While the general public in Japan is focused on every new piece of news about the current 4th COVID-19 wave and what it means for the Olympics scheduled to start on July 23rd, the construction related industries are all abuzz about the “woodshock.” Unlike other advanced nations that have seen a dramatic increase in home construction during the pandemic, Japan has seen starts slide as famously risk-averse consumers sock away more and more money into no-interest bank accounts or under their tatamis. With restrictions on show home openings, salespeople cannot approach new contacts further hampering contracts. This situation unfortunately also follows a sales tax increase in the fall of 2019, which pushed forward some housing demand to 2019 from 2020.
While the domestic Japanese market struggles with weak demand and builders trying to reduce prices to keep market share, booming housing markets in other countries are driving up wood prices at an unprecedented rate. For many months, trading companies and other importers tried to resist paying higher prices and desperately searched for other options. The deflationary mindset in Japan is still strong and the housing sector in particular is bent on pushing prices ever downward. However, as the United States sucked up more and more global supply with higher and higher prices and ocean freight rates from Europe in particular further complicated the situation, less volumes were available to Japan. As a result, a state of panic has set in with the industry being forced to increase prices or face not getting supply.
Canadian dimension lumber was the first to face the price pressures being closest to the US market. Therefore, people thought this to be a 2×4 housing market problem. Many were even predicting the end of the 2×4 market because of the situation. However, as more European wood also shifted to the US, less lamina was available for the engineered wood used in zairai (post and beam) homes. Of the lamina used in Japan, 70% is imported and there is limited volume of domestic wood to replace such a volume. As a result, pre-cutters that service the zairai market have been announcing order curtailments from May. Some have reduced their offers to only 50%, while there is also talk in the industry about some pre-cutters running out of wood completely by the end of June unless the situation changes. Everyone here is in shock.
One part of the solution to this is of course breaking the deflationary mindset and passing on price increases all the way to the consumers. This is not the problem of a certain segment or just a few companies. The entire industry has to accept the reality of global prices. Even domestic sugi is seeing large increases in prices now, for some the first in almost a decade. Japan is a high-cost nation, so it is unbelievable that over the past few years many builders have pursued strategies to push building costs below CAD$100 a square foot. While this woodshock is painful, it may lead to a much healthier and more profitable Japanese housing market in the longer term as such death spiral strategies are finally put to an end.