Title: Real Estate Policy Issues in the United States and Japan
1Real Estate Policy Issues in the United States
and Japan
- David Lereah, Ph.D., Chief Economist
- NATIONAL ASSOCIATION OF REALTORS
Tokyo, Japan October 21, 2003
2U.S. Japan Comparisons
3Government Tax Policy
4Government Tax Policy (continued)
5Real Estate Market Players
6Vibrancy Comparison
7Tax-cut Assistance in U.S.
- Mortgage interest deduction - permanent
- Local property tax deduction
- Local governments main source of revenue via
property tax - Variations in tax rates among localities
- Home equity loan interest deduction
- Homeowners can borrow money off home equity
- Many use to pay for college tuition or for home
improvement - Capital gains exemption from home sale
- 500,000 for married couple
- 250,000 for single
- But must live in the home for at least 2 of the
past 5 years - Large allowance before the estate tax
- 1 million in 2003 and rising steadily to 3.5
million by 2010 - Down-payment assistance
- 5,000 average, assisting 250,000 households
8Other Benefits in the U.S.
- Non-recourse residential loan
- No-prepayment penalty for most loans
- Permitting refinancing when interest rate falls
- Simple and low real estate taxes
- Can get tax benefits on two homes
- Primary residence and second home
- Variety of mortgage products
9Favoritism to Secondary Mortgage Market
- Fannie Mae and Freddie Mac do not have to file
with SEC, no tax on profits, perceived backing of
the U.S. government - Mortgage access to low to moderate income
households (FHA Loan guarantees) - Mortgage access to veterans (VA Loan guarantees)
- Private Mortgage Insurance
10Similarities
- Well-functioning Economies
- Top two in the the world
- Low Overall Tax Burden
- Japan 23 of national income
- U.S. 28
- European countries 30 to 55
- Significant Wealth in Real Estate
- High homeownership rate
11Homeownership RatesLatin America, Europe, Asia
Pacific
Asia Pacific
Latin America
Europe
()
12Historical and Current Real Estate Problems in
U.S. and Japan
- Japans current problem
- Substantial drop in land and home prices
- Substantial number of problem real estate loans
- U.S. Historical Problems
- National home price drop during Great Depression
- U.S. Local price drops
- Honolulu in 1990s Japanese investors fled
- California in early 1990s sharp job losses
- Boston-New York in early 1990s sharp job losses
- Texas in latter part of 1980s SL Debacle
(most closely related to current Japan Problem)
13Past Localized Bubbles
14Why the Pop?
15Real Estate Prices in Japan
Source The Japan Real Estate Institute
16Despite Fall, Japanese Home Prices Remain High
- High Home Price-to-Income ratio
- 7 in Japan
- 3 in U.S.
- High housing prices also mean high housing wealth
could be unleashed to stimulate spending,
provided government does not take away
17How the U.S. Dealt with the SL/Real Estate
Crisis
- Permitted Bank/SL Failures
- Quick massive sale and removal of uncertainty
- Created Resolution Trust Corporation
18Fast Sell Off by the Resolution Trust Corp.
19Observations for Japan
- Low number of real estate transactions
- High real estate related taxes on individuals
- Real estate pricing infrequent/inefficient
- Kouji-Kakaku publishes land price index every
year - Limited liquidity in real estate market
- Limited secondary market
- Ineffective temporary real estate tax relief
20Permanent Real Estate Tax Relief
- Milton Friedmans permanent tax hypothesis
- Temporary tax changes are ineffective
- Corporate Finance Theory on Capitalization
(present value discounting of future benefits)
imply miniscule impact on real estate values from
temporary tax relief
21Hurdles to Overcome in Japan
- Create market environment to facilitate real
estate transactions - Low real estate tax burden on individuals
- Frequent and timely data collection on real
estate pricing - Facilitate the creation of a secondary market
- Create a greater variety of mortgage products
(eliminate prepayment penalties) - Introduce non-recourse mortgage loans
(collateralized loans) - Establish risk intermediaries to facilitate both
primary and secondary mortgage markets
22Real Estate Policy Issues in the United States
and Japan
- David Lereah, Ph.D., Chief Economist
- NATIONAL ASSOCIATION OF REALTORS
Tokyo, Japan October 21, 2003