Why the Japanese economy is not growing: Residential construction sector

By Bill Lewis, James Kondo, Makiko Shinoda, Naoko Shozuzawa, Yoshinori Yokoyama, Angelique Augereau, Ali Rowghani
Why the Japanese economy is not growing: Residential construction sector

In Japan, construction companies rarely compete on price, requiring consumers to amass substantial savings before they can afford a single-family home. Encouraging a secondary housing market and establishing standard designs, methods, and materials would give the residential construction industry the push it needs to become more productive.

In Japan, construction companies rarely compete on price, requiring consumers to amass substantial savings before they can afford a single-family home. Encouraging a secondary housing market and establishing standard designs, methods, and materials would give the residential construction industry the push it needs to become more productive.

Productivity performance

The overall productivity of the sector is estimated at 45 percent of the US level. Productivity in single-family housing (SFH) is at 33 percent of the US level, compared to multifamily housing (MFH) at 60 percent.

Operational reasons for productivity gaps

The main sources of the productivity gaps across all segments are the lack of large-scale developments and the lack of standard designs, methods, and materials. The comparatively lower productivity in SFH is due primarily to poor organization of functions and tasks (OFT), particularly in the traditional "post and beam" segment, which accounts for 80 percent of employment in SFH. In addition, most SFH uses very inefficient sales techniques. For MFH land acquisition is slow and difficult.

Industry Dynamics

The residential construction industry in Japan is very static, with little change in market share across construction types or players. Companies are reasonably profitable and wages are relatively high, so there has been little pressure to change. There have been very few new, productive, successful, entrants—either foreign or domestic. Price competition is quite limited; instead, firms compete on customization and reputation.

Important, external barriers to productivity and output growth

The lack of price-based competition and the lack of standardization of construction materials and methods are the main causes of low productivity. The lack of price-based competition is the result of a missing secondary housing market, the small proportion of large-scale developments, and the lack of suitable MFH. The key factors restricting growth of these markets are the lack of public transaction information, the Government Housing Loan Corporation's lending policies (which favor new housing), the tax system (which increases the cost of transacting in the housing market and decreases the cost of holding land), and the zoning codes (which hinder development of MFH).

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