Japan's 1995 Kobe earthquake resulted
in the loss of 6,432 lives, and the complete destruction of over one hundred thousand buildings – a loss of homes comparable to that caused by Japan’s recent tsunami.
The people of Japan rebuilt then. Can they rebuild now?
(In the pictures: a post-earthquake collapsed expressway; Kobe's expressway today).
New research by Yasuyuki Sawada and Satoshi Shimizutani, forthcoming in the Review of Economics of the Household (disclosure: I co-edit this journal), provides extensive evidence on the strategies families used to recover from the Kobe earthquake - and lessons for the latest disaster.
The cities affected by the Kobe earthquake differ in important ways from those affected by recent tsnumani. Kobe is, as Professor Sawada explained to me by email, one of a series of cities connected to Osaka by train: Kobe - Ashiya - Nishinomiya - Amagasaki - Osaka. Because Osaka suffered relatively little earthquake damage, many of those who commuted to the city to work lost no income as a result of their earthquake. Indeed, Sawada and Shimizutani report that 60 percent of respondents to a survey carried out twenty months after the Kobe earthquake experienced no change in their income level, 34 percent saw their incomes fall, and 6 percent had an income rise.
Having an on-going source of income was vital to the survivors of Kobe because individuals and families shouldered the responsibility for rebuilding lost homes with little government assistance. According to Sawada and Shimizutani's research, people financed the repair and rebuilding of their homes by borrowing. Those who needed to replace furniture or other household items destroyed in the quake withdrew money from their savings, or cut back on other spending to finance the new purchases.
The latest disaster differs from the Kobe earthquake in many key respects. A typical tsunami-affected community has no major city close by to offer employment. There is no information available yet on the loss of employment in these communities. However, we can get some sense of the scope of the disaster by looking at a community such as Rikuzen Takada. Professor Sawada donned a helmet (there's a risk of another earthquake) and (metaphorically) dug out some information about this town from the library stacks. In a community that, in the 2005 census, had 7,784 households, more than half of the homes were destroyed by the tsunami. If half of work places have been destroyed, more than a half of people will have lost their place of work -and likely their employment also. If, as is suggested by media reports, the central business district of Rikuzen Takada was totally destroyed by the tsunami, the loss of employment would be much higher.
Yet even those who have lost their livelihoods and their homes may still own something. Professor Sawada's calculations, based on Japanese census data, suggest that in a typical community 80 percent of those who lost homes in the tsunami would still own the land that their homes were built on. Can they, like the survivors of Kobe, rebuild?
In some respects, rebuilding will be easier then than it was now. As a response to the Kobe earthquake, the Japanese government has introduced a “livelihood recovery transfer,” program, which provides home owners with a cash transfer of up to 4 million JPY at max (50,000 USD). This transfer, which was not available to those suffering property damage after Kobe, will facilitate rebuilding. Recent news reports have also announced plans for a 4-trillion yen extra budget to build 100,000 temporary homes and other infrastructure.
Yet, to the extent that the responsibility for rebuilding still rests with individuals, the tsunami-affected communities face serious challenges. The cost of rebuilding a destroyed home would, Professor Sawada estimates, be about US$150,000 to $200,000. But in 2005, the most recent year for which census data is available, the median age in a typical community like Rikuzen Takada was 52, and 30 percent of the residents were over 60. Age matters because those with relatively few working years ahead of them have limited ability to pay off a loan. Japanese financial institutions, Professor Sawada predicts, "will be reluctant to provide a 20-25 year home loan to an 60 year old person." Younger people, on the other hand, have more years of earnings ahead of them, but face a potential "dual loan" problem.
The dual loan problem stems from the nature of the Japanese mortgage market. In Japan, almost all home loans are recourse loans. As Professor Sawada explains, "Even if a owner lost her/his home by tsunami, she/he has an obligation to continue repayments for the outstanding debt for the home loan. Then, she/he has to rebuild a new home by borrowing a new loan." This double obligation leads to the "dual loan" problem.
There is still much that we do not know about the tsunami, and especially about the pattern of mortality. Are the deaths evenly distributed, or concentrated among the people who were older and less mobile? Were families lost together, or did some survive? Given the key role played by family support after Kobe, where sometimes a child would guarantee a loan for a parent with too few years of future earning to qualify, mortality patterns matter. Yet we can draw some qualified conclusions.
The lesson from Yasuyuki Sawada and Satoshi Shimizutani study of Kobe is the key role played by mortgage lending and financial institutions in the rebuilding of the housing stock - but the differences between those affected the two disasters suggest that people this time around may have more difficulty qualifying for mortgages and other home loans.
My take away is that there is, at minimum, a role for government loan guarantees, both as a way of allowing people to get access to mortgages, and reducing the interest rates charged on those mortgages. More broadly, the disaster raises questions about the desirability of recourse loans - might it be a good idea to allow people to walk away from disaster? The Japanese system of recourse loans shifts full responsibility, hence all risk, onto the individual - who might not be the best person to shoulder the burden.