for any reason in Japan, but there are many other ways to get a tenant to leave a property if the landlord doesn’t want them there anymore. 

The thing about the anti-eviction law is that it is the only national law that protects the interests of tenants, and while it sounds like a major protection, other tenant rights that are taken for granted in other countries regarding things like fees and rent control and property maintenance are not similarly protected in Japan. However, tenants who are not formally receiving government assistance and find themselves in temporary financial straits can apply for rent relief from the central government. After the pandemic hit almost two years ago, the government relaxed some of the conditions so that more people could receive the subsidy and for longer periods of time. It proved to be popular. According to Tokyo Shimbun, the number of approved applications in fiscal 2020 was 34 times what it was the previous year.

Obviously, many renters were suffering financially and the subsidy was a big help, but while the period for applications was extended, it wasn’t made indefinite, and many recipients who have been relying on that money will soon be cut off. According to the emergency revision to the rental subsidy law, households in need could receive the funds for a maximum of 15 months. Tokyo Shimbun, in fact, covered the matter because a number of citizens groups had a meeting in Tokyo on Dec. 14 to demand the government make the rental subsidy program permanent and open-ended. 

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Make Mine Maglev (2)

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Section of maglev route, in red, that goes through Shizuoka

Right now there are much more serious matters on people’s minds than the maglev Chuo Shinkansen, or “linear motor car,” as it’s called in Japanese. Nevertheless, the train, which will spirit bodies from Tokyo to Nagoya in about 40 minutes, is set to become a major public works project that many in government and industry probably think could help revitalize the economy in the new post-pandemic “normal,” though no one has actually taken the time to publicly explain its role in such a brave new world. But one thing is for certain. It’s not going to be finished by its planned completion date in 2027. Actually, we never thought that was possible in the first place, but now it seems to be definite because the major media have said so.

Though there are actually a lot of reasons why the project won’t be completed on time, the only one the media is talking about is the governor of Shizuoka Prefecture’s refusal to allow construction to proceed on the 10-kilometer portion that passes through his bailiwick. Consequently, Heita Kawakatsu is the scapegoat for everyone who has a stake in the maglev. The governor of Aichi Prefecture, Hideaki Omura, is especially aggrieved, since the city of Nagoya is spending a great deal of money redeveloping the area surrounding the new maglev station. If it doesn’t open by 2027 everything will be screwed up fiscally. A think tank has estimated that the maglev will generate ¥2.3 trillion for Nagoya during the ten-year period after the station opens.

Kawakatsu’s gripe is about water, specifically the water supply for the 600,000 residents who live along the Oi River, which is 168 kilometers long. In 2013, JR Tokai, the company behind the project, carried out an environmental assessment that found construction of the tunnel through Shizuoka would result in a loss of ground water amounting to between 1.07 and 2.12 tons per second, equivalent to 17 percent of the river’s volume at any one time. Read More

Viral market

Posted on by catforehead

Delivery of bathroom fixtures from Asia has been delayed

Since consumption has declined precipitously during the CV19 crisis, it’s no suprise that the real estate market has suffered considerably. The Nihon Keizai Shimbun has obligingly looked into the particulars, which are mostly predictable but worth looking at in detail. The Nikkei reports that people have essentially stopped looking for new homes, though the effect hasn’t been sustained enough to cause prices to fall just yet; and, in a sense, it might be better if prices did fall a bit, since that would encourage people who may be sitting on the fence to jump off and sign a contract.

The main problem at the moment is that people who have already signed contracts are getting cold feet, even if it’s too late at this point. Nikkei says that more than a few realtors it talked to have said they receive requests from customers to “disinfect” the used condos they buy, thus placing the realtors in a difficult position. As one agent told the newspaper, he understood the sentiment but how exactly he was going to convince the customer that he had cleaned the apartment “to their satisfaction” was going to be a problem. For people who had already signed contracts, it wasn’t a primary issue, but for those who were about to sign, the agent’s response could prove to be vital to the sale. A number of realtors said that more than the usual number of price negotiations had broken down since the pandemic developed. Demand is quickly evaporating unless something happens soon to change the situation. Read More

Slipping away

Posted on by catforehead

That first step is a doozy: First world elderly problems.

Here’s a fairly common retirement strategy: The kids are gone and have families of their own, so the house you bought so long ago and which is likely paid for by now becomes too big, so you sell it and use the money to buy a condo somewhere in or near an urban center where public transportation and retail resources are easy to access. However, a recent feature in the weekly magazine Shukan Gendai warned people who are thinking of doing this to think twice. It may not be as easy as you think, and, in fact, it could end up being a disaster.

The number of people in Japan over the age of 65 recently exceeded 35 million, an expanding demographic that has become a target for real estate agents who are selling used or new condos, which tend to retain their value more readily than single-family homes. As it stands, many of these new retirees probably live in single-family homes in the suburbs of large cities to which the heads-of-household used to commute. These houses are likely two stories, a structural feature that becomes more of an inconvenience the older you get, and they are also probably far from public transportation hubs, meaning the people who live in them require a car to get around. Realtors use such reasonings to convince people to sell their homes and buy condos, and it makes sense, but not as much sense as it used to. First of all, there are just too many single family houses on the market and not enough people who want to buy them, and that disadvantageous ratio will only get worse as the population greys further.

Gendai also brings up the magic amount of ¥20 million, which is what a retired couple should have in savings to supplement their pensions. Actually, ¥20 million is probably not enough unless the couple is able to invest in some kind of financial instrument that can guarantee a small income, but most people still have their savings in time deposits, which generate almost no income, so the thinking here is that the couple lives off their pensions and doesn’t touch their savings since they may need it for emergencies. It’s a precarious way to live. Read More

Heirs? Apparently

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This land is your land?: Property marker in the middle of a residential street

An ongoing headache for the government, in particular the land and justice ministries, is all the land in Japan whose titleholders are only vaguely determined. The reason this is a problem, of course, is that the central and local tax authorities don’t know to whom they should send property tax bills, but also when public works projects are being planned that involve the appropriation of land the relevant authorities don’t know whom to deal with. For a more detailed discussion of this problem see here, but suffice to say that the volume of property nationwide with undetermined owners amounts to a piece of land the size of Kyushu.

The reason for this confusion has to do with inheritance laws. When a title holder dies, if no formal transfer of the property has taken place, their property automatically passes to their heirs, meaning spouse first and then children. If those heirs never properly register the land in their names, then it then passes on to all their heirs when they die, and so on. According to a Nov. 18 article in the Nihon Keizai Shimbun, there is one piece of land—location undisclosed—that has up to 700 potential titleholders since the land has not been re-registered since the registered titleholder died many years ago. The amount of money and resuources needed to sort out these matters is beyond the ability of local governments. Of course, in most cases, the land is worth probably nothing to the family—maybe it’s on the top of a mountain or in a remote forest—and they simply don’t want to be taxed for it. However, a good portion is located in already developed areas. In any case, the local government or maybe a developer may want to exploit that land someday. The central government would like to have everything properly registered.

The Civil Code states that the titleholder must be consulted in order to dispose of the land or any portion of it, so if the government really wants to solve this problem it should amend the law, and that seems to be the plan. The Nikkei article says the government is now considering an amendment to the law that will allow the sale of plots of land or any portions of it if a certain number of heirs agree to the sale. At present, all titleholders must agree to such disposal. The land and law ministries plan to send this bill to the Diet in 2020, and are currently carrying out research that will better define vague property lines. As of 2017, about 16 percent of the land in 80,000 “locations” classifed as “urban,” meaning designated for residences and commercial businesses, does not have a definite titleholder in accordance with existing records. The portion of undetermined land is probably more, since the 16 percent mainly represents lots that are being disputed for some reason—either neighbors want to buy the land for expansion or local governments want to use it for parks and other public facilities or a developer wants to build a condominium on it. None of these entities have the money to negotiate with all the heirs, and according to most local laws any property line disputes have to be mediated through the consultation of surveyors and other experts, and those services have to be paid for by the parties involved.

On the surface, passing such a law should be easy. All the government has to do is specify the problem and how many of the identifiable heirs or titleholders must be located in order to dispose of the land. But because Japan has such a weak concept of eminent domain, it’s likely there will still be limitations to what the government can do unilaterally. And it’s apparent that people who have rights to a piece of land but are coy about being located have a reason for being coy. The main obstacle will be defining how much work should be involved in “notifying” all the interested parties. They must also determine if unpaid back taxes can be waived. One solution, according to Nikkei, would be a condition that the land in question must be sorted out within a certain timeframe due to health or safety concerns, and while that may sound like a limiting condition itself, the government has never been averse to bending such laws when it serves them.

Yen for Living: Houses As (non-)Assets

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For sale? Good luck.

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. Read More