Home Truths: property taxes

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Our Home Truths column this month, which appears in the Japan Times today, is about property taxes, a fact of economic life that is taken for granted. As we imply in the article, most first-time home buyers don’t really take taxes into consideration when they embark on the biggest purchase of their lives, presumably because, like death and…well, taxes, it’s something you can’t avoid so there’s no reason to worry about it. And maybe it isn’t, depending on where you buy property. Outside of large cities and productive suburbs, property taxes can be minimal. What we found troubling, and the reason we decided to write about it, was the frequent looks of bewilderment we received from real estate agents when asked how much a particular property would run a buyer in terms of annual taxes. Some knew approximately, but some said they didn’t know at all and would check at the office (and then never called back because they sensed–rightly, in most cases–that we weren’t that interested in buying in the first place). This was odd in more ways than one. In the most significant way, property tax should be something a realtor knows by heart, since it has a direct bearing on the financial ability of the buyer to maintain whatever loan repayment schedule he or she will be responsible for. In a less signficant but more bizarre way, many real estate companies actually print the annual property tax levy in the ads for properties, so for their agents to profess ignorance is just downright laziness, and also indicates that none of them are ever asked such questions by potential buyers. In other words, the inevitability of property taxes has rendered them a moot concern; maybe people just prefer not knowing.

And while knowing will not necessarily change someone’s mind about buying a place, it’s something they will eventually have to address. The fact that most people don’t think about it until the bill comes led us to wonder how reliable property assessments are. As we came to discover, the criteria and calculations used to determine the value of a property for tax purposes are too complex for a lay person to understand, which perhaps explains why the authorities don’t bother explaining them: property values are not listed on the tax bills. Then, last summer, we saw a report on commercial property tax problems on one of TBS’s newsmagazine shows. The gist of the report matched our own ponderings very closely: payers don’t understand how their taxes are determined, so they have no way of knowing whether the assessment has been done properly. The reporter asked people on the street about their own property taxes and the answers boiled down to, “The bill came and I paid it.” When we did our own informal survey of friends and acquaintances who own their own homes, the answers were the same. TBS learned that there have been many instances, nationwide, of commercial property owners becoming suspicious of high tax bills and hiring outside experts to carry out assessments, and then finding out that they’d been overcharged for years. One man in Nagoya, who owns refrigerated storage facilities, discovered that he had been paying up to ¥2 million a year more in property taxes than he should have. He sued and ended up getting a refund of ¥50 million. Apparently, when the local government originally assessed his facilities they neglected to take into account the fact that his warehouses are refrigerated, which means they depreciate faster than “regular” warehouses. He had essentially been paying the same rate since the beginning. At first, the city said it would only compensate him for five years, since there was a kind of statue of limitations on compensation, so he sued. In another case, a country club in Gunma Prefecture also hired an outside expert and discovered that the city assessors, who are obliged to carry out evaluations annually, had regularly overvalued fixtures and features, some by as much as 55 times. When challenged by the country club, the city said they couldn’t find many of the older related documents and that some of the assessors had “retired.” The expert hired by the country club said that most city assessors are not really qualified to make evaluations. They are usually civil servants who are in such a position for only a few year before being rotated out to other departments. The tendency is for them to overvalue rather than undervalue since they have to answer to their supervisors, not the property owners who, it’s assumed, know even less about the arcane evaluation process and will never ask about it. But this one did, and now the local government is being investigated for purposely overvaluing the property in order to get more revenue.

TBS only talked about commercial properties. Residential property assessments seem to be less problematic, but who knows? Since no one understands the process and most homeowners start from the position that there’s nothing you can do about it, they don’t challenge those assessments. Business owners who are paying millions of yen a year for property taxes can afford to hire expensive consultants to check their tax assessments, but residential property owners can’t, and if they’re only paying ¥100,000, they probably don’t think it’s necessary.

Another aspect of property taxes that we didn’t go into is that local governments, and even the central government, manipulate them in order to carry out stimulus programs. Right now, in fact, the central government allows for up to a 50 percent cut in property taxes for people who buy new homes that fit certain criteria having to do with energy savings. We didn’t mention it in the article because the tax cut expires in March, which means you would have to close on a house before then to take advantage of it. But it might be extended. Clearly, the purpose of the scheme is to sell more new houses (previously owned homes, even those with nominally “eco” features don’t qualify) and thus prop up the construction industry. Local governments also offer reductions on property taxes, either to help builders in the area or to encourage population growth and thus boost the tax base in the long run. The whole nuclear power controversy is tied inextricably to local tax policies. Local governments will encourage utilities to build nukes in their districts, even if residents don’t want them, with initial tax relief but in the long run they will still make more money than if the land was not developed. The sticking point here is that depreciation means that nuke plants pay less taxes the older they get, and so local governments then encourage improvements or even more plants (it’s why the Kashiwazaki-Kariwa plant in Niigata is the biggest in the world). They can collect more taxes from the operators. It’s not just a question of jobs.

And we haven’t even gotten into the issues of inheritance taxes and cadastral surveys, all of which are intrinsically linked to property evaluations. That’ll be for another post.

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4 Responses to “Home Truths: property taxes”

  1. Ἀντισθένης Says:

    “We should never have built it in the first place,” you quote the owner of the vacation-home in your Japan Times article, and that’s a piece of wisdom. Property ownership is a straight loss in Japan, with the rarest of exceptions, from the moment after the ‘Bubble’ burst, and that’s over twenty years. The purchase of a house should never be treated as an investment in Japan, but as a consumer good: buy it if you can afford to lose the money. It is not only limited to the shrinkage in the population and the economy, but curious cultural traits which erode the value of the building on the land: fetish for newness, a dislike for living in ‘someone else’s’ home, poor building materials and limited maintenance.

    Unless Japan profitably repatriates its off-shore manufacturing, and solves it’s demographic issues with mass immigration, property prices will continue to slide: they will continue to slide. Rental is also getting cheaper and this will accelerate, despite the oddness of the Japanese rental market’s extra fees, further disincentivizing the purchase of homes. At this point there is nothing propping up Japanese home prices but the custom of home ownership, and echoes of the value they once held during the ‘Bubble’. A case where a long memory is a liability.

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    • Matt Leichter Says:

      “Unless Japan … solves it’s demographic issues with mass immigration, property prices will continue to slide.”

      Japan has no demographic issues. If land values drop due to population decline, that means younger people can either buy houses more cheaply or buy larger ones for the same price. Rent will drop as well. Since urban Japan is overcrowded, fewer people is better because it reduces congestion and carbon emissions. These are increases in living standards.

      Also, until Japan’s unemployment rate drops to zero and all the Lawson Stations and MOS Burgers have to raise salaries to hire workers, there’s no need for mass migration. As for old people and pensions, Japan’s productivity is still increasing, meaning it takes fewer workers to support the elderly than in the past.

      Japan still has massive private sector debt left over from the bubble that it still hasn’t dealt with. This is Japan’s problem, not its population.

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  2. Jen Says:

    Thanks for this. Property taxes were some of the most frustrating parts of building our own home. No one would tell me even approximately what they would be, not the builders, not the tax assessment office, no one. It was exceedingly annoying. We eventually just asked the only people in our neighbourhood who built a house recently, and they told us what they pay. Ours is ¥1100 a year higher.

    When they came out to check our house, they even measured the open space in the house (Fukinuke). I can’t believe I’m paying for that.

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  3. Matt Leichter Says:

    I liked your article in the Japan Times. I have a few comments:

    (1) Not to commit the “fundamental attribution error,” but I don’t sympathize with Keiko and her house in Gunma, at least beyond her and her husband losing their income sources. Home ownership is partly land speculation, and the problem with land value is that it’s created by the community and not by the land owners. This is why economists from Adam Smith onward argue for land value taxation, and if you’re interested the book to read is the 19th century treatise, Progress and Poverty, by Henry George. LVT has numerous advantages over other types of taxes, such as income taxes (can be hidden), sales taxes (reduces commerce), and capital gains and building taxes (discourages investment). LVT can’t be passed onto tenants because the supply of land is almost totally fixed; it encourages land owners to use land efficiently (building upward and not outward); land can’t flee the jurisdiction to an offshore tax haven; and it inhibits land bubbles. Thus, if Keiko and her husband had not lost their jobs and their land’s value appreciated when they sold it, they would’ve made an unearned windfall. As it is, they could have sold the house when they knew they were unable to afford to live in it.

    (2) The same problem as Keiko’s obviously occurred in the U.S. Many homeowners lost their jobs and instead of renting out rooms or downgrading, they demanded property tax caps from their state governments, and New Jersey, New York (less NYC), and possibly Indiana obliged. This means that those states’ and their municipalities will have to find other sources of revenue (income and sales), which drive business and workers elsewhere. Worse, schools are funded mostly through property taxes, so their quality will decline.

    (3) Otherwise, your points about realtors not knowing sites’ property taxes and government over-assessment are fascinating and good research.

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