An Insight a Day

Why Do Houses Go up in Value?

I've recently stumbled upon this video on Why Japan is Giving Away 8 Million Free Houses and it was pretty interesting.

That’s right, in just ten years’ time, nearly every third Japanese home will be vacant, according to the country’s largest economic research institute. And while its population is among the fastest shrinking in the world, demography alone cannot explain these strange real estate dynamics.


Broadly speaking, there are two ways to make housing more affordable: increase supply or decrease demand. Japan, uniquely, does both. For one, demography certainly doesn’t hurt. Its population has been declining since 2010 and is expected to return to 1970 levels within the next twenty-five years. Fewer people means fewer households means fewer homes. That’s on the demand side. But supply is no less important. To put it simply: Japan builds. like. crazy.


How can it be that Japan, with only 40% as many people,
builds almost as many new homes each year as the United States?
We all know California is starved for housing, but this is just crazy. The math doesn’t add up. The solution to this puzzle, it turns out, lies in the number of existing homes sold. Now we can see that although the total number of homes sold in each country — both new and used — is roughly proportional to its population, there’s a huge difference in composition.

The vast majority of American home sales are second-hand, whereas the vast majority of Japanese home sales are brand new. In fact, if we stretch the data out, we can see that it’s almost the inverse of America. And that’s Japan’s secret. The reason its housing market is so fundamentally different. It’s not just about national control of zoning, it’s also an entirely different perspective on what housing is.

In most advanced economies, a house is an investment that doubles as a place to live — a 401k you can sleep in. In Japan, a house is a consumer good — not unlike a car or a refrigerator — that rapidly depreciates in value. In a mere thirty years, the typical Japanese home goes from brand-new to about valuable as a CD player in 2023. That’s no exaggeration. According to the Ministry of Land, even a reinforced-concrete apartment has a lifespan of just 37 years. Try to sell your house on the 38th year and banks will tell you it’s worth zero dollars, or less since the building has to be demolished before a new one can be built.

Housing as an investment is something that I've never fully understood. To me, houses should go down in value because their physical structures tend to degrade over time. But most people believe that they will go up in value, likely due to the economics of supply and demand. After all, shelter is a basic human need, and land is scarce.

Turns out, I'm not alone in thinking that housing is more like a consumer good than an investment. In fact, I think it would be better if we stop treating housing as an investment. Then again, I really don't know much about the dynamics in the housing economy so take that with a bucket of salt.