What America Can Learn From Japanese Housing
On housing policy, America needs to be less fascist King Kong and more free-market Godzilla.
I don't own a home. In fact, I don't even sleep in one. Houses are so expensive that, to save for a future down payment, I cut costs by living in the air vents here at the Reason offices.
Which raises the question: Why are houses so expensive?
In America, housing policy rests on two mutually exclusive goals: we want our principal investment vehicle to be home equity, and for the value of our homes to rise indefinitely and astronomically. But then, we also want the cost of houses to be more affordable. For some reason, nobody seems to consider that we can't have houses worth more and also cost less. We don't have a quantum housing market. What we have is supply and demand, and it applies to housing whether we like it or not.
America doesn't actually have a housing policy. We have an investment policy.
Let me show you how we got here.
Starting in the 20th century, politicians decided everyone ought to own a house. A man who owns a house has a stake in his community and is less likely to flush alligators down the toilet or contract communism. That idea kicked into high gear during the Great Depression, when the New Deal created federal subsidies, loans, and tax incentives to help people buy homes.
Today, our tax structure continues to encourage homeownership as a national investment strategy. You can deduct the interest on up to $750,000 of mortgage debt from your federal taxes. And you can deduct much of your local and state property taxes from your federal income taxes. First-time homebuyer credits exist. And because the federal government backs 30-year mortgages as a guarantor, banks are less concerned about risk and charge lower interest.
Add it all up, and Washington subsidizes homeownership to the tune of around $150 billion per year.
On top of all that, when you sell your subsidized home, the first $250,000 of profit—or $500,000 if you're married—is exempt from capital gains taxes. I can't get that kind of exemption when I chip in on my strategic Beanie Baby reserve.
Renters get none of these benefits. No subsidies on the way in, no exemptions on the way out.
So it makes perfect sense to get a mortgage and build equity. But once you have that equity, you will want to protect it. If someone builds an apartment complex across the street, your property value may go down. Cheaper housing near your house means your house is worth less.
That's why America's 90,000 local jurisdictions fight to ensure cheap housing never threatens existing home values. "Not in my backyard" (NYMBY) advocates make it illegal to create inexpensive housing through minimum lot sizes, single-family zoning, height restrictions, historic preservation rules, outright bans on apartments, and density limits.
And because of supply and demand, restricting new housing keeps prices high. Build more homes in a city, and prices fall. Even when zoning boards aren't deliberately conspiring to restrict supply, that is exactly the effect.
So American housing policy literally cannot achieve its stated goals. You cannot have housing serve as the nation's primary wealth-building tool and also expect affordable housing for everyone.
Which is why I think we should all become a little more Japanese—not in a Mickey Rooney in Breakfast at Tiffany's way, but in a wonky policy way.
Japan treats housing as a commodity, not an investment. Houses physically get worse over time—pipes clog, roofs leak, ghosts accumulate in the attic—and Japan's tax system recognizes that. Homeowners can depreciate the value of their houses on their taxes like a business asset, and that depreciation decreases as the home gets older. If you want to keep living there, great, you just can't act like a 50-year-old house is a mint-condition treasure forever.
Japan's zoning system is also far simpler. The entire country only uses 12 zoning categories. To put that into perspective, American cities can have four times that many categories within a single municipality. New York City alone has more than 150, layered with special districts and exceptions. In fact, roughly 40 percent of the buildings in New York could not be legally built under today's rules.
Japan doesn't have 90,000 different zoning czars inventing local obstacles. Zoning is set nationally by the Ministry of Land, Infrastructure, Transport and Tourism. There's no meaningful regulatory difference between Godzillaberg and Mothra City. A construction company can operate anywhere without relearning the rulebook every time it crosses a county line.
Meanwhile, America loves minimum lot sizes and minimum square footage requirements. If I want to subdivide an acre into 10 smaller lots to create a tiny-house community so I can finally have enough friends for game night, a zoning board will shut it down.
In New York City, a studio apartment can't be smaller than 400 square feet. In Tokyo, "microapartments" can be as small as 50 square feet—essentially a walk-in closet with a mattress—and rent for about $500 a month. Try finding anything close to that in New York.
Critics argue that microapartments are unfair to those who have no other choice. But the alternative to a small affordable unit is not a large affordable unit—it's homelessness. Better a tiny apartment than a park bench.
Construction in Japan is also far less bureaucratic. If you meet the building code, your project is approved. There is no yearslong public comment process, fewer environmental reviews, no endless legal jujitsu, and no newly invented historic district just to stop housing.
In cities like Los Angeles, by contrast, historic preservation zones multiply faster than Fast and Furious sequels. Whenever anyone threatens to build an apartment complex, zoning fascists suddenly discover that their ugly adobe monstrosities are historically significant and therefore it's illegal to build a larger, multi-family adobe monstrosity. Some neighborhoods have even declared vacant lots "historic" purely to block new housing.
The outcome speaks for itself: Japan builds far more housing than we do. Japan produces about five times as many homes per capita as California. And because housing supply actually exists, prices are lower. The average one-bedroom apartment rents for around $4,000 in New York, $3,000 in San Francisco, and $2,000 in Chicago. In Tokyo? About $1,100—half the cost of Chicago, and with significantly better kaiju.
Supply and demand are not optional. It governs both human and giant-monster economies. We can't have cheap, abundant housing and also rely on home equity as the main driver of middle-class wealth. On housing policy, America needs to be less fascist King Kong and more free-market Godzilla.
