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Monday, Nov. 26, 2007

JAPANESE PERSPECTIVES

Japanese housing slumps into legal, moral quagmire


Japanese housing starts have fallen sharply in recent months, just as housing-related markets in the United States have declined since the advent of the subprime mortgage crisis. But the backgrounds of the two slumps are totally different.

In July, Japanese housing starts sank to 950,000 units per annum, down roughly 30 percent from 1.35 million units in June. In August they dropped another 20 percent to 750,000 units per annum. The August figure represents a plunge of more than 40 percent from a year ago.

In the meantime, housing-related investment in the United States fell 16.3 percent in the first quarter, 11.8 percent in the second quarter and 20.1 percent in the third quarter — all on a year-on-year basis.

The housing slumps in Japan and the United States, however, are totally different. While the primary factor behind the U.S. slump was financial in nature, in Japan it was the implementation of the revised building standards law on June 20 that triggered the plunge.

Needless to say, the legal reform was prompted by an architect's fabrication of quake-resistance data used to design dozens of condominiums and other buildings to build them on the cheap.

It is unforgivable to falsify crucial data on a home, which is likely the single biggest purchase a family will ever make. Many salaried workers take on debts even larger than their retirement pay to buy a condominium. Such crimes not only make the homes unlivable, but also unaffordable as the buyers fork out huge additional sums to have them rebuilt.

It is only natural to revise the law and tighten building standards, but Japan's government and the legislature should take the blame for acting too late.

The legal changes in Japan have affected economic activity in a broad number of ways.

First, the sharp decline in the housing starts in July was partly a reflection of strong demand in the previous month, when condo builders rushed to start new projects before the new standards took effect. This factor must be taken into account when assessing the condition of the market.

Second, the tighter standards have led to more rigorous screening of building applications, which has generally prolonged the screening process.

It used to take about 20 days to get an application approved, but in some cases it is now taking as long as 70 days.

In addition, greater efforts to improve efficiency are needed from the private sector and the administrative authorities screening the applications, given that they still lack a computerized system for checking building applications.

The third factor is the recent revelation that data for fireproofing materials also is being falsified, necessitating adjustments in the production and inventory of those industries as well.

Although housing-related investment accounts for only about 5 percent of Japan's gross domestic product, a sharp decline in the sector could become a drag on the entire economy.

Fourth, while it will only be natural for a delay in housing starts to negatively affect demand for furniture, appliances and automobiles, the slump is coming at a time when the domestic market is sluggish and first-half vehicle sales are down 8.1 percent from the same period a year ago.

The subprime crisis in the United States has highlighted the issue of home ownership and borrowing risks. This issue may be more serious in Japan, because while the population is increasing in the U.S., it is forecast to decline in our country.

For much of postwar Japan, housing demand was supported by the steady rise of the population and rapid economic growth. Today, however, houses have already become redundant in Japan with the decline in the birthrate, the aging population and the spread of nuclear families. What is needed now is to improve the quality of the houses and to meet the needs of people who want new ones to accommodate changes in their family structure.

A newly married couple may only need one bedroom, but they will want to move into a bigger house with multiple bedrooms as their children grow. A retired elderly couple, meanwhile, may find a smaller house more comfortable and easier to clean each day.

This is not a call for a sheer increase in number of houses available, but for a housing market that makes it easier for people to move into new houses that suit their needs.

Housing starts will hit bottom someday, but they probably won't return to their previous levels so readily.

Housing is not the only industry in Japan where falsification has been exposed in recent years, as the scandals in the food industry show, and perhaps more legal reforms are on the way.

But since people say the law represents the minimum set of morals that must be maintained by the public, those industries under fire should show they are operating at a higher moral standard first before responding to changes in the legal system.

Teruhiko Mano is a professor at Seigakuin University Graduate School.


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