Freakonomics Radio - 157. Why Are Japanese Homes Disposable?

Episode Date: February 27, 2014

In most countries, houses get more valuable over time. In Japan, a new buyer will often bulldoze the home. We'll tell you why.

So let's say you're an architect, and what you really like to design is single-family houses, houses with flair, with distinctive, maybe even avant-garde features, and you want to design houses that will actually get built. So if that's who you are, then for you, utopia might be Japan. So they make a very, very weird-looking or avant-garde-looking houses. Well, one of, it's hard to describe, but... Quite avant-garde, radical designs. Strange-looking, weird-looking. Living in the home is like climbing around a jungle gym or a matrix.

One of them was about four or five stories, but one wall was cut in such a way that the floor space at the fifth level was bigger than the fourth and the third and the second, and it looked very unstable. Of course, it's highly eye-catching. They don't have handrails on stairways and balconies. Three-story building can be built on maybe 500 square feet.

They have walls that can open entirely, exposing the house to the outside. The design can be very, very sharp or really, really unique. Even homes that have no windows at all. And it was covered in this textured material that was, at least to me, it was a complete eyesore. Maybe for some modern artist, it was something to be proud of. Okay, so if you are an architect, not only can you go wild with the design of Japanese houses, but even more important, there's a lot of work.

There's a huge demand for new homes. Jiro Ishida specializes in real estate economics at Penn State University. He used to work on the same issues for the Japanese government. So on the per capita basis, the number of architects in Japan is 3.8 times greater than in the United States. There are, in fact, more registered architects per capita in Japan is 3.8 times greater than in the United States. There are, in fact, more registered architects per capita in Japan than any other country. Not so surprisingly, there are a lot of construction jobs, too. And so in Japan, the construction employment as a percentage of the total population

is 2.1 times greater than in the United States. So let's add this up. A lot of construction jobs, a lot of architects, and a huge demand for creatively designed homes. So that sounds like your pretty typical housing boom, yeah? I think you have to dig deeper than that. Alistair Townsend is an architect in Japan. And as he'll tell us today,

the story of home building there has an unusual in Japan. And as he'll tell us today, the story of home building there has an unusual wrinkle. It's just such a profound and huge thing. And it doesn't seem to occur this way in any other country in the world. And so I'm genuinely, even though I know a lot about the topic, I'm still sort of baffled. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything.

Here's your host, Stephen Dupner. On today's show, we're talking about a huge demand for new homes, you probably think it's because of either a booming economy or a growing population, maybe both. In the case of Japan, there is neither. The economy has been famously stagnant for more than two decades, and the Japanese population has been shrinking, dramatically shrinking, continues to do so. The government says the Japanese population will decrease by an astonishing 30% by the year 2060. So what does this mean for housing? Japan has an abnormally high vacancy rate, estimated to be in the mid to high teens.

So you'd think with so many vacant homes, there wouldn't be a lot of new home building. You'd think that if someone was looking to buy a house, they'd simply buy one, maybe freshen it up and move in. That's not what happens. Here's Jiro Yoshida again. According to an engineering study, approximately half of houses are demolished before 38 years of building age in Japan. Okay, did you hear that? Half of all homes are demolished before they're 38 years old. So basically, that is the half-life of housing stock in Japan. So half-life of housing stock in Japan is 38 years. In contrast, the half-life in the United States is approximately 100 years.

So that's a huge difference. So more than 60% of all Japanese homes were built after 1980. Now, why would that be? Again, you might think it's because of a baby boom or a growing economy, but Japan doesn't have either of those. The reason that so many not very old homes in Japan are knocked down seems to be this. They've lost their value. And in my estimation, the structure fully depreciates after 30 years

for detached houses and after 40 years for condominiums. So it's really, really fast. That's right. A home in Japan loses its entire value after just 30 years, or according to other studies, in as little as 15 years. Now, that's the house itself, not the land,

although land values have certainly fallen since their peak. A little quick history here. During the last half of the 1980s, land prices in Japan more than doubled. Richard Koo is chief economist at Nomura Research Institute in Tokyo. Land prices were so high that just the Imperial Palace Garden in the middle of Tokyo during the bubble days was worth the entire state of California back in 1989. But that bubble burst and property values have fallen. Jiro Yoshida again. Since then, housing prices in Japan have been continually decreasing, except for a few years of small appreciation in 2007 and so on. Compared to 1991 price levels, current housing price levels will be probably 40% of the peak.

Okay, so that is a big fall in property values, 40 percent off the peak prices. But it's not like they fell to zero. That is, however, essentially what happens to the value of the physical house in Japan. There's only a tiny resale market in Japan for used houses. In most cases, when a property is sold, the house is demolished and a new one built. This is in direct contrast to most places, the U.S. in particular, where not only do homes keep their value,

but older homes with their colonial charm or brownstone character, they are particularly cherished. The Japanese are willing to look beyond all of that and just demolish a house, even though it could provide shelter and it could be renovated for a lot less than they would spend building a new house.

Alistair Townsend was born in England, grew up in Iowa, and returned to England to become an architect. Well, I met my wife, who's Japanese, as a student in London, and we worked for a number of years for architects. But since I decided to study architecture, I've always been fascinated by the radical homes that I saw in Japanese architectural magazines. When they finished their studies in England, they saw that their opportunities would be limited. We decided to leave London because it's actually very hard to build new housing there as a young architect. Most of the commissions are

renovations and refurbishments of existing old houses because the planning system makes it very hard to build new homes and people value historic homes more than they do new ones. And we moved to Japan in order to get more experience and hopefully build more. In Japan, Townsend found a huge appetite for new homes. You see advertisements everywhere on the train and on billboards for new housing, commercials on television, TV programs. In Townsend's opinion at least, the fact that Japanese homes don't hold their value changes what people are looking for when they hire an architect. The economic incentives to build a house that will one day be resold don't exist in Japan

because of housing depreciation. And this means that a client is free to build a house according to their own personal preferences and their own idiosyncrasies. Townsend also thinks that with so many architects in Japan, they are all fighting to stand out in a crowd. Plus which, local governments typically don't regulate neighborhood aesthetics like they do in many countries. So that may help explain all the unusual and avant-garde houses in Japan. But we still haven't answered the more bizarre question. Why are Japanese homes essentially disposable?

The houses that are built today exceed the quality of just about any other country in the world, at least for timber buildings. And so there's really no reason that they should drop in value and be demolished. So why are most houses knocked down when someone buys them? Coming up on Freakonomics Radio, we try to answer that question. Does it have to do with culture or economics or maybe manufactured fear? I really feel that the risk of earthquakes to single-family homes is overstated, and it's a way that house builders market their houses. From WNYC, this is Freakonomics Radio. Here's your host, Stephen Dubner.

So we've been talking about the housing market in Japan. Prices have fallen a lot since their peak, but the land itself continues to be valuable. The houses, on the other hand, lose just about their entire value after two or three decades because most Japanese homebuyers do not want used homes. Why? Here's Jiro Yoshida again from Penn State. On this issue, people have many, many casual observations or casual explanations. For example, many people say that Japanese consumers are just different. Japanese consumers just like new things. For example, the most sacred Shinto shrine's called Ise Jingu.

And this shrine is a massive timber structure, but every 20 years it's torn down and a new identical shrine is built on a plot next to it. And that is Alistair Townsend, the British-American architect living in Japan. And this is something very ingrained within the Japanese psyche, which values newness as something that is spiritually clean and pure. So maybe the hunger for new homes is a cultural appetite, at least to some degree. For example, if we take a look at the second-hand or used car market,

even used cars are traded really cheaply in Japan compared to other countries. So there's something to it, but it's not the whole thing. Okay, so what else might explain Japan's disposable housing attitude? Let's go back to World War II. The most famous U.S. attacks on Japan were the atomic bombs dropped on Hiroshima and Nagasaki. Both cities were devastated. This is the gallant crew that rode the big superfort which carried the first atomic bomb to Japan. Piloted by Colonel Paul Tibbets, Jr. of Miami, carrying Navy Captain William Parsons of Chicago, who helped design the bomb as observer, and Major Thomas Parrabee of Moxville, North Carolina,

who pulled the plug on Hiroshima, the B-29 dropped its load of atomic death, which exploded with a force equal to 20,000 tons of TNT. A few days later, the second atomic terror was loosed on Nagasaki. But the U.S. dropped a lot of non-atomic bombs in Japan and a lot of other cities. Five months before the atomic bombs, more than 300 American B-29s started dropping more than 2,000 tons of incendiary bombs on Tokyo. Most of that city was burned to the ground. 100,000 people were killed and 1 million people were left homeless. And after World War II, when everything was flattened by American bombing, they had to rebuild everything very, very quickly. That's

Richard Koo from the Nomura Research Institute. And at that time, they didn't pay much attention to the quality of houses they were building. It was certainly the case that after World War II, many of the houses that were built during the boom were shoddily constructed. Alistair Townsend again. They lack insulation and are generally very cold. They have heavy tile roofs, which make them a liability in earthquakes. So it's understandable that those houses are being replaced. So you can see why the first round of homes built in Japan after the war were torn down after not too long,

especially as the country started to get richer. But there's another factor that led the Japanese to think of their homes as non-permanent, and that is earthquakes. 20% of the world's earthquakes of magnitude 6 or greater happened in Japan. And because of that history, Japanese have come to view the houses, building structures in general as kind of perishable, because after each earthquake, many of those were destroyed. And so there's a fundamental feeling within the Japanese scheme of things that nothing is permanent.

So that makes sense. And it might help explain why Japanese homes depreciate so much and so fast. But as Jiro Yoshida tells us, there's another earthquake-related explanation. So the deep question is, why do structures depreciate so fast? And why do people have to demolish these old buildings so soon?

And actually, one very simple answer, and in a sense, an uninteresting answer to that is the revisions to the building codes. And revision to the building codes, especially with respect to earthquake resistance standards. So in the past, the building codes in Japan have been continually revised after major earthquakes. It began nearly a century ago with what is known as the Great Kanto Earthquake. And that Great Kanto Earthquake destroyed over 500,000 houses in Tokyo. And that was a huge, huge disaster. And after that Great Kanto Earthquake, the building code Miyagi earthquake,

and in 2000, most latest in 2000, after Hanshin Awaji earthquake. So as new earthquake standards were put into place, older buildings were decreed unsafe. When a property was sold, the house would be torn down and a new house put up. But everyone we talked to for this story, Richard Koo, Jiro Yoshida, and Alistair Townsend,

they all point out that today, even homes that easily meet earthquake standards are still demolished when they're sold. Many of these homes, Townsend says, exceed the quality of just about any other country in the world, at least for timber buildings. And so there's really no reason that they should drop in value and be demolished.

So there's no reason except maybe fear of earthquakes, as rational or otherwise as that fear may be. I really feel that the risk of earthquakes to single-family homes is very much overstated, and it's partly a way that housing companies, house builders, market their houses by instilling, you know, effectively instilling fear within their prospective customers by making so much of, you know, seismic technology, most of which is redundant. By the time that you have skinned a house with structural plywood, it's sufficiently cross-braced to sustain an earthquake. So think about this for a minute. If you buy a house and you knock it down to build a new one because you think the old one isn't safe, and if you know that the people who eventually will buy that house from you will do the same, how much money and time do you think you'll invest in taking care of your house?

Richard Koo calls this the vicious cycle of the Japanese housing market. Maybe they will keep the rooms tidy and clean, but externally, I mean, once the house is built, it's never repainted again. And a lot of external things are allowed to dilapidate, deteriorate. And then 20, 30 years, the whole thing is torn down and another one is built in its place. So it's kind of a vicious cycle, right? If you expect the house to last only 20, 30 years, you're not going to put much into maintenance. And as a result, the house really lasts only 20, 30 years, you're not going to put much into maintenance. And as a result, a house really lasts only 20, 30 years. Alistair Townsend has seen the same lack of maintenance.

That's nowhere near as developed as in the U.S., where you have massive stores like Home Depot and Lowe's where people can go and buy every part of the house. And it seems like many people in America are confident to build an extension onto their home or finish the basement or remodel a room. In Japan, that really just doesn't happen because part of that is there isn't an incentive to maintain the house. All right, so we've identified at least what seem to be several legitimate reasons for why Japanese houses don't hold their value over time. Now, you might just say that, well, things are different in Japan. It's not necessarily worse. But Richard Koo disagrees. A few years back, he co-authored a paper called Obstacles to Affluence, Thoughts on Japanese Housing. The paper argued that the habit of treating homes as disposable is extraordinarily

wasteful and that it has contributed to Japan's long economic slump. So you tear down the building, you build another one, and tear down the building, you keep on building another one. You're not building wealth on top of wealth. It's a very poor investment compared to Americans or Europeans or even other Asian countries where people are building wealth on top of wealth because your house is a capital good. And if you do a certain amount of maintenance,

you can expect to sell the house at the higher price. But in the Japanese case, once you buy it, you expect to sell it at a lower price 10, 15 years later. And that's no way to build an affluent society. So we've come full circle. At the beginning of this story, when we heard about the huge demand in Japan for new houses and architects,

we might have assumed an economic boom was the cause. But not only isn't there a boom, the ongoing slump, at least according to Richard Koo, may have been caused in part by Japanese attitudes toward the housing market. Now, if you're an American or a Brit who suffered during the housing hysteria of the past decade or so, the idea of not locking up all your wealth in a house might be appealing. But the opposite of hysteria is not necessarily utopia. It may in fact be its own sort of madness, which Alistair Townsend, even after six years in Japan, still can't comprehend. Okay, it's one thing if it's about, I don't know, buying shampoo,

but it's not. This is like people's biggest investment in their lives. And the Japanese are basically throwing it all away. Hey, podcast listeners. Next week on the show, we look at the value of learning a foreign language. The average American student will spend two or three years studying a foreign language. Some people think that time could be much better spent. There are so many kids who remain barely literate and numerate in their own language. The ROI on learning a foreign language. It's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC and Dubner Productions. Our staff includes David Herman, Greg Rosalski, Greta Cohn, Beret Lam, Susie Lechtenberg, and Chris Bannon,

with engineering help from Jim Briggs. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com, where you'll find lots of radio, a blog, the books, and more.