Buying a Home? Japan Will Set Mortgage Rate
The following facts, unfortunately, are related. In the United States, where people save less than 4% of their incomes, mortgages rates have risen to more than 11% and, if the experts are right, will go higher before they go lower. The housing market, not surprisingly, is slowing down.
In Japan, where people save 17% of their incomes, the government is eliminating the tax exemption for interest earned on savings to encourage people to spend more--perhaps on housing, which they can buy with government-subsidized mortgages at around 6%.
What’s the connection? It’s this: U.S. interest rates are going up because domestic savings are inadequate to finance the federal budget deficit plus the other needs of industry and society. So, the Federal Reserve must boost interest rates in order to persuade foreign savers to invest in U.S. securities. Specifically, says economist David Wyss of Data Resources Inc., the rate on U.S. Treasury bonds, which serves as a guide for all other interest rates, must be kept well above the rate on Japanese government bonds--currently 5.5%.
So the need to appeal to investors in the suburbs of Tokyo and Osaka is chilling housing markets in the suburbs of Los Angeles and New York.
Produce or Pay
And we may as well get used to it, because the consequences of becoming a borrower nation will continue for some years. What that “borrower nation” tag means is that through years of importing more than it was exporting, the United States put billions of dollars in foreign hands.
Those dollars now represent $100 billion in claims on U.S. resources--meaning that they can earn interest on government or corporate securities, or they can buy U.S. goods. So Americans must produce the goods or pay the interest. Exporting goods would help retire the U.S. debt; paying the interest prolongs it.
Does that mean permanently high interest and no hope for young people trying to own a home? No, it means only that Americans aren’t totally in control of their economy, and forces far away will cause rates to jump around--as they have before. For most of the 1970s, the oil producing nations dictated to the U.S. economy. Now it is foreign investors, notably Japan, where since World War II consumers have been held back while industry got first call on the nation’s capital.
But the global economy is a complex thing, and there are points to keep in mind lest we fall into needless gloom. First, U.S. savings rates are understated. Americans are not as profligate as they are made out to be.
Savings Elsewhere
Savings may not be in bank accounts, but they are in houses--in trillions of dollars worth of home equity. Growing equity. A new report from Salomon Bros., the investment banking firm, says that in the last 17 years houses have appreciated more than 8% a year in all parts of the country--nearly 2% a year after inflation. The Northeast and California, at around 11%, fared best during the period. The Midwest, at 7.5% a year, trailed, but still beat inflation by almost 1% a year.
Nor is housing all. U.S. savings also reside in pensions and in Social Security. The Japanese, on the other hand, do not have Social Security for retirement. When people reach 55, they retire with a lump sum payment and start their “second career”--which often means a mom-and-pop grocery store.
Housing can be expensive. A 1,000-square-foot single-family house in Tokyo costs $1 million--meaning a typical down payment, 10%, would be $100,000. On the other hand, a house two hours commute from Tokyo might cost $250,000--about seven times a middle-class Japanese salary, which now is on a par with American salaries.
National policy lies behind those statistics. The Japanese government, while subsidizing mortgages, has held back on housing. More export production, and less domestic home building, is one reason that money has piled up in savings. Now, faced with worldwide opposition to its export surplus, and competitive difficulties due to the strong yen, Japan is looking homeward for economic growth.
And that means a period of transition. Until its domestic economy gears up, Japan’s savings surplus--comparable to the spare capital Americans had in the late 1950s--will flow into foreign investment, a lot of it to the United States.
Americans, meanwhile, must rebuild a savings surplus--which means selling U.S. goods to others and, at home, living with fewer options in housing and many other things.
Federal Reserve officials say it is not really a worrisome thing to be a net borrower and on the receiving end of foreign investment. Certainly Tuesday’s sharply recovering stock market didn’t seem concerned. But it’s also undeniable that the economy would be healthier if U.S. mortgage rates could be again what they were in the early 1960s--under 6%. Maybe the U.S. government should take a leaf from the Japanese and consider a tax exemption for savings.
