Guest Post – Housing Seminar

Everything you wanted to know about buying a home in Japan

We have a real treat for you today: a guest post from Alan with his notes from attending a real estate seminar in Tokyo recently.

I’m stunned at how comprehansive and useful it is. Huge thanks to Alan for taking the time to write it up to share with the RetireJapan community, and also props to the seminar organizers, who seem to have done a great job of providing information. Check them out via the link below.

Background

My name is Alan. I’m in my mid-20’s, living in Kanagawa and employed in the IT sector for a Japanese company. Compared to many other guest writers and readers here, I’m still just starting out on the road to retiring here, but I’ve been doing quite a bit of reading on the subject, much of it thanks to Ben’s blog. I also had the chance to attend the Tsukuba seminar last October, and have been a regular reader of the Monday Reads ever since. When Ben asked on his Monday Reads a few weeks ago if anyone was interested in attending a Tokyo-based seminar on buying a house and sending him their notes, I happily volunteered.

I’m certainly several years away from purchasing a home, but I thought that much of the information could be useful to me in the future. It could also be useful for other readers as well, which is why I was asked to pen my notes into the following guest post. My hope is that my notes can act as a good primer before you start reading further into particular aspects of buying a home here in Japan.

Organizers

The seminar was run by Real Estate Japan Inc., a subsidiary of Fuji Television. In addition to a real estate portal, they also provide information on the purchasing process in Japan. Additionally, a representative from LINC was present for consultations. From what I gathered, they’re a partner firm that also caters to foreigners.

It ran for about an hour, with 40 minutes of slides from the Real Estate Japan representative, followed by 20 minutes of Q&A with the audience led by the LINC representative. In total there were about 20 of us in attendance.

Introduction

Real Estate Japan runs these seminars because from their perspective, the Japanese real estate industry tends to be pretty closed, and information available online — even in Japanese — tends to not be so great. Since the national database for listings, REINS, can be only accessed by licensed real estate agents, going through a real estate agency is pretty much mandatory once you’re in the market for a house or an apartment. Knowing what to expect before you start consulting with an agent will help make it all a bit easier.

The main points covered by the seminar were:

1. what to consider when buying a home
2. how to purchase
3. the market

Factors to consider when buying a home

In short, the 6 points covered were:

1. interest rate
2. preferred tax system
3. rising construction costs (*recently compounded by the coronovirus outbreak)
4. taxes
5. home loan
6. property viewing

Loans and interest rates

The longest available home loan is known as the Flat 35. It takes its name from the fact that it’s a 35-year loan, and the interest rate is locked in (flat) for all 35 of those years. As of February 2020, the lowest available rate on a Flat 35 is ~1.2%, while the high is around ~1.5%.

However, banks also have more preferable rates if you qualify for them. The example rates shown during the seminar came from MUFJ, which appeared as follows:

• fixed 3 year interest @ 0.49%, followed by 1.8-1.85% for the remainder
• fixed 10 year interest @ 0.69%, followed by 1.6% for the remainder

The catch is that these preferable rates are very difficult to qualify for without being a permanent resident of having a spousal visa. These currently low rates mean that the borrowing power for the consumer is stronger than ever, but as a consequence, this has apparently been a big reason that real estate prices in Japan have been going up.

Preferred tax system

The Japanese government provides a tax incentive while you’re actively paying down a mortgage, and this should be something to consider in your financials when purchasing a home. The main one is the Home Mortgage Deduction, wherein 1% of the year-end mortgage balance can be deducted from the your income and residence tax.

There’s also the Cash Back Housing Benefit (すまい交付金), but it comes with a couple of constraints. The ones that they touched on were:

• it cannot be claimed if you make greater than 7.8M yen annually
• your property also needs to be eligible for the benefit
• the current maximum amount of cash back is 500,000 yen.

Rising construction costs

According to data from the Ministry of Health, Labor, and Welfare, the number of carpenters actively employed in Japan have steadily been decreasing.

• 1985: 805,789
• 2005: 594,021
• 2010: 397,400
• 2020: 211,000

As a result, more of a premium needs to be spent by construction companies in order to get the labor that they need and for a housing project to finish on time. If you’re considering purchasing a property that will be newly built, this is something to keep in mind.

Another consequence is that since a larger proportion of the money for building a home has to go towards labor, the cuts tend to come out of the material used for the interior. This can result in default interiors for new Japanese homes feeling kind of cheap unless you’re willing to shell out more.

Since finding the right labor is getting harder to come by, construction periods for newly built homes are also increasing in length.

Lastly, as a result of the recent COVID-19 epidemic, supplies on construction materials and furnishings manufactured in China have been stretched a bit thin. The big thing right now that’s in short supply, according to the presenter, are toilets.

Taxes

When you buy a home in Japan, the following are charged to you as one-time taxes:

• Real Estate Acquisition Tax
• Registration Tax
• Stamp Tax

For every year that you hold onto your real estate, you pay:

• Property Tax
• City Planning Tax

Finally, when you sell, if you make over 30M yen in profit, you have to pay the Capital Gains Tax. However, if you make less than 30M from the sale of your home, the amount is tax-free.

Home loans

The big question on most of the attendees’ minds was, do you need permanent residency in order to qualify for a home loan? From the banks that Real Estate Japan has dealt with, not necessarily.

No: MUFG, Prestia, Shinsei
No, but: Tokyo Star, SBJ, SMBC
Yes: Aruhi, Resona, Mizuho

*The “but” meaning that they require you to have lived/worked in Japan for x number of years, and you also need to talk to the right bank and the right representatives who are willing to work with you.

The presenter noted however, that recently MUFG has become a little less foreigner-friendly, perhaps due to a change in internal policy. On the other hand, SMBC apparently recently really wants to work with foreigners. Supposedly, if you’re married — even to a non-Japanese national — your chances of getting approved for a home loan will go up with them.

He also touched on the following factors that may influence your approval:

1. Do you intend to live in Japan forever? (e.g. do you have PR, are you working for a big Japanese company, or are you married to a Japanese national?)
2. Visa Status
3. Your level of Japanese proficiency (since all of the paperwork and exchanges with your agent will be in Japanese)

Property viewing

As you may know if you’ve had experience renting an apartment in Japan, online information does not cover everything. The same goes for real estate. This underscores the importance of a good agent, who can make a list of suitable properties based on the factors that you want.

If you’re purchasing an already built home, when you go for a property viewing with your agent, an agent from the seller’s side will also be in attendance. The following should be kept in mind when going to one of these viewings:

• Wear something nice
• Try not to negotiate directly with the seller (especially if they still live there! That property is probably sentimental to them. Additionally, haggling is also a taboo here.) If you insist on doing so, do it through your agent.
• Make the seller feel good — if they don’t like you, they probably won’t sell their house to you!

Buying vs. renting

From the presenters experience in helping foreigners to close on properties over the years, the interest rate on a home loan is not really affected by you having permanent residency versus a long term visa. However, it does affect how much you may need to put down up front.

Without a down payment, your monthly mortgage payment will of course go up, but it still may make sense financially for you compared to renting a similar property or apartment. A good real estate agent will have these calculations prepared for you.

Purchasing steps

In general, the following are the required steps for acquiring a property in Japan:

1. Research properties and explore financing options
2. View properties
3. Complete purchase application
4. Review explanation of important matters
5. Execute purchase agreement and complete / execute loan documents
6. Transfer ownership and move in

In more specific terms, the actual purchasing process can be broken down like this:

1. Make an offer
2. Get pre-approval on a loan from a bank (usually takes about 2 weeks)
3. Sign a purchase agreement
   • A down payment is typically ~10% of the purchase price
   • Stamp Tax is paid on the agreement (~10K yen for a 1M-5M property, to ~30k yen for a 99M property)
   • 50% of the negotiated real estate agent’s fee
4. Get an official approval on the loan from a bank
5. Sign a loan document with a bank
   • Stamp Tax is paid on the loan agreement (~20K for 1M-5M property)
   • Administrative fees
   • Fees for a loan guarantor
   • Fire insurance policy fees
   • Group credit fire insurance
6. About 1.5-2 months after the loan has been formally approved and the money is in your account, you must complete paying the remainder of the fees:
   • The remainder of the purchase price
   • The remaining 50% of the real estate agent’s fee
   • Fees for recording costs
7. Following that, you inform the property manager and the tenant that you are the new owner. Then comes actually moving in.
8. Lastly, you must make the one-time Tax Payments and submit your claims for tax returns.
   • Real Estate Acquisition Tax
   • City Planning Tax and Fixed Asset Taxes
   • Claim for Tax Return (Home Mortgage Deduction / Cash Back Housing Benefit)
9. After all is said and done, you should still be setting aside some money every month for:
   • Management fees (if you have purchased a mansion)
   • Reserve funds for various home repairs

Other things to be careful about

Know the difference between leasehold and freehold properties: leasehold gives you home use rights, but you don’t the actual building or the land after the mortgage has been paid off; if you want to own, you must make sure you are purchasing a freehold property.

When assessing the purchasing price, ballpark 10% for miscellaneous fees (finder’s fee, group insurance, fire insurance, etc.) Also make sure to save continually after you buy so that you have a repair fund handy.

The market

I was rather interested in this point, so I tried to take some more through notes on what was being said.

Property prices in Japan have been changing drastically over the last 20 years. In general, there’s an upward trend in the purchasing price, but the cost of renting per square meter has been fairly stable. This is a bit of an anomaly compared to real estate markets in other countries, where both the purchase price and the rental price tend to increase together.

Should you be interested in acquiring property for investment purposes, a good ballpark net yield should be around 3% in the Tokyo area. If someone is trying to get you to buy something and insisting that the yield may be 7-9%, alarm bells should be going off in your head! Tread carefully, as they’re probably hiding something (like hidden costs or other damages).

What’s going to happen to the cost of real estate going forwards? That’s the big question on a lot of peoples’ minds. If the interest rates go up, it’ll become harder for some people to continue paying their mortgage. As a result, bankruptcies may be declared, and the pricing of real estate will go down. Additionally, it may also become harder to quality for a home loan, and the average consumer’s borrowing power will go down.

The main factors, according to the presenter, will be a) the interest rate; and b) the aging of Japan’s population. If you ask your agent, “Why are property prices increasing?” and they reply with, “The Olympics / tourism / the upcoming World Economic Forum” and don’t mention the interest rate at all, you should have some doubts as to how good an agent they are.

Q&A with LINC

The last portion of the seminar consisted of a Q&A with more specific questions from the audience. I didn’t have anything to ask since I was just there to try and soak up information, and so I managed to get every question that was asked. For the rest of this section, “I” refers to the LINC representative.

1. For a Flat 35, if I pay it down quicker, will my total interest payment in the end go down?
   • Yes
2. Do delayed / missed payments on credit cards disqualify you from home loans?
   • Basically if you have these bad marks on your financial record, it can be a factor. However, if you provide evidence that it was a one-off incident (e.g. your bank statement during the period that a payment was missed shows sufficient funds to have paid it), the bank may reconsider.
3. Should I postpone buying a house until after the Olympics? Additionally, I heard from a friend that in 2022 the abandoned house tax will increase, meaning homeowners may want to sell for cheaper before then and land will become widely available.
   • No, I don’t think that the Olympics will affect property price. At least in Kanto, there are very few if any abandoned properties. These will mostly be out in the inaka. In short, neither the Olympics or the tax increase will affect anything, in my opinion.
4. What about for 事故物件? The stigma doesn’t bother me, so can I get an agent to look into those for me?
   • You should check out Oshima Teru. You can also ask your agent to look for those specifically.
5. How does credit history affect your ability to borrow? For example, I have no credit cards in Japan, I work for a foreign company, and I am paid in foreign income.
   • That means that you don’t pay income tax here in Japan, correct? If that’s the case, I’m sorry to say that your financing options are basically zero, since from the bank’s point-of-view, you have no financial history in Japan.
6. Which has more of an impact on getting approved for a home loan? Salary, or job stability?
   • At least for Prestia, with previous clients, I’e found that the length of the current job doesn’t matter. MUFG/SMBC want at least 3 years working, and 5 years living experience. Being at one company for a longer time helps.
7. Is there a credit card rating system in Japan? How will my credit history affect my chances of getting approved?
   • Banks will be able to see your credit history, and will see any red marks on your file. However, from my experience living in the UK and US, I feel like borrowing money in those countries in based more on trust, e.g. your credit score means a whole lot more to lenders. On the other hand, here in Japan, a loan is just considered to be regular debt, and so it may actually be easier to get approved for a home loan here compared to those countries.
8. Do you need prior history with a bank to qualify for a loan from them? Say like, depositing x amount of yen into an account?
   • As long as you pay Japanese income and residency taxes, Japanese banks will be able to see that history and also see your income over time. You don’t need to have prior history or an existing account with them. With a working visa, keep in mind that you’ll probably need to pay around 20% as a down payment for loan. With PR, you probably won’t need to put anything down.
9. Do you have clients who set up holding companies to purchase properties?
   • For investment purposes, yes. If they’re planning to live there themselves, then there’s no point. There are no cost savings if you do this for a personal property, as the same taxes are charged on holding companies as they are for individuals.
10. How is the capital gains tax determined when you sell?
    • How long you’ve lived at that property is a major factor.
11. How is property tax calculated?
    • 1.4% of the assessed value is the property tax. 0.3% of the assessed value is the city planning tax.
12. Can you find projections of how much the government thinks that your house will be worth?
    • For a new home, the government will send someone to come by and assess it.
13. That sounds a bit random.
    • There’s a market value for all areas in Japan that the government calculates themselves. They survey all prefectures and all regions annually. The calculation is something that they keep to themselves, and so no one except the employees who do it know how it’s done. Square meterage and construction material may be factors.
14. It’s not purely based on land value?
    • Correct. That means that depreciation also comes into play for calculating this figure.

Conclusion

That about covers everything! Unfortunately they weren’t willing to share the slides with the attendees afterwards, and so I hope that some of this information from my notes can be useful to you in the future. If you live in the Tokyo area, they seem to run this seminar fairly regularly, so you can also pop in yourself.

Thanks again Alan, that was wonderful. If anyone else has information that would be of interest to our readers and would like to write something on the site, please do get in touch and let me know.