Japan’s Possible Mortgage Crisis

I’m on my way out the door for a personal trip that will take me around Hokkaido, so I apologize for writing and posting in haste with what may contain a few leaps of logic and clerical errors, but I saw an article by Business Insider on Japan’s “bizarre new mortgage crisis” (with an inexplicable photo of a crazy Japanese female zombie). The post covers an issue with mortgages that I recently saw profiled in an NHK mini-documentary:

With the onset of the recession, Japanese companies have exercised their option to reduce or even cancel bonuses, and for the past month the media has been buzzing with a new term — June crisis — to describe the situation of workers who may not be able to meet mortgage payments as a result.

June and December are bonus months, and 45 percent of Japanese people with housing loans have contracts that require them to pay larger amounts in these months than they do in other months, in some cases as much as five times.

Publications and TV news shows have been filled with human-interest stories about people suddenly faced with the possibility of losing their homes. The Asahi Shimbun tells of a 40-year-old housewife whose husband did not receive a bonus this month and apparently won’t receive one in December either. Even worse, his salary has been cut by 20 percent. They have 20 years left on their 35-year mortgage. They pay only ¥80,000 a month toward the loan, but during each bonus month they pay ¥400,000. With one child in university and another in junior high school, they have saved very little. “When we took out our mortgage,” the woman says, “it was unthinkable that my husband’s bonus would be zero.”

Business Insider asks from someone in Japan to provide more insight, so I decided to make this post to weigh in with a minor explanation and supplemental comment. In a word, the annual salary of company workers in Japan is regularly divided into 14 month portions, not 12 months — one extra month given during the bonus seasons in the summer and winter. Accordingly, some mortgage products, especially those sold in the 80s and 90s, had extra payments during bonus months. (The trend became very unpopular in recent years and is now much more rare.) However, a problem with this is that although a worker may believe his annual salary to be his monthly amount times 14 (not 12), the bonuses of many companies are not guaranteed, although its payment has long been taken for granted, at least before the current economic crisis that has hit Japan’s exporters hard.

The only additional comment I have is that I don’t expect this to develop into a real “crisis.” Banks do not want to forclose on homes in Japan. With the collapse in housing prices over the past 20 years, lenders would not be able to fully recover on many loans if the borrowers defaulted, and even where the loans permit recourse, it still seems unlikely that banks would benefit by making people lose their homes. Perhaps thats wishful thinking, or even unrealistic, but this is a blog, so tell me in the comments if you think I’m wrong.

And on a final note, I’d always take anything I read in the Japan Times with a big, big bucket of salt — just check out the following unverified assertions using scientific journalistic terms such as “pieces of crap”:

There are more than 6 million vacant houses in Japan. Most will never be sold, because they’re pieces of crap that were never meant to outlast their 35-year mortgages. Condominiums are no better. On average, Tokyo “mansions” built in 1990, when land values peaked, were selling for half their original prices by 2004.

While I may find something to agree with in the commentary of that section, I would like to hear on what basis there are 6 million new and vacant homes, as implied. While there are lots of homes abandoned by families when elderly relatives go into homes or kick the bucket, for estate tax purposes, 6 million vacant homes sounds like unsubstantiated rubish. Certainly the fact that mansions built in 1990 are not selling at half their original price is that homes in Japan depreciate rapidly in price.

23 thoughts on “Japan’s Possible Mortgage Crisis”

  1. You can’t even begin to discuss Japanese mortgages without mentioning the bizarre yet common situation that ownership of the land and the house itself (even for a standard single unit/lot) are often decoupled, with residents sometimes owning the house outright while paying rent on the land. With the somewhat rare exception of old houses that have some intrinsic historical or artistic value, it’s true that most houses in Japan are “pieces of crap that were never meant to outlast their 35-year mortgages” (partly due to government policies that encouraged this). And yes, while the HOUSE loses its resale price very quickly, the LAND can retrain value quite well, at least if you’re lucky enough to own land in a city and not a depopulating region. When you consider that most of the value in a used house is in the land, it makes complete sense that buying a condo is a worthless investment.

    BTW, you forgot to provide a link for your “pieces of crap” quote.

  2. The system sounds a bit like the UK system leasehold estate ( http://en.wikipedia.org/wiki/Leasehold_estate ). Where the leaseholder has the right to remain/use the property for an agreed rent. Usually you hear terms like 99 year lease – with this one in areas that are particularly desirable to live in, for example the more expensive areas of London.

    With regards to the mortgage crisis – well bad news sells. In agreement that without giving some idea of how the count was made for 6 million vacant houses – it’s a meaningless number.

  3. The quote was from a opinion column, not a news story. http://search.japantimes.co.jp/cgi-bin/fd20090628pb.html “Pieces of crap” seems like a fair comment.

    Having said that, most houses built now are perfectly capable of lasting 50 or 60 years at least. The problem is a) very few people want to buy a used house and b) houses aren’t properly maintained because of that.

    The government seems to be belatedly recognizing the environmental damage of so many disposable houses and has started talking about “200 year homes”. If I was building a home now I’d consider spending the extra money to make sure it lasts. Who knows how attitudes in Japan might change over 30-50 years.

  4. Sorry — that link is contained in the Business Insider post. Feel free to amend this post to reflect that.

    -Curzon, on his Blackberry

  5. Really, this is not so different to the situation in a western country where people would get made unemployed during a downturn, and have no income to pay their mortgage. At least the Japanese workers still have jobs, if their income is reduced.

  6. The biggest difference, as the linked-to article explains, is that if you default on an American home mortgage, usually you lose the house but have no further debt, but in Japan you lose the house and STILL have to pay off the remainder of the debt, which is ruinous. I have no idea how bankruptcy works in Japan, but I believe Curzon was going to give a brief explanation…

  7. This is totally based on anecdotal evidence, but it wouldn’t surprise me at all if there were actually 6 million vacant houses in Japan. As mentioned, most of these houses are pieces of crap, so if grandma dies and you don’t own the land, then you just walk away. It’s not so noticeable in Tokyo, but if you go to some of the depopulating rural towns that were also mentioned, you can find scores of abandoned houses in each one.

  8. When we say “bonus” here, we are really talking about “withheld income,” right? Someone who makes $50K a year, for example, will have that distributed as part of “bonuses” rather than make $50K in 12 months PLUS another $5K in bonus etc. I would love to know the history of this policy, because it seems like a way for employers to have an easy way to cut salaries when times get tough — without employees feeling like their “salary” was cut. Also seems a bit parochial: “you should only be spending X per month and then can splurge at these special times.”

    Any history on this?

  9. in Japan you lose the house and STILL have to pay off the remainder of the debt, which is ruinous.

    To be more precise, it’s ruinous if your outstanding debt exceeds the value of the house; otherwise there’s no difference.

    When we say “bonus” here, we are really talking about “withheld income,” right? Someone who makes $50K a year, for example, will have that distributed as part of “bonuses” rather than make $50K in 12 months PLUS another $5K in bonus etc.

    Formally, it’s the latter. Salary is a certain amount, employees get 1/12 of it each month (before taxes and allowances), and bonuses are generally calculated as a separate function of salary. That said, employees are usually given a bonus expectation when they are hired, so they factor that number into their total compensation package.

  10. When I worked in a university office, the total compensation package was 15 months, with 1 month summer bonus and a 2 month December bonus, but the amounts were clearly delineated in the contract, and not a “bonus” at all.

  11. the annual salary of company workers in Japan is regularly divided into 14 month portions, not 12 months

    Actually, quoted yearly compensation totals are typically divided into 18 portions, 12 of which are paid monthly as salary and the remaining 6 months split in two and paid as a summer and winter bonus, which some variance depending on performance. But companies will rarely divulge how they calculate this to their employees.

    However, you will notice that most Japanese companies do not quote yearly salaries, but rather monthly amounts only. This way they have much more latitude in “adjusting” (read: decreasing) bonus amounts as they see fit. Likewise, companies that quote a yearly salary often add “plus incentive” or somesuch to reflect a potential bonus, with the same effect. The yearly quote is fairer, in my opinion, since you know exactly how much you will get, before the bonus (and can more easily discover just how low your pay is if you work for a Japanese company).

  12. Of course, Japanese companies also have a lot of perks which make up for the low pay. Like, y’know, not being fired and stuff. The other important aspect to note is that allowances can often be a substantial part of the paycheck. About 15% of my pay now comes from allowances and subsidies for food, housing and transportation, none of which are part of my base pay. If I were married and living in a bigger apartment, the figure would be more like 25%.

    I think the distinction between “bonus” and “withheld income” is silly and amounts to a “half empty or half full?” argument. If anything, the bonus is a psychological boon for all the salaryman and OL drones who ordinarily don’t have much to look forward to in the office. When people get two or three months’ pay at once, they feel like they can finally splurge beyond ordinary levels. At least where I work, we see people from travel agencies and car dealerships come around every bonus season trying to capture some of that irrational exuberance.

    Besides the wants of banks, one should also keep in mind that the FSA has its hand around the gonads of every Japanese financial institution and its administrative guidance is basically law (as Citibank recently discovered). If enforcing all those mortgages would really cause a crisis, the FSA would be pressured to issue a circular to the banks telling them to hold off.

  13. Are the bonus split mortgages really that unpopular? Do you have any data? When I bought my place four years back we went for an almost 50:50 split (not looking forward to next week’s bonus…) and I often see leaflets for flats for sale advertising stuff like “Only 80,000 yen per month*” and the asterisked point mentions a bonus payment of a sizeable multiple of said 8 man.

  14. If you lose your house you are pretty much ruined anyway.

    If your house is worth more than the mortgage and you think you cant make mortgage payments, you should sell the house and move into a cheaper apt or something rather than get foreclosed on. And if thats not an option then youre ruined no matter what and you have to declare bankruptcy.

    Generally I think the bonus payment system is kinda ludicrous because if there is no penalty for early repayment you can design your OWN bonus payment system by choosing to pay down your debt. As Ken mentioned stuff like that is just another way for real estate people to play 3-card monte with prices.

  15. Tony said,

    [M]ost houses built now are perfectly capable of lasting 50 or 60 years at least. The problem is a) very few people want to buy a used house and b) houses aren’t properly maintained because of that.

    My host family was interested in my tales of home repair/improvement. After all, it’s not aomething they’d undertake, and it was somewhat humorous to them that a woman would do such things.

  16. On a related note, the latest episode of Planet Money discusses why the American home market is so special – most people own homes in the suburbs that they expect will go up in value (and still do at least in the long term). In many countries (and the US before the 50s) people see houses like they see cars – as something that will inevitably go down in value. The argument for why the US is so much more suburbanized than Japan as follows:

    1) Before the 1930s housing was not the government’s concern at all
    2) Incentives toward home ownership started in the 30s as part of the New Deal but didn’t really take off until the 50s
    3) Suburbanism took off in the 50s for a number of reasons:
    – Geographic: America has a lot of good land to build houses
    – Technological/material: The technology was there to build sturdy cheap houses
    – Racism: white flight meant that massive of former city-dwellers flocked to suburbs for “better schools” (also blacks were initially excluded from America’s housing programs) – the fact that there is nobody to run from in countries like Japan takes away a major motivator to leave the city
    – Incentives: The low fixed interest rates and low down payments were subsidized by the govt and were the final icing on the cake to make housing seem worth it

    In Japan we seem to be missing the available space, racism, and sturdy house factors, though ownership rates are actually kind of high at 60% (compared to 69% in the US). Also it looks like only part of home loan interest is tax deductible in Japan, whereas in the US I am pretty sure it’s 100% deductible.

    http://www.npr.org/blogs/money/2009/06/hear_paying_it_all_back.html
    http://www.stat.go.jp/data/jyutaku/2003/panflet/4cyou3.htm
    http://en.wikipedia.org/wiki/Home_ownership_rate
    http://www.jhf.go.jp/jumap/atoz/houseloan/3_5.html
    http://www.columbia.edu/cu/history/fac-bios/Jackson/faculty.html

  17. I just heard that same episode too, and was going to make pretty much the same followup comment you beat me to. What’s interesting is that the idea of a home as disposable faded in the US around the same time that old homes actually first became stylish. This is really only just beginning to happen in Japan, but considering the poor quality and style of most post-war homes, I doubt it will ever (at least not for many decades) have even close to the same level of effect.

    You actually forgot one of the essential points made in that episode though, which is the way in which primary/secondary education in the US is almost exclusively limited to your local school district, making the choice of living location far more critical than it is in Japan, and presumably many European countries. Japanese people I speak to about this difference (and it comes up a lot, which me being in the graduate school of education) find it kind of hard to comprehend that the only way for the vast majority of Americans to choose a school for their children is to move.

  18. “Technological/material: The technology was there to build sturdy cheap houses”

    They didn’t mention mass car ownership? Japan built most of its really crap postwar housing about a decade before car ownership became the norm. Out in the inaka here you can pretty much ride a wave of housing quality. Middle of town – mix of the best (recently rebuilt) and the worst (old shells and leftovers from the 50s), bit more out – decent apartments (80s and 90s) but crap houses and stores (built in the 1960s and 1970s), doinaka – houses look fine (mostly bubble era), but are starting to show age. Of course, down this way you don’t feel the lack of quality (insulation, etc.) like you do up north.

  19. “the only way for the vast majority of Americans to choose a school for their children is to move”

    I’m not sure that’s true. Most major cities have magnet schools these days…

  20. Major cities have a small number of elite magnet schools, but most students still have no real choice but to go to their local school. For example, in NYC there are a handful of top-notch high schools like Stuyvesant or Bronx Science, but they have an entrance exam as competitive as anything in Japan.

  21. In addition to moving, some people in the US utilize other methods to have their kids placed in better public schools. One method would be to have someone living in the better district serve as guardian of the child.

  22. Sure, there are cases of that but it’s a tiny minority, and not practical in most cases anyway. I mean, most people want to live with their own kids even more than they want to send them to another school, and transportation isn’t adequate in most of the US to send your kids into another down early in the morning every day, while you go to work in another direction.

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