Encore Episode: Japanese Housing Policy with Jiro Yoshida

Shane Phillips 0:04
Hello! This is the UCLA Housing Voice Podcast, and I'm your host, Shane Phillips.

This week we're re-airing our 2021 interview with Professor Jiro Yoshida about Japanese housing policy, but before you decide to hop off if you've heard this one before, I have a reason you may want to stick around. You may recall from the intro to our previous episode that I just spent 8 or 9 days in Japan, mostly in Tokyo, and despite very high expectations I think the city somehow exceeded them. Partly because of that, I'm planning on a recording a follow-up episode sharing some of my own research on what makes Tokyo tick -- digging into some things that we didn't quite get to from our conversation with Jiro, like the details on how Japan's zoning code actually works, how land use intersects with the transit network, and some of my own observations from a hundred miles of wandering through the city. I'm hoping to have that released for our next episode or the one after that. As for this 2021 interview, it's worth a listen even if you've heard it before. We cover some of the unique historical, economic, demographic, and seismic factors that have helped create the Tokyo we know today, a place that builds five times more housing per capita than California, and where rents per square foot have actually fallen since the early 2000s, at least as late as 2018, which is the latest release of the government's every-five-years Housing and Land Survey. We talk about the importance of real estate depreciation in the Japanese context, and how tax policy shapes housing outcomes in subtle but important ways, from the type of homes that get built, to who owns them, whether they're rented or owned. There's a lot to learn, and I hope it'll serve as a great refresher for my solo Tokyo episode in a few weeks.

The Housing Voice Podcast is a production of the UCLA Lewis Center for Regional Policy Studies, with production support from Claudia Bustamante, Jason Sutedja, and Gavin Carlson. If you have a question or show idea, send it to me at shanephillips@ucla.edu. With that, let's get to our conversation with Jiro Yoshida.

Joining us this time is Jiro Yoshida Associate Professor of Business at Pennsylvania State University and Guest Associate Professor of economics at the University of Tokyo. We're actually discussing two publications that Professor Yoshida has worked on. One is a short case study for the Brookings Institution on the Japanese mousing market and policy context. And the other is an article in the Pacific Basin Finance Journal titled, The Economic Depreciation of Real Estate: Cross sectional variations and the return implications, which estimates and compares depreciation of real estate in Japan and the US. We know many of our listeners have an interest in how the Japanese housing market differs from ours here in North America, and what we can learn from their successes and challenges in Japan and other places overseas. So we're very excited to have you on the Housing Voice podcast, Professor Yoshida, welcome to the show.

Jiro Yoshida 3:35
Thank you for having me. I really enjoyed this podcast and I actually added this podcast to my Spotify favorite. I sent some of the episodes to my colleagues, so I'm really happy to talk to you.

Shane Phillips 3:48
This is how we're growing our audience, literally one Professor in housing...

Paavo Monkkonen 3:52
One researcher at a time,

Shane Phillips 3:53
Every week, our audience grows by one person. And you can hear Paavo here with us today. Welcome, Paavo.

Paavo Monkkonen 4:02
Yeah, I'm excited to be here. Jiro and I was waiting to spring this on you as a surprise. You were my TA for Tom Davidoff's class at Berkeley in 2006 or something.

Jiro Yoshida 4:14
Right?

Paavo Monkkonen 4:15
It's good to see you again. After all these years.

Jiro Yoshida 4:16
Oh, wow. Excellent.

Paavo Monkkonen 4:18
You were a good TA

Jiro Yoshida 4:21
Coincidence.

Shane Phillips 4:22
Our first question. As always, if you were giving us a tour of your city, what would you want to show us? So this can be a tour of Central Pennsylvania, State College or somewhere else in the US, but I will admit that I think Paavo and I are both hoping maybe more so for a tour of Tokyo if you know it well enough.

Jiro Yoshida 4:42
Right? Yeah, so I live in State College, Pennsylvania. And there are several interesting stuff in State College. For example, it has the world's fourth largest stadium in a small town with only 42,000 population.

Shane Phillips 4:59
That's interesting.

Jiro Yoshida 5:00
But I agree that Tokyo and Japan has a little bit more interesting stuff. So I would guide you to Tokyo in Japan, especially what I'm interested in, and what I like about Tokyo and Japan is that it is an architecture Wonderland, right? So first off, Japan has a 1300 year old wooden structure, which is the world's oldest wooden structure. It's called the Holy Temple, and that structure was built by a 1400 year-old company, which is the world's oldest company. And we have a lot of older stuff. But also, Japan has Le Corbusier modernism architecture used as Museum, and Frank Lloyd Wright's Imperial Hotel preserved in historic theme park. And there are eight Pritzker Architecture award winners in Japan. So their work is everywhere. So we have a lot of good architecture stuff. But at the same time, people continue to build a tiny, three-storey detached houses on a tiny lot like a 250 square foot lot. That's really amazing to see. So I would like to show you around a lot of different kinds of architecture in Tokyo and Japan.

Shane Phillips 6:21
Yeah, more diversity in terms of the building typologies and everything, than I think we have here in most parts of the US. So I think the idea that we're going to be talking about real estate depreciation may be a little bit intimidating to some, and I would actually count myself among them. But to our audience, rest assured, we're going to start as simple as we can and go from there. But even before we get to talking about depreciation, and why it matters for housing, let's first just talk about the Japanese housing market generally, I know that Tokyo has a special place in the hearts of many pro-housing and yimby and other housing advocates, certainly on housing production, and especially compared to California, and other coastal cities in the US. Tokyo has a population and this you know, there's like the city, the metro area, there's different things, but Tokyo, by one definition has a population of about 13 million, but it builds about 150,000 homes per year, on average, while California has three times that population, but has averaged around 80 to 90,000 new homes per year for the past five years. So overall, that means Tokyo is building about five times more housing per capita than California, and almost certainly more per capita than any other large city in the US. So we'll actually link to a blog post by James Gleason, which includes a lot of other interesting facts about Tokyo housing, including how the average floorspace per resident has more than doubled since the 1960s, which is a stat I think, is really interesting, just because it sort of illustrates how production growth can be associated with improving quality of life. But in your case study, you summarize Japan's high production and other aspects of its housing market in the first sentence of your case study. You say, the Japanese housing market is characterized by large construction volume, rapid technological progress, fast depreciation of housing value, the thin secondary market, and low maintenance of existing properties. And I already mentioned the housing production numbers for Tokyo. But could you expand on that introduction a little bit, it strikes me as almost the exact opposite on every point pretty much as the characteristics of the US housing market, so I think it's worth dwelling on for a bit.

Jiro Yoshida 8:47
Sure. So you're right. Japan has been very aggressive in producing housing, especially after World War Two. Another interesting fact suggesting a large volume of construction in Japan is that Japan has the largest number of architects per capita in the world. Well, so Japan has one architect for 400 people, whereas the US has one architect for 3000 people

Shane Phillips 9:13
Wow,

Jiro Yoshida 9:14
But that shows that the need for architects are abundant in Japan. And for the past 70 years after World War Two, a total of 77 million new housing units were constructed, although there are only 54 million households in Japan. So that's another fact that shows very active construction activities in Japan. So as you said, in Japan, total number of housing stock exceeded the number of households in the late 1960s. Still, people are making new houses here or in Japan. So that's pretty interesting. And new housing construction is also associated with a concertration of people into Tokyo metropolitan area. So you talked about statistics about the Tokyo government or jurisdictions number, but including commuting zones, Tokyo metropolitan area is much bigger, with 38 million population, right? That's the world's largest city. And so...

Shane Phillips 10:21
Almost the same as California too, the whole State, right?

Jiro Yoshida 10:24
Yes, so the construction activity in the Tokyo metropolitan area is even greater. And still, also Tokyo is still growing every year. So net migration has been mostly positive throughout the history. But even today, even recent years, the net migration is over 100,000 every year.

Shane Phillips 10:48
Wow.

Jiro Yoshida 10:49
That means Tokyo is adding two or three state colleges every year right now. So that's how new construction is needed in Japan, and that's what's going on. And, yeah, that's our construction situation.

Paavo Monkkonen 11:07
I guess, just to add on, I mean, the difference in production statistics is really impressive, and more impressive when you think about the demographic profiles of California compared to Japan, because Japan has, as I understand it, a much larger elderly population compared to California. So if we think about, you know, potential new households, and how much housing is being built, you know, California is doing even worse in comparison right?

Shane Phillips 11:34
Can you talk a little bit more about, maybe two parts of this, I think we'll get into the rapid technological process in a later question. But the thin secondary market, what do you mean by that, and what that represents, and also the low maintenance of existing properties?

Jiro Yoshida 11:51
Sure, so the number of transactions of old or existing houses in Japan, relative to the number of completion of new houses, is pretty low. So people don't really trade old houses. And the reasons, there are several reasons for that, but people cannot really expect high prices for old houses, and that is related to depreciation I'm going to talk about later. But also, when people do not expect a lot of high price in the secondary market, they don't have incentives to maintain their homes for resale purpose. So maintenance is very low in Japan. And then what's going to happen is because maintenance level is very low, the actual physical quality of the housing stock is deteriorating. And indeed, the quality of old houses are not really good, or they are under-maintained. So knowing that buyers also discount the price of those old houses, especially people are not sure about the quality, true quality, of housing.

Shane Phillips 13:07
right

Jiro Yoshida 13:08
That's a classical lemons problem, or adverse moral hazard/ adverse selection problem. But that's what's going on, and as a result, the size of the secondary market for housing in Japan is relatively small.

Shane Phillips 13:24
It's almost hard to like wrap my head around the idea of like, used housing, like it's so commonplace, it's what our housing stock is here. And so to hear it described as like secondary or used is just like, that's what housing is here. So it's just such a different mindset, and approach to housing.

Jiro Yoshida 13:46
That's right.

Paavo Monkkonen 13:47
Yeah. I wonder if that's as true for the small detached houses that you mentioned, as well as condos and multifamily buildings? And is it the case in Japan, like many countries, that the majority of multifamily properties are multi-owner as well? Or are there also a lot of like in the US, where the majority of multifamily properties are one owner that rents out the units separately?

Jiro Yoshida 14:11
Right. So in Tokyo and large cities, there are multifamily apartments and multifamily condominium structures, and they were built more recently. So when we look at the statistics, the demolition and sales statistics are sort of combined, so we have to be careful. But in Japan, the ownership structure is a little bit mixed. What I can say is that there are few professional or business owners of apartments in Japan, because those professional investors are sort of staying away from apartment investment until recently, and the majority of owners of rental apartments and the multifamily structures were individuals. Now, some wealthy individuals own entire structure, but the entire structure cannot be too large because the owner is the individual, so we have many small-scale rental residential structures in Tokyo. Then another type is a larger-scale multifamily structure that was sold to many individual owners. And then those individual owners just own each condominium and rent each unit to other tenants. That's also common.

Shane Phillips 15:40
And I think, in your maybe the Brookings article, you mentioned that's sort of a tax-advantaged ownership structure, which is why it's so common.

Jiro Yoshida 15:49
That's right. So that's a really interesting part of the Japanese housing market. So Japanese tax policy encourages individuals to own residential apartments or rental apartments. So a big motivation is tax advantage. When you talk about property taxes, you start without tax assessment of property, right? And for residential rental properties, tax assessment is significantly reduced from the market price.

Shane Phillips 16:25
Okay

Jiro Yoshida 16:25
So the assessed value is really small for residential rental apartments. So that is a good incentive for individuals to own rental units. And on top of that, there's (an) additional benefit of inheritance tax in Japan. So for wealthy individuals, when they have bequest motives, they have choices of having financial assets or real estate, and when they own real estate, then there's a huge tax advantage to that. That's another motivation for wealthy individuals to invest in residential, then they provide rental apartments, especially in Tokyo.

Shane Phillips 17:06
Yeah, I mean, it's interesting just in that, in the US, we're having lots of, you know, conversations and debates around corporate ownership, and the growth of these large owners. And so it's interesting to hear that in Japan, it's almost the opposite is, is encouraged. So, you know, zooming out again a little bit here, in addition to just building a lot of housing, I think maybe the most important characteristic of Japan's housing market is that it's quite affordable compared to other places. And Tokyo is, I think, especially impressive, in that it's managed to keep its prices relatively stable for the past two decades, even as rents and home prices have, you know, exploded in many other major cities around the world. And as you said, Tokyo even as Japan's population has stagnated, or I think, even fallen a little bit over the past few years, Tokyo continues to grow at a pretty rapid pace. And so because it's facing similar growth pressure to places like Los Angeles and New York and Seattle, we're going to focus I think, a lot of this conversation on Tokyo. So I'm curious, does it success on affordability come down to housing abundance mainly or are there other factors that you want us to know about that help keep housing affordable there?

Jiro Yoshida 18:25
Yes, I would agree with you that affordability come from a lot of the supply of housing. But also Japan is a unique place where housing prices continually decreased for two decades in the past. And that is also related to general deflation in Japan is economy. And also, you know, income growth in Japan for the past 20 years, was very slow. So those general macro economic factors also contributed to the low price of housing in Japan. But also, as you pointed out, probably what's more important is abundant supply of housing in Japan. Again, as I said, Tokyo is having a demand pressure or in migration from rural area of Tokyo still. So there's a demand growth in Tokyo, then, the reason why we can still have sort of reasonable price for housing is that new housing units are continuously added to the market. Then when you think about the supply elasticity or the new addition of housing units in this market, probably one interesting feature is the zoning regulation for Japan. Zoning regulation in Japan is governed by the national government. Although each designation is determined by local government, then the system of zoning in Japan is determined by central government.

Shane Phillips 20:04
So it's like the central government says these are the zones that you can pick from, and then level local governments get to decide where to put those different zones, but they don't get to create their own zones.

Jiro Yoshida 20:16
That's exactly right.

Shane Phillips 20:17
Okay, got it. Yes. Sounds nice.

Jiro Yoshida 20:21
So that reduces a lot of, you know, negotiations and uncertainty in zoning regulations in Japan, because developers can go to other cities and look at the same zoning regulation. So they don't have to learn new things in every city. So that's one thing but also what's interesting about Japanese zoning is that Japanese zoning system allows more flexible land use. For example, if you look at the the, say residential zones, right, so in residential zones, then only residential uses are permitted. But if you go to commercial zones, then both commercial uses and residential uses are automated. And in the industrial zones, industrial, commercial and residential are admitted. So you get the idea, right? So if you create a matrix of zoning and land use, you have a triangular matrix of unlimited land use, and that creates more flexibility, especially in terms of the supply of residential units, right? So residential units can be provided in residential zones, as well as in commercial zones. That's one thing. By contrast, when I took Community Planning and Development class at MIT, I learned that the basic zoning land use matrix in the United States is pretty different. So mainl, as a basic kind of concept, each zone is designated to a particular land using data states. So if you create a matrix of zoning and land use, you have a diagonal matrix instead of a triangular matrix. Although I'm simplifying a lot, because you know, I'm ignoring PUDs and other special zones. But as a basic philosophy of zoning, there's a big difference between Japanese zoning system and the US zoning system. And I think that helps the supply of housing in Japan.

Paavo Monkkonen 22:28
Yeah, I wouldn't characterize our zoning system as simple...

Shane Phillips 22:33
No, I think that's fair!

Paavo Monkkonen 22:35
...or standardized. And because you know, some cities do have that pyramid structure to zoning in the US. But you know, every city gets to make its own zones, and yeah, way to do it. Yeah, I wanted to ask about what you think about how the transportation network in Tokyo affects the affordability. I was wondering whether compared to US metros like LA or New York, do you think that neighborhoods are less differentiated to some extent, because of the transportation network in Tokyo?

Jiro Yoshida 23:06
Yeah, that's a good point. As an aggregate, because of a great transportation network, and the speed and efficiency of the transportation network, if you think about the urban rent gradient in the standard urban economics model, so the rent premium at the central location comes from the benefit of saving in time and commuting, right? But because Tokyo has a really good transportation system, the city can sprawl and a city can easily expand. So the entire Tokyo Metro area is really large. Still, people can commute without a problem from a distant place to the center of Tokyo every day, go back and forth, back and forth. Right. So that creates a lot of abundant land around Tokyo. And especially in the past, those surrounding locations were agricultural field. But those were gradually converted into residential land and create a new supply to housing. And that will reduce the rent premium in the central location as well. So you're right. Better transportation system helps a lot in affordability of Tokyo housing.

Shane Phillips 24:23
And you were talking about the role of the central government in planning. It's my understanding that that was not always the case. And that a lot of this came about, I think it was in the 90s following a real estate bubble, you know, not so different from what we experienced in the 2000s here in the US, but a lot of actions were actually taken to prevent something similar from happening in the future. Is that correct? And if so, can you tell us a little bit about that history and how these changes came about?

Jiro Yoshida 24:54
Right, so what's interesting about the so called "bubble burst" in Japanese real estate economy or real estate market was that the burst was triggered by the government indeed. So there was an asset price bubble or really sharp appreciation real estate prices in the late 1980s and early 1990s, then government imposed a special restriction on transactions and taxes to real estate holding and real estate investment. So that triggered the declining real estate prices. So that is sort of a trigger so...

Shane Phillips 25:39
When you say investment, it sounds like you're not just talking about building housing, but just buying housing, buying property, with the, you know, expectation that it will appreciate in value, is that part of what they were targeting?

Jiro Yoshida 25:54
That is also true, that is true

Shane Phillips 25:56
It sounds like there's still a lot of investment happening in new production?

Jiro Yoshida 26:00
That's true, that's true. So I guess in the run up of real estate prices, people started to speculate on housing prices and real estate prices. So they started to trade very frequently, like flippers. So the Government's intention was to stop those flipping investment behavior. But that affected the entire real estate market, and who suffered most was really the normal, you know, everyone suffered, or everyone got hit by the decline in the property market. But that was the trigger of the stagnant period of Japanese karate,

Shane Phillips 26:47
and was what what did production housing production look like prior to that? Was it also very high and just continued to be high? Or did it actually increase since that time,

Jiro Yoshida 26:58
um, I have to check the statistic. I don't have specific numbers in mind. But a construction activities has been always high before and after the financial crisis. And what we see these days in the current market is the a lot of convergence of industrial sites into high rise apartments and high rise condominiums. So in different time period, different kinds of development activities occurred. For example, in the past 1970s and 1980s. Japan had a lot of new towns, New Town developments around Tokyo, and huge amount of housing was provided in new towns because a lot of people came into Tokyo metro area in order to accommodate people's demand for housing, those new towns were created. And then in 1990s, 2000, more inland renovation and inland redevelopment occurred. And then, in the current market, more of redevelopment of former industrial sites so, you know, different phases have a different focus of housing development.

Shane Phillips 28:17
In the Brookings article, you say that there are three distinct things about Japan that help explain its housing market, scarce land, the prevalence of earthquakes and economic trends following World War Two, I think we've touched on that a little bit. But, you know, if you could explain maybe the first two, in particular, the scarce land and the prevalence of earthquakes and kind of tie this to building codes and the role that has played in the rapid turnover of housing in Japan.

Jiro Yoshida 28:48
Right, right. Sure. So scarce land is definitely the defining factor of Japanese market. Japan is a small country, but livable place, or habitable place is only 30% of the national land because of inland water, forests and mountains. So the habitable areas already small, so it's natural to have very tiny housing units in Japan. So the average size of housing is pretty small. In like, around 1980, European Commission reported that Japanese people live in rabbit cages. And so that's sort of natural because Japan has only small land, so that each each unit is very small. Then, over time, the size of housing units has grown rapidly after World War Two because of the changing lifestyle. So the lifestyle has changed significantly in Japan right after World War Two to 1970s and 1980s. So through that process, the desirable type of housing changes rapidly. And so in accordance to that, developers responded to the new demand for housing. And so that contributed to the obsolescence of old structures, and all these structures become obsolete very quickly. And those obsolete structures are unpopular...

Shane Phillips 30:31
Are they unpopular, just because people feel like they're not safe or is there more to it?

Jiro Yoshida 30:36
Good point, right, there are two points, both are safety and taste. So in terms of taste, the different kinds of sash or different kinds of wall, different kinds of, you know, floor to floor height, and so on, those are the factors defining the taste. But also regarding the safety, earthquake is another important factor defining Japanese market, especially right after a big earthquake, architects, and engineers came up with new earthquake resistance technology for buildings, and quickly implemented those new technologies into the national building code. So national building code has been revised right after the major earthquake in the past, and Japan had big earthquake every 10 years, basically. So building code has been revised every 10 years significantly, in terms of the safety and earthquake resistance, because you know 20% of the major earthquakes on earth occur in Japan. So that's a major risk factor for Japanese housing. And then what's going to happen is after the building code is revised, all the structures are non-compliant with the new code, so there should be a lot of restrictions on the old structures, and that diminishes the price of the old structures further, that contributed to the faster depreciation of old structure. So overall, two factors, as you mentioned, changing the lifestyle, as well as changing the building technology contributed to the large and fast depreciation of housing stock - so those are pretty important factors for the market

Paavo Monkkonen 32:35
Do I understand correctly that it's almost impossible to get a loan to buy a structure that's not compliant with the latest building code, right?

Jiro Yoshida 32:45
I wouldn't say impossible, but it's significantly more difficult. So, for the non-compliance building, still, the owner can make some modification or some, you know, a fix to the existing structure then the loan institutions and banks may admit, or may originate mortgages to these old buildings. But anyway, it is significantly difficult to obtain.

Paavo Monkkonen 33:15
Do people demolish old structures before selling or what do people do if they have an old house?

Jiro Yoshida 33:21
Right, so they demolish or they keep all the structures as is, that's another problem for Japanese housing market right now. So the average building age at demolition for Japanese housing is 32 years. So after 32 years, on average, houses were demolished.

Paavo Monkkonen 33:42
Right, that may be too fast

Jiro Yoshida 33:45
Too fast, in the US, it's about 62 years, and then in the UK, it's about 82 years and so on so it's significantly short. Then also, tax code favors properties with residential structure on it. So from an owner's perspective, if I demolish the structure and create a roll land or flat land, then the property tax is going to increase significantly, so people just keep all structures unmaintained atleast on the lot, keeping it vacant. So, that is a current problem in many cities in Japan. And obviously, those vacant houses create negative external effects in the neighborhood. And some, you know, vacant houses are used by some strangers or, you know, deteriorating and those old structure can be very dangerous in structure. So that's a new problem for Japan right now.

Shane Phillips 34:54
Is there much reflection, like politically, in policy circles on the sustainability impact of that rapid reconstruction of housing? You know, there's the balance of high-density housing is more efficient, the carbon emissions involved in the operation are lower. But there's a lot of embodied energy in the construction materials itself. And so how, how do Tokyo, (and) Japanese policymakers think about that?

Jiro Yoshida 35:23
Right, so actually, the environmental concern was the reason why I was interested in this housing depreciation problem. When I studied the green buildings in Japan, especially green condominiums in Japan, Tokyo's green building code, or green building label includes an item called "long life design". So the Sustainability Building Standards take into account longevity of building life. And as Shane said, long life building is good for environment, and carbon emission and so on. Then, when I look up the price of green condominiums and non-green condominiums, I find that the green condominiums can maintain its value over time, aging effect is pretty minimal for green buildings. But non-green buildings depreciate, depreciation is very large. So over five years, the value depreciates by 25%, for normal condominiums. So that was when...

Shane Phillips 36:32
Like buying a car.

Jiro Yoshida 36:33
That's right, that's right. That's when I became interested in the appreciation problem of housing. And so, the government is aware of that so in Green Building Research Council at the Ministry of Land and Infrastructure, we discussed how you know, long life and the green buildings can contribute to the environmental sustainability issues. So, government is concerned about that, but the change is very difficult, because large construction, fast depreciation, low maintenance, small, secondary market, they are all consistent with each other, and they form a particular equilibrium. So, it is really difficult to deviate from the current equilibrium to something better. And just one change in the system cannot do that. So, even though government is aware, and some businesses are aware, still with the system is going on, and, you know, short life of Japanese housing is still continuing.

Shane Phillips 37:49
Yeah, before we get into depreciation a little more, I just want to kind of close our Japanese housing market section of this conversation, and just ask kind of more generally, are there policies or approaches to this that you would want to see exported from Japan to the US? And also, you know, on the flip side, are there any things you think that here in the US we do pretty well that you'd like to see more of in Japan?

Jiro Yoshida 38:18
That's a challenging question. But if the objective is to increase the housing supply, then there will be several things you can learn from Japanese market. One is, as I talked, more flexible zoning regulation, right? So if you really only think about the supply of housing, then more flexible zoning regulation would help as Tokyo experienced. But you know, the resulting environment and the neighborhood characteristics and so on, that's a different thing. We don't really think about only housing supply in quantity, so it's a more difficult problem.

Paavo Monkkonen 39:02
I'm sorry, can I just ask about that because I remember an article about a hillside that had a great view of Mount Fuji in Tokyo. And they were going to build some new buildings that would block the view, and it was like a very famous view that scholars had pondered on the mountain from for centuries. And so that was something I wondered about kind of opposition to redevelopment, kind of at the neighborhood level in Tokyo, and whether that's something that you can see... I mean, did Japan go too far?

Jiro Yoshida 39:32
I see I see, that's an interesting point. So the case you mentioned was in Kunitachi city. And so what happened was a new large tall building was designed and constructed, then residents opposed to the development and eventually, the developer had to cut the top part of the building to lower the height of the building so that people can see Mount Fuji. So, that was a very famous case. But now, you know, there are many tall high rise residential buildings in Tokyo everywhere. So I don't think people are opposing, on the grounds of view of the Mount Fuji and something like that. So people are more now accepting (of) high rise buildings but at the same time, it takes a lot a long time for a Japanese developer to build a large-scale building. One example is a Roppongi or Roppongi Hills development, it took 20 years to complete a project from the purchase of the land to completion of the building. So usually, US developers won't be interested in that type of long term development. So that manifests some opposition and a lot of opposition and the difficulty in getting permission for large-scale development. So you know, even though the general zoning code is flexible, still, there are many other factors defining development activities and pathways, right. So it's not simple.

Shane Phillips 41:27
We can move on here just in a minute. But I did want to note, one last thing that I didn't put in my notes, but I wanted to flag here is that it sounds like Japan, maybe all of Japan, also has effectively some form of rent stabilization, and Just Cause Eviction protections. And so I just, you know, I want to flag that as like, they have those protections for tenants, and they're able to produce a lot of housing, these things are not necessarily in conflict with one another or not, you know, impossible to make work alongside one another. If you have the right policies in place. Is that like a fair characterization?

Jiro Yoshida 42:05
Right, so tenant protection is really important aspect of Japanese housing as well. And I would say that tenant protection creates a very interesting and particular consequence on the housing market. So let me elaborate on that. So as Shane said, the tenant protection in Japan's rental market is really strict, historically. And so the landlord cannot reject the lease renewal, or cannot evict tenants without filing a lawsuit and establishing just cause. On the other hand, at the same time, on the tenant side, tenant can terminate the lease anytime by one month notice. And also, tenants can stay almost indefinitely by renewing the lease. Also, the landlord cannot increase rents significantly to the market level because again, if a landlord get into a lawsuit, it's probably difficult for a landlord to win the lawsuit. So out of that strong tenant protection, what's happening is the rents for existing tenants are very stable, so sitting tenant rents are very stable over time, especially for long-term tenants. So after 10 years, 20 years, it's possible that all the sitting tenants rents are half of the market rents. So that's a particular form of rent control although it's not called rent control. So that is one consequence, direct consequence of the tenant protection. Then long term consequence of that tenant protection is the under supply of rental housing for families. Why? Bause families tend to stay in a house for longer time than young adults. So landlords try to prevent or try to avoid having family tenants in the unit. So landlords, rental housing in Ambrose, they like to provide smaller units, so called "one room mansion" in Japan by the way, one room mansion is like an oxymoron but it is a studio apartment in a high- rise or medium-rise. multi family structure.

Shane Phillips 44:47
Yeah hard to raise children with in one big room though, not very large.

Jiro Yoshida 44:52
No, but the one room mansion in Japan, it's very small. So typical size is 30 square meters or less. So it's really just a studio apartment

Shane Phillips 45:02
.. just under 300 square feet I think .

Jiro Yoshida 45:04
That's right, that's right. That's correct.

So that means for family tenants, there aren't many descent rental housing units for families. So families have to build their own houses. So that creates a lot of demand for new single-family detached housing. So the consequence of a strong tenant protection in the long run was that the supply of family residential units are really limited. And most families have to arrange mortgages and buy new houses. And that created a new demand for housing construction. And the construction industry responded to that. And again, that created the system of a large construction of single family housing, and, and so on.

Paavo Monkkonen 45:58
Got it, that's super interesting.

Shane Phillips 45:59
Yeah. Okay, so we're going to forge ahead here and talk a little bit about depreciation and depreciation rates. I'm going to start with some very, very basic questions. And the two most basic I can think of are where I will start, which is what is depreciation in the context of housing development, and housing generally, and why does it matter?

Jiro Yoshida 46:24
Sure, so depreciation I study is so called economic depreciation or real estate prices and rents, as opposed to depreciation for taxes and accounting. So first, it's important to distinguish these two

Okay.

And so, the economic depreciation is the reduction in value or rents due to physical deterioration or functional obsolescence. Whereas tax and accounting depreciation is predetermined by the tax authority or IRS. And in the United States, residential structures have 27.5 years of life and value depreciates or the value accounting value decreases by the same amount every year. So that is determined by the tax authority, regardless of the quality regardless of the economic reality.

Shane Phillips 47:20
Like you could be maintaining it really well, but are still depreciating by three and a half percent a year...

Jiro Yoshida 47:26
That's right

Shane Phillips 47:27
... each year in the US yeah,

Jiro Yoshida 47:28
That's right. So what I studied the economic depreciation, and economic depreciation is, again, driven by two factors. And it is again important for sustainability, and also it is important for consumer welfare because if the depreciation rate is really large, then people have to spend a lot of resource and income into housing every year, right? So imagine a planet where housing structure depreciates by 100%, every day, then every day people have to rebuild housing, right? Then all income has to be basically put into housing reconstruction, and all resources of capital and labor have to be put into construction industry, then no other resources left for, let's say, you know, medical research or whatever, right? So, depreciation affects people's welfare and wealth accumulation. So large depreciation means that people have to sort of spend a lot of money into rebuilding and reconstruction of structures, and that's not only for homeowners, but also renters have to bear the cost as well, because the landlord is going to charge extra rent corresponding to the fast depreciation in the form of rents so, renters also have to pay housing costs. So large depreciation means that overall housing or residential costs are high, that's a reason why I'm interested in depreciation.

Shane Phillips 49:09
And you find in in your paper, you estimate that depreciation, economic depreciation, in Japan is much faster than in the US for all the reasons we've already talked about - around six to 8% for residential properties each year, upward of 10% for commercial properties, in many cases, and in the US, we're looking at less than 2% per year in for residential properties. And so I guess, one question, I think we've answered it to some extent already but if you have any more to say about why there's such a big difference there, but since you brought up how these depreciation rates affect the amount we spend on housing, do you actually find, I know this is not the focus of your paper, but do Japanese households spend a lot more of their income on housing.

Jiro Yoshida 50:01
Uhm so I didn't really formally compare the housing expenditure share between different countries so I cannot say for sure about that point. But if you compare two cases where one with a low depreciation and one or the other with large depreciation, mechanically, large depreciation has to be associated with a large expenditure share of housing income. So affordability of Japanese housing is not coming from depreciation. Actually, depreciation is working against affordability of Japanese housing, but affordability of Japanese housing coming from greater supply of new housing in the market.

Shane Phillips 50:47
So it might be possible that if housing in Japan were still very abundant, but better maintained, and so not depreciating, as quickly, you might actually have even lower...

Jiro Yoshida 50:57
Yeah, I would think so

Shane Phillips 50:58
... in that case, okay. Yes,

Paavo Monkkonen 51:00
Yeah. I wonder how it compared with like... so, you know, when we talk about the housing crisis in California, sometimes we say that it's not, it's not that visible, new fancy apartments are very expensive, it's that old, deteriorated, apartments are very expensive. So I think it's important to note that, you know, the depreciation, economic depreciation is not reflected in the deterioration of quality of housing, necessarily. And so that made me think like, you know, as an indicator of our problem, I think, in California, for example, depreciation is very low. So there, can you think about some kind of optimal depreciation rate or, you know, because he's saying that a large depreciation rate means that people are spending more money on housing but what would be the optimal or is there a way to think about that?

Jiro Yoshida 51:48
Hmm, that's a good question. I don't have immediate thoughts about the optimal depreciation. But what what I can say about California housing, is that the proportion of land in property value is pretty high in California. So if you think about the rent, rent can be decomposed into structure land, and land rent or location rent, and California's high rent is really coming from large location rent. So in a sense, you know, deterioration in structure in California doesn't really matter, because the location is really important factor determining the rent.

Paavo Monkkonen 52:31
In reference to the land, capital, exchangeability, and different parts of the city, you also estimate depreciation rates at greater distances from the CBD. Maybe you can just say what you found, and why that's relevant, CBD being central business district, something that used to be a big deal.

Jiro Yoshida 52:52
Right, right. So yes, CBD land prices are higher than suburban land prices. So in my data, I observe higher proportion of land in CBDs and central locations, then what's going to happen is that observed depreciation is lower in central locations, because the majority of asset prices land value, then the proportion of a structure is smaller in those locations, then where structure is more important, then the depreciation rate is higher. But if you focus on the structure component itself, then structure depreciation rate is pretty constant, regardless of the location, so that's a distinction. So that's another important distinction, whether you look at the depreciation of the entire property level, or look at the rate of depreciation only for the structural component. And I would say structure depreciation rate will be pretty constant, because physical depreciation is pretty common to all properties or structures. And functional obsolescence is also pretty common to different structures. But proportion, man, it's very different by location.

Paavo Monkkonen 54:19
Yeah, and I mean, it makes me think just because I'm in California, where so much of the most valuable land is restricted to one small housing unit, or one large housing unit, I guess, I should say. So I wonder how much of, I mean, it might be interesting to estimate and whether you've thought about kind of looking at how zoning interacts with this depreciation estimate.

Jiro Yoshida 54:41
So those properties don't depreciate actually because part is financed and depreciation is tiny in value. So they don't really depreciate.

Paavo Monkkonen 54:52
And so because you could potentially estimate kind of in different zoning scenarios how that would affect the overall depreciation rate of a metro....

Jiro Yoshida 55:00
Yes, yes.

Shane Phillips 55:01
Even though your paper is more on the economic, I have a question about the tax side of things, because it's actually what I already knew a little bit about just had some context here in the US for. And so I want to just tell this quick story that I've been telling myself about depreciation and how it might be important and sort of under recognized as a factor in production and affordability, more broadly. So curious to hear your reaction to it. While I was researching my book, I learned about a series of tax changes made in the US in the 1980s that dealt with housing, the Economic Recovery Tax Act of 1981 actually cut the depreciation schedule for rental property by more than half from, it was 32 years prior to that Act. And it was cut down to 15 years, and other changes were made regarding like tax shelter provisions and capital gains taxes that were also favorable to rentals. Around that same time, multifamily construction just jumped massively from 390,000 homes per year in 1981, to 670,000 per year in it, or for that year in 1985. But then, in 1984, and 1986, many of those changes were reversed. And by the early 1990s, multifamily construction had fallen all the way down to 175,000 multifamily homes per year. And obviously, there's a lot going on during that time. It certainly can't all be attributed to depreciation rates and tax shelters. But if you know anything about this, or if, you know, you have similar examples, like just explain to us a little bit about what's going on, or why this matters, or what lessons we might draw from this.

Jiro Yoshida 56:51
Yeah, that's a fascinating example of how tax code can affect housing, investment and housing production. And so, the depreciation tax shield is part of the tax code. And as you explained, depreciation tax shield can be a very important part of tax abatement, right? So, um, that is significant. And so I have two things related to that. So the driving factor is not necessarily depreciation itself, but it's really the tax advantage, right? So any tax advantage related to housing investment can cause similar effects. So what you illustrate is how tax is important for housing investment and housing construction. Then one example I can talk about regarding Japanese housing is again, inheritance tax, and so on. So, as I mentioned before, Japanese housing properties have tax advantage in terms of property tax, and inheritance tax. And that inheritance tax advantage of housing creates a huge supply of housing construction in Japan. And that's another example of how tax code can affect people's investment in housing. And this is just what, what I talked about. And then another thing I can talk about is, in the United States, the tax treatment is different between owner-occupied units and rental units right? So what you talked about is about rental units, especially income producing rental units, right, so think about the owner-occupied housing units. You can think of owner-occupied housing unit as a one person being a landlord, and the same person being a tenant at the same time....

Paavo Monkkonen 58:59
imputed rents

Jiro Yoshida 59:00
...imputed rent but in the United States, imputed rents are not taxed, imputed rents are not considered as an income, but...

Shane Phillips 59:09
You're paying to yourself as rent basically yeah,

Jiro Yoshida 59:12
That's right, that's right. Then once the owner and the tenant are separated, suddenly the government starts to recognize the income and start to take money from that transaction. Okay, landlord, you are getting money so I'm to tax on your income, right? And then depreciation tax shield is effective in that process right so...

Shane Phillips 59:40
So the taxes on the rental income are sort of all else equal discouraging investment in rental housing, but the tax shield the depreciation is intended sort of offset that

Jiro Yoshida 59:51
That's right, so in the first place, the US government is encouraging homeownership, and owner-occupied housing and discouraging rental apartments by the tax code. And if there's a stepping back, if there is a tax system on the imputed rent in the first place, then there has to be a very different composition of home ownership and rental units. So the question is whether we like to have more rental units or owner-occupied units. And there's a lot of debate around that. Homeownership has a lot of positive externalities, as well as the negative externalities. And so the question is whether, as a society, we like to have more rental units or more housing owner-occupied housing units, and again, like...

Shane Phillips 1:00:47
Right now, we could just use more of both.

Jiro Yoshida 1:00:50
Right, again, what you illustrate is how tax code can be very powerful in determining the proportion of different kinds of housing.

Shane Phillips 1:01:03
And yeah, I think that's part of why I like to bring up that case is just we think so much about, you know, people's incomes and zoning and other aspects. And we don't think much about the taxes, but they really can have a big impact, at least, you know, in a system where we rely on private investment to build the vast majority of our housing.

Paavo Monkkonen 1:01:23
And you can also think about the tax benefits to building new multifamily and owning multifamily long term, because I think it's also the case in Germany, where there's a lot of individual, you know, like, people own one unit that they rent out, and that is a tax benefit to them in the long term. And there's so they're willing to accept kind of stabilized rents over a long period of time and provide a stable home to people in that manner because of the tax benefits. And I do think the Housing Voice podcast listeners are ready to think about homeowners as renting to themselves. Although most people don't think about it that way. I wonder because I think Switzerland does tax imputed rents for homeowners. Do you know of any other countries? Do you know if that's true? Are there any because...

Jiro Yoshida 1:02:10
No, I don't know

Paavo Monkkonen 1:02:10
... a very big conceptual leap to make in the tax code, I think.

Shane Phillips 1:02:16
Yeah, I think they do. They're like one of the very next level,

Paavo Monkkonen 1:02:20
I mean, at least make the 10 year choice tax neutral. I mean, I think, you know, most countries benefit homeowners much more than they benefit renters. But, you know, I think, you know, making it slightly on the renter side makes sense, just because there are other benefits to homeownership.

Jiro Yoshida 1:02:36
But I would expect a lot of opposition from homeowners, but yes, for 65% of the population and...

Paavo Monkkonen 1:02:45
A higher share of the voters, yeah.

Shane Phillips 1:02:48
Professor Jiro Yoshida, thank you for joining us.

Jiro Yoshida 1:02:51
Thank you very much.

Shane Phillips 1:02:56
You can read more about Professor Yoshido's research and find our show notes and a transcript of the interview at our website. lewis.ucla.edu. Housing Voice is taking a break over the holiday. So this will be our last episode of 2021. But we'll be back at the beginning of 2022 with a new interview, and we'll be talking about our podcast name inspiration, the Housing Choice Voucher Program. The UCLA Lewis Center is on Facebook and Twitter. I'm on Twitter @ShaneDPhillips, and you can find Paavo @elpavo. Thank you again for listening, and we'll see you in the new year.

Transcribed by https://otter.ai