Tiny Homes, Real Estate Thugs : Japanese Feel the Squeeze as Land Prices Skyrocket

Looking up from the coffee shop table where she was dickering with a land developer on behalf of the owners of a tiny electronics shop being threatened with eviction, Yoshiko Ueno got an unmistakable message. Surrounding the table were five or six burly yakuza, or gangsters.

“We will get this land even if we have to kill you,” one of them told the petite, bespectacled tenant activist.

Thus does the syrupy etiquette of daily life in Tokyo often break down when the subject is land. And the subject often is land. During the last two years, real estate prices throughout Japan--always high because of the nation’s dense population--have taken off in an unprecedented speculative explosion.

Some prime land in central Tokyo has appreciated by almost 90% in each of the last two years. Because Japanese tax provisions encourage the beneficiaries of profitable land deals to pump their profits into new purchases, the boom in land prices quickly rippled out to the farthest reaches of the metropolitan area, as central-city landowners went searching for new property.

In Tokyo, real estate fever is an ailment easily caught. Recently there has been an outbreak of redevelopment plans for embassy compounds owned by foreign governments. Australia, blessed with a sizable holding of land in Minato ward, expects to gain as much as $8,000 a square foot for the portion that it will sell or lease.

In the Los Angeles area, 1 square foot in a similarly upscale district of mixed office and residential use--in Century City, for instance--would sell for about $350 if already built upon, according to a spokesman in the Westside office of Grubb & Ellis Co., a San Francisco-based real estate firm. If there were any empty land, it would go for about $100 less, he said.

$300,000 Home

High land prices in Japan affect daily life, especially in Tokyo and other big cities, in ways that residents of other industrialized countries can scarcely appreciate. For most middle-class workers in Tokyo, where more than 10% of Japan’s 120 million people live, buying a home seems to have become a hopeless dream. The average $300,000 price of a single-family dwelling in the capital would be more than six times the average annual family income.

In any event, the location of even the exemplary $300,000 Tokyo home would force its owner to commute two hours each way to work in the city. In the community of Ogikubo, an hour from Tokyo, a two-bedroom apartment can cost nearly $3 million. In other districts the same distance from the center of town, a single person might pay more than $1,000 a month for a “six-mat” room--an apartment the size of six tatami reed mats, about 108 square feet, including a toilet, bath and tiny kitchenette.

Many large Tokyo corporations reduce that strain by providing housing for their single employees closer to the workplace--often in drab dormitories.

Income Drain

Once they marry and have children, Japanese couples spend more than 30% of their income on housing, even if they are only renting. Because that figure buys much less shelter in Japan than in the United States, and because the high land price is reflected in the high cost of food, manufactured goods and other commodities, the drain on income has effects that extend well beyond Japan’s borders.

Lower housing costs, for example, would have done much to blunt the edge of the Japanese export boom, the cause of the huge trade surplus that poses embarrassing international problems for Japan. A study by Nomura Securities, a huge Tokyo financial services firm, indicates that if the Japanese spent at the level of Europeans for housing, they would have had so much money left to spend on imported and domestic merchandise that Japan would not have run a trade surplus with the rest of the world until 1984. Rather, it has run a steady and geometrically growing surplus since 1965.

But the price of land and housing is certainly much more of a burden to the Japanese than their trade surplus is to the West. As long ago as 1890, a European observer denigrated the homes of the Japanese as “rabbit hutches.” And when the label was picked up by a Common Market report a few years ago, it stuck in the vernacular.

A standard middle-class home in Tokyo is one that few middle-class residents of Europe or the United States would easily tolerate--poor insulation, low ceilings and cramped floor space. There’s a brisk market in Japan for electrically heated rugs to throw over skimpy tatami-mat flooring but not much space to put other furnishings.

Real Estate Thugs

Land fever has disturbed the fabric of Japanese life in other ways. One is the rise of the jiageya --literally, a person who raises land prices. The jiageya is now understood as a thug who helps developers harass tenants out of their homes and shops in redevelopment districts.

“They are close to criminals,” said Ueno, director of the Shinagawa Tenant-Lessee’s Cooperative Assn. “They attack the very weak.” She said that 10% of her group’s 12,000 members have come into contact with the breed.

Sometimes the jiageya harass building occupants with constant late-night telephone calls or visits. Sometimes they engage in outright destruction of homes and other property.

In the case of the shop owners that Ueno represented during her coffee shop meeting, the jiageya also sent three gangsters to stand in front of the electronics shop, preventing customers from entering. When the police were called, the men melted into the side streets. The shop owners eventually vacated after Ueno met a second time with the developer and negotiated a relocation allowance of about $80,000. The space in question was 40 square feet.

Speculative Boom

Land in Japan has always had a tendency to appreciate--periodically at overheated rates. Developers and economists attribute the latest outburst partially to Tokyo’s rising stature as a global financial and business center. This has created a huge demand for office space that was itself overestimated, producing a speculative boom in the central city.

About the same time, Japan’s banks added fuel to the boom. As Japanese manufacturing corporations began to reap the riches of their miraculous success in the export markets, their need for bank loans dropped sharply. But, under the unique corporate relationships developed in modern Japan, they felt obliged to continue borrowing money under the principle of giri, a sense of obligation for past favors.

“For half a century, banks had cultivated special relationships with industrial clients,” Akio Mikuni, a leading Japanese bank analyst, told a meeting of international regulators last year. “The banks stood ready to bail out the weakest, faltering client. The other side of the coin was always that they expected prosperous customers to go on borrowing, even if they needed no finance.”

The companies’ excess cash was pumped into real estate, which Mikuni called “the basic currency in Japan.”

The banks also began lending heavily to real estate syndicates, some of which were later accused of jiageya violence or illegally running up land prices through multiple title transfers.

Banks Seen as Key

Since then, the banks have become identified in the public mind as the key to the land-price spiral. Their offices have often been the targets of protest, especially by rightist groups. One such group last year attacked three branches of Sumitomo Bank, one of Japan’s largest, by tossing bags of excrement around the offices. Last month, a man who claimed rightist affiliations rammed a dump truck into the main branch of Dai-ichi Sogo Bank, which has been accused of financing a jiageya, and dumped a pile of rocks into the entryway.

Although the Japanese continually argue that their cramped quarters are the inevitable result of shoehorning a population half that of the United States into a space the size of Montana, much of which is too mountainous to be habitable, statistics suggest that to a certain extent their confinement is self-imposed.

Tokyo’s population density, while high, is just slightly greater than that of Manhattan and 70% that of Paris. Nevertheless, the average size of a city dwelling in Japan is less than a third the size of one in Manhattan and half that of one in Paris.

Inefficient Land Use

Japan is among the world’s most inefficient users of land. Although Tokyo’s main boulevards are lined with sizable office buildings, behind them in many downtown districts are webs of tiny diagonal streets occupied by one- or two-story houses and shacks.

“If land were cheap, these low-rise buildings would be OK. And if the buildings were tall, these high land prices would be OK,” Richard C. Koo, senior economist of Nomura Securities, said. “But to have these low-rise buildings on the world’s most expensive land is simply unforgivable.”

But the nation’s tax system encourages people to hold on stubbornly to tiny plots and keep them off the construction market. Property taxes in Japan are very low, but capital gains taxes on profits made when land is sold are very high. So holding on to land is cheap, and transferring it is expensive.

Holding land is even cheaper if it is designated agricultural land, on which property taxes are almost nil. That helps explain why, within the 15,157 square miles of Japan’s three largest cities--Tokyo, Osaka, and Nagoya--more than 2,400 square miles are still designated as agricultural land. Even during the unprecedented run-up in land prices of the last two years, almost none of that land was converted into building sites.

Another aspect of the tax system further encourages the fragmentation of land holdings into uselessly minuscule parcels: a progressive inheritance tax that runs as high as 50%.

100-Square-Yard Parcels

“Land prices are now so high that very small landowners are millionaires and billionaires,” Koo said. These owners’ survivors often must pare off for sale tiny portions of their tiny plots to pay the tax. The result: Among the roughly 1 million landowners of Tokyo, more than 40% own parcels smaller than 100 square yards.

The effect of this pattern was evident in the development of a complex known as Ark Hills, the closest thing in Tokyo to an American-style, multipurpose high-rise complex. Ark Hills’ developer, Taikichiro Mori, built its modern, electronically controlled skyscrapers in three years--but only after 16 years of negotiations with nearly 500 landowners, including the occupants of laundries, tofu restaurants and ramshackle dwellings strewn over the site. For years some even resisted offers of apartments in the futuristic complex then on the drawing boards.

“Americans can never understand our desire in Japan to stick to a single piece of land,” said Shinji Wakabayashi, general manager of the office of regional development for C. Itoh & Co., a major development, engineering and trading firm.

Suggested Solutions

But the most common solutions proposed for Tokyo’s real estate quagmire have little to do with rewriting the tax code. They run more to moving portions of the national government out of town, or even moving the entire capital to another city.

The Japanese government did acknowledge its own responsibility for Tokyo’s congestion late last year by ordering each ministry to move one function out of town. The preliminary selections, announced this month, predictably run to peripheral offices involved with overseeing regional projects. Because so much of Japanese life, not only the government, is focused in Tokyo, many observers regard the step as little more than a gesture.

“To do business in Japan takes face-to-face relationships,” Wakabayashi said. “The need to have an office in Tokyo will never disappear. And, similarly, the most important parts of the government will remain.”

Super-Speed Trains

Some believe that the ultimate answer to the difficulty of living within a reasonable commute of central Tokyo will be the development of super-speed “mag-lev” (magnetic levitation) trains. They would reduce the travel time from Osaka to Tokyo to one hour and thus convert the entire 250-mile stretch into a megalopolis, where anyone can live and get to work after a short ride.

Still, the land question is so complicated that even efforts to solve one element tend to create crises elsewhere. One such result is likely to arise from the Tokyo and national governments’ initiatives late last year to crack down on central-city land speculation. They imposed rules requiring that the prices of transactions involving plots over a certain size be approved by government officials. Capital gains taxes on short-term turnovers also were raised to spectacular levels.

In this case, the rules seem to have produced a drop in center-city land prices of as much as 20% since last fall. But this also means that less land, not more, is being opened up for efficient development in the city, and that may eventually produce even higher rents and speculative pressure.

“Limited supply of something for which there is great demand--that’s exactly what you need for a great speculative asset,” Nomura’s Koo said.