Hideyo Totani 　　　　　　　　　　　　　　　

Executive Director

HICPM, Housing Institute of Complete Project Management

Business Opportunities

Business opportunities with local builders expanding

JAPANESE houses are the most expensive in the world even without figuring in astronomical land prices. A house built in Japan to the same designs and specifications as one in a Western country will be double or triple the price. The government runs a much-trumpeted housing finance system to enable people to be able to buy homes for about five-times their annual salary, but this is merely a ploy to stimulate the economy by encouraging housing investments. Those who take advantage of the program and sign home loans for five years worth of their salary find that in the sixth year, when the principal begins to be repaid, their payments soar to the point that they are close to insolvency. In fact, about 200,000 families have had to declare bankruptcy because of the program so far.

Compare that to Europe. North America, and Australia, where quality permanent housing is available for two or three times annual salaries. Japanese consumers naturally want the same thing. Houses necessarily require land, and the prices will vary for that but the house itself should be buildable anywhere in the World. That quickly leads to the idea of importing the entire house and setting it up here just as cheaply as it could be done in the West. In fact, the government has been encouraging house imports as a way to provide homes for prices closer to those in Europe, North America, or Australia. But fifteen years of promotion have not had much impact.

Cost analyses reveal that the total value of importable materials is only about 30% of the price of the house and that the total value of all the materials used, including those sourced in Japan, is only about 40%. Catalog prices for imported building materials are out of this world, anywhere from three to twenty times market prices in other countries depending on the quality. Even when the cost of transporting them to construction sites in Japan is factored in, materials purchased directly from overseas suppliers should only be about 1.5 times the foreign market price. Loading them on a ship and bringing them over may take time, but the freight charges are no more than domestic long-distance freight Importing, therefore, is not a major problem in materials prices. But imported housing still costs double and triple in Japan what it does in the exporting country. Many suspect that the problem lies in some sort of import restrictions. And they are wrong.

GROUNDLESS PRICES

Japanese house builders and construction companies do not accurately explain the quantities and unit prices that appear in their estimates. The buyer is told that the estimate is made on a "cost plus" basis-that is, the builder figures out what materials are needed and adds everything up. The truth is that the real costs are never revealed. In fact, the sales people at house builders cannot tell you from the estimate what the actual cost to the builder is not from their competitors' estimates and not even from their own. The estimate is in reality just a plausible breakdown of the price (or construction costs) charged the customer. It has nothing to do with real costs. If the buyer complains that the estimate is too high, the sales person is only too happy to discount "as much as I can." However, the estimate says nothing about the subcontractors' profits, so one would think that discounts would mean losses for the main contractor. But the fact is estimates in Japan are a sham that stand up neither to analysis nor even close inspection. Comparisons of Japanese estimates with those from other countries are not very revealing either.

The base cost of a house is the price that is actually paid to have the construction take place. Comparisons on an expenditures basis between houses in Europe, North America, and Australia and houses of the same design and specifications in Japan reveal that Japanese materials costs are about 30% more, but the total for other costs-labor, and administrative expenses and profits-is about triple. These costs make up about 40% of the price of a home in Japan. This has nothing to do with direct importing itself; it is purely an issue of the domestic housing industry, a question of productivity and economy.

What prevents it from improving are the Japanese construction laws and related administrative ordinances, and the checking methods employed by the government housing finance system. In Japan we use "wood platform-method frame construction" ("2X4 construction"), which we imported from the United States and Canada. But our production is irrational, partly because Japanese technology levels are low and partly because we failed to learn with sufficient humility from more advanced countries. Were that our only irrationality! The fact is the government has abused subsidized housing loans to foist on the public specifications that are far more irrational than even our lack of technology produces. The main perpetrators are the Building Standards Law and the Housing Loan Corporation's "Common Specifications." But the Ministry of Construction, Housing Loan Corporation, affiliated organizations, and the sycophantic "scholars" who are only too happy to serve their interests, marshal specious arguments about Japan being "different from everywhere else" to prop up existing standards and prevent housing production from rationalizing.

And while they claim that existing standards are an impediment, the fact is that house designers are jumping on the bandwagon of imported housing because they can charge ridiculous "designfees"-higher than anywhere in the world-for adapting imports to Japanese rules. Though they prattle on about safety and quality, the fact is that entrenched interests are gorging themselves at the expense of consumers.

BEING A COUNTRY WITH UNDEVELOPED HOUSING AND WHAT TO DO ABOUT IT

Beginning in the 1960s, Japan's leading export industries learned from the experiences of more advanced countries, imitated them and adapted them to Japanese conditions. Having done that, they went on to pioneer their own new and creative fields. By contrast, the domestic construction industry, the housing industry included, has used the rising tide of urbanization to profit at the expense of other people's dreams. With no international competition, a steady supply of public-sector demand, and a hierarchical subcontracting structure, the system has become flabby and corrupt, to the point that enormous wealth can be had merely for assigning people jobs without ever lifting a finger oneself. Indeed, a certain corrupt synergy has developed between the irrationalities of the building regulations and financing conditions on the one hand and the those of the construction industry on the other. The discrepancies have been "solved" by allowing housing prices to skyrocket.

Which brings us to where we are today. The housing industry is itself in an awful state, but house builders continue to put up gorgeous model homes and mistake the opulence of their facades for real skill and technology. The fact is, you could take the same model home any place else in the world, even to the most backward of developing countries, and still put it up for less than it would cost in Japan. Our housing industry has the dubious distinction of being the "worst in the world."

More advanced countries are exporting their materials, systems, and technologies to Japan. The reason why the Japanese housing industry is unable to export is precisely because it lacks skill and ability. Both the industry and the general public need to be aware of this fact and what it means. We need to be humble enough to start learning from and imitating countries that are more advanced than we are.

What deregulation of the housing industry must do is create an environment in which the kind of housing being built in more advanced countries can be built in Japan as well. Anyone can build gorgeous houses. All that requires is lots of money. Builders may think they are showing their best when they put up million-dollar model homes, but they are really just airing their dirty laundry in public. You mean that's all you can do for that kind of money？

As an example of how valueless Japanese housing is, when houses are put up for auction (probably because the buyer was lured into one of the government loan schemes and cannot repay the principal when the time comes), they only fetch about a third of the price they were purchased for. Unless we face up to this dismal reality, there is little chance of deregulation moving in the right direction. Housing markets in Europe, North America, and Australia supply homes that are eligible for mortgage finance. Japanese housing loans do not mortgage the house, they only lend against the borrower's ability to repay, an indication of how little faith the banks put in the value of houses. In fact, housing loans come with a mandatory life insurance policy, as if to tell the borrower, "You better pay it back, even if you have to die doing so." In the unusual event of a house being taken as collateral, banks do not try to foreclose when the loan is defaulted. Instead, they push the borrower into a quick auction and pocket whatever money comes out of the sale. But that is only about a third of what was paid for the house, so the borrower ends up having to declare bankruptcy as well.

Deregulation needs to make it possible to build in Japan housing that does not lose its asset value over time and that means creating an environment in which the same kind of housing can be put up as in more advanced countries. In other words, the laws, institutions, and systems must be changed so that the same materials and techniques can be used here. Or to put it another way, we need to rid ourselves of the laws, systems, institutions, and organizations that are standing in the way of providing quality housing at a reasonable price. The time is now to dismantle the Housing Loan Corporation, Housing and Urban Development Corporation, and the Pension Welfare Service Public Corporation.