Japan has the housing blues

Rather than being the mild contributor to growth the government had hoped, housing in Japan has become one of the nation's biggest liabilities, with a glut of unsold homes building up. By Dave Keating

Last month's devastating 7.9 Richter scale earthquake in Southwest China created a monumental sudden need, with the government rushing to send rescue forces, food and water to the affected region. Though the emerging superpower has largely sought to undertake the relief effort itself, it has accepted some aid from its neighbors. One of the offers it has received has been a very basic need that often gets overlooked in such a crisis: Homes.

Japan, China's historical rival, has stepped in with an offer to donate temporary cardboard huts, a solution it has developed after years of trial and error taking care of the needs of its own citizens after its many earthquakes. The cardboard huts, which resemble Mongolian yurts, can be put together in just two hours using sticky tape and can accommodate five people.

In a larger sense, when it comes to housing, these days Japan has excess to go around. As Japan lends its temporary housing expertise to China, it is facing a housing problem at home that is threatening to derail the country's economic recovery.

Japan is right now facing a glut of unsold homes, condominiums and apartments, and as a consequence, new home construction has dried up. Data from the Ministry of Land, Infrastructure and Transport shows that housing starts in the country in March fell 15.6 percent from a year earlier, to 83,991 units. Though economists have been prepared for a drop-off, this fall was vastly greater than the 6.8 percent fall that had been expected for the month. And the pace of the decline is hardly promising. In February, housing starts only saw a five percent drop from the previous year.

What has caused this dramatic decline? Rather than being caused by unwise lending practices or a housing bubble like in the US, Japan's housing problem has been a result of regulatory chaos. Last June, Japan hastily implemented new rules requiring more stringent structural checks for new buildings, following a scandal over the fact that many developers were taking advantage of laxness in the previous law which let them use fake engineering data.

But not only are the new rules requiring additional time for approval, but the government hadn't finalized the rules by the time they were, technically, to go into effect, which kept the market in limbo for months. Developers didn't know what was going on and housing starts fell 30 percent in the second half of 2007 from the same period in 2006.

Though the government had hoped that this situation would change once the new rules were ironed out, this has failed to materialize. Once the developers emerged from the new regulation confusion, consumer demand had fallen. Developers are now ready to start building again, but they are facing a reluctant homebuying population worried about the effects of a global economic slowdown and the lack of wage increases in Japan. According to a report by Reuters, sales of new condominiums have now fallen to a staggering 14-year low in Tokyo in the year to March. Many analysts agree that neither these sales nor housing starts in general are likely to pick up this year.

The troubles are not just a sign to steer clear from the residential sector in Japan. They could also have significant consequences for the Japanese economy as a whole. The government had hoped that housing would be a component of overall growth for the economy, but it now looks likely to drag it down. Some analysts are saying that the trickle-down effects of a lack of housing investment – which affects many other sectors – could add up to a loss to the overall economy of about one percent. What makes it even worse is that analysts had previously predicted growth for the housing sector. Morgan Stanley, for instance, was predicting a three percent housing growth rate for the year to March 2009. Now they've cut that prediction to a 0.5 percent fall.

All of this just serves to remind us that the Japanese economic recovery is still fragile. Last month, Dr. Seek Ngee Huat, president of GIC Real Estate and one of the 20 most influential LPs selected in PERE's May issue, said that the contagion effects of the US subprime crisis will likely accelerate the downward spin of the current property cycle in Japan. Though there are still sectors with good vital signs in the country, including the office market and senior housing, there are troubling signs for the market as a whole.

As Japan sends its emergency housing solutions across the Yellow Sea to China, it is probably hoping that it receives its own rescue from its current housing mess. Otherwise the economic recovery could quickly turn into an economic disappointment.

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