There is no spoon
We looked at housing options in Japan last month: broadly speaking you can choose a flat or a house and both have their advantages and disadvantages.
Today we’re going to look at whether it is better to buy or to rent, and the kinds of things you might want to think about when deciding. We’re not going to talk about buying real estate to rent out to other people today.
Let’s address the main thing: buildings in Japan depreciate. Unlike most western housing markets, the price of a new house or condo will probably go down over time, often reaching zero or even minus numbers (the cost to demolish the building is deducted from the value of the land).
Land prices may increase, hold steady, or decrease, depending on local conditions.
This make buying a home in Japan less attractive than in other markets, where you might expect house prices to at least go up with inflation, if not more.
As in other countries, transaction costs to buy are high in Japan (our lender budgeted around 10% of the purchase price for taxes, fees, compulsory insurance, etc.) which further reduces the attractiveness, particularly in the short-term.
However, mortgages are often cheaper than the rent on a similar property (sometimes quite a bit cheaper). It is important to remember to include the cost of property taxes, insurance, fees (for manshons), and maintenance when thinking about the cost of buying, but even after doing so you may find it is cheaper to buy than to rent, provided you stay there forever.
The transaction costs and depreciation will eat you alive if you try to buy and sell real estate over the short-term (less than 10-15 years).
If you buy a new house you will be able to design it according to your needs and wishes (although just how much time this takes should not be underestimated). New houses also depreciate the fastest, and the more you customize it the less attractive it may be to a buyer.
Second-hand houses or condos can often be a good deal, as you benefit from the depreciation the first owner has paid for. Buying them means you get to renovate or decorate them as you like.
Also, by buying you escape from the rental market in Japan.
Renting a home in Japan can be stressful too (maybe not as stressful as buying, but you tend to only buy once, whereas you may find yourself renting several times).
Rents tend to be higher than mortgages, as they have to cover the landlord’s costs and profit.
It can be difficult to rent, particularly if you want to rent a nicer property. I found it easy to rent apato or manshons in Sendai, but when we tried to rent a house we had a 90% rejection rate, for reasons. There are also a lot fewer houses for rent here than there are flats (this may be different in other areas).
Then there are the fees. Shikikin (deposit), reikin (thank you money???), estate agent fees, compulsory insurance, renewal fees, etc. can easily add up to four to six months rent even before you move in.
* I have heard good things about UR, both in terms of fewer fees and reasons, so they might be an option to consider if you are looking to rent a manshon.
So is it better to rent or buy in Japan? They can both be expensive and stressful.
Generally speaking, if you will be living somewhere for a long time (15+ years?) you may find the numbers favour buying. If you know you’ll probably only be there for a few years, you might be better off renting.
Other than that, it all boils down to lots of emotional and situational differences. Everyone is going to have different priorities. Just do yourself a favour and make sure you understand the numbers before you make a decision. All the numbers.
Also think about some extreme situations, like ‘what happens if we decide to move in a few years anyway’ or ‘what happens if there is a serious natural disaster’? It’s always good to be aware of worst-case scenarios.
Finally, it can be really expensive to get out of a place you bought or rented, so do your homework before you move in: check out the local area in detail, try to meet or observe the neighbours, see what the noise levels are like at all times of the day and night.
Crazy neighbours are no fun, as my family found out when we had to call the police five times on the weird guy across the way who took a hostile interest in us.
How about you? How did you decide on your current dwelling? Anything we missed in the article?
The magic figure is around 2M at minimum for processing, taxes, insurance, registration, loan guarantee and miscellaneous fees. You can loan the whole amount from a bank at as much as -1.85% off over the current counter rate at 2.475% even without PR nowadays. Of course, you should avoid agents and go direcrly to the house builder. With them, you can even haggle at around 3 to 7% off the selling price. In addition, you should prepare around 500K to 1M for miscellaneous expenses for moving, buying new stuffs (curtains, wax, lights, fixtures, tables, cupboards, etc. for the new house, etc.
In my view, it’s also better to buy a house in a place wherein a number of units are being built. In that case, all of you in the new neighborhood will adjust to one another instead of you adjusting to everyone already there.
One thing you didn’t mention here are the tax breaks you can get when you buy a new property. Property taxes are discounted for 10 years if it has a certification that it will last for 30 yrs or more. You can also reimburse 1% of your remaining bank loan every year for 10 years (at max 40M property). Basically, 400k at max every year. Of course, this should not exceed the overall income/residence tax you are paying.
Yes, not mentioning the tax rebate was a huge omission! Although it’s probably not enough to change the decision by itself.
I’m a big fan of UR, and have lived in one of their flats in central Tokyo since moving up here from west Japan some years ago. Friend of mine who was already living in one told me about them, and I was hooked. Even though my wife is Japanese, I did all the paperwork, and there were no problems. Haven’t been any since, either. Plan on buying a second-hand place back in Kansai once retirement looms. It’s always interesting to hear from those who’ve bought second-hand properties and what to look out for – thanks to all those readers of this site who have contributed in the comments under previous articles. Really helpful.
Hi Ben, nice post. We’re renting and will continue to do so for at least a while, very possibly forever. A main reason is we have no idea where we’re going to want to live in 5 years, let alone 15. Another is the depreciation.
Could you elaborate on a couple of things? You mention escaping the rental market – you mean the fees, etc.? Or something else? One fear my wife voices sometimes is that when old and grey we’ll be refused most rental apartments. You also mention ‘reasons’ for being refused a house rental: what’s your best guess?
Another related point that not enough people pay attention to is the size of mortgage you can sensibly consider taking out. The advice back in the UK is no more than 2.5-3 times your annual income; an interesting calculation when you see apartments in Tokyo advertised on the metro for 70 million plus… (To be fair, plenty of people in the UK ignore that advice too.)
Hi Adam
For us it was the lower quality of the dwelling. The manshon we bought was build to quite a high standard (high ceilings, thick walls) and now that we’ve put in triple glazing and the extra front door it is far more comfortable than anywhere else we’ve lived in Japan.
The reason we were turned down is because the landlords didn’t like the look of us/didn’t want to rent to a foreigner. This despite me having a job at the kencho at the time, not to mention Japanese wife and three stepkids. That’s not counting the vast majority of houses here that will only rent to companies, not individuals.
I believe mortgages here are calculated on the proportion of your income that would go on loan repayments, which is why they want to see what other debt you have. With the low interest rates and relatively long mortgages, this allows people to borrow quite a bit more than seems sensible…
I’ll second the “won’t rent to foreigner” issue in a very similar situation (1 Japanese wife, 3 Japanese kids, extremely stable situation in Japan. Did not matter, the landlord refused to rent to a gaijin, and stated it very clearly without sugar-coating it).
That alone is stressful enough that I’d rather buy next time. It’s one thing to be rejected as a gaijin when you’re just a couple with kids and are looking at a big market of small condos; but for a family of 5 where we are looking at a much smaller market of “decent sized” homes or flats, getting rejected 3 times out of 5 visits for “reasons” was not a very comfortable situation.
My article on that rental house hunting experiment: http://howtoretireearly.net/well-happened-faster-expected/
Oh, and we lived in a UR for a couple of years and gladly would again. The rent was a bit higher compared to non-UR but everything else was cheaper, nicer and easier 🙂
Just got approved for a 28 year loan at 1.25% fixed for ten years. The tax rebate is amazing and effectively reduces the interest rate to 0.25% – close to free money. The combination of low rates and the tax rebate surely means buying is better then renting assuming to plan it stay there for ever (or a very long time). The mortgage application process was surprisingly smooth and straightforward (all arranged through the house building company – the bank staff came to the builder’s office to meet us). If we’d taken a three year fixed rate of 0.9% the tax refund would have meant we’d actually be EARNING 0.1% by borrowing money!
Good to hear! Not mentioning the tax rebate was a huge omission 🙁
Rates seem to be going up, eh? Good that you locked it in now.
I certainly don’t think that rates will fall..
1.25% is fair for 10 years’ peace of mind. And I’ve got a pension pot growing in the UK index linked to the rate of inflation, which is currently heading north of 2%
Your 10% in costs sounds high, should be 6-7% only…
It was a 9m yen property and the lender estimated 9.9m to cover all fees (0% down).
It probably would have ended up that much, but the estate agent was a friend and gave us a huge discount, and I refused all but the most basic fire insurance, leaving us with a couple of hundred thousand left over to invest 🙂
I’m guessing some of the fees are fixed, so for a larger mortgage will make up less of the total. Our mortgage was relatively small.
I believe the correct translation of “reikin” is “outrageous unjustifiable rip-off that has no place in modern society”.
Or “humble insignificant trifle from unworthy applicant to honourable and wonderful landlord and master”?
We’re renting a new classroom from March. It’s something like eight months’ rent in advance for shikikin, reikin, insurance, and fees.
At least residential contacts are becoming more reasonable!
That works too!
We rent 5 places (4 classrooms and 1 house for us). The whole thing is a big rip off. Now more so than ever because you are FORCED to go through a guarantor company—more money out of your pocket for unnecessary things. It’s actually quite comical because these stupid companies CALL me asking all the same questions and often I am speaking to the SAME person that I spoke to a month ago for the guarantor on another place. I am like—you KNOW the answers to your stupid questions—you just asked me the same ones a MONTH ago when we rented the last place. I think things ARE changing but not fast enough.
We got a new management company for our building, and they require us to pay for insurance.
When I asked, they told me that the insurance was to compensate them in the case of us not paying.
Not sure why we are paying this and not them, but we’re pretty much over a barrel here 🙁
In the case you buy a property you get the low interest loan as you plan to live in it
After living there for say a year you need to move due to work reasons so you rent it out to someone while you are not living in it as you like the location and plan to return there in the future
Is the bank ok with this ?
No, this would break the terms of your mortgage and result in the bank demanding immediate repayment in full.
If you want to rent out the property you would need a buy to let mortgage, which is considerably more expensive.
Of course, many people do rent out properties with residential mortgages, but the consequences can be severe.
RJ, is there a time limit on this? Does this still hold if you’ve got a 30-year mortgage and rent out when you’ve got 10 years left to pay?
Don’t think so. It’s the terms of your mortgage, so you’d have to check the paperwork you signed.
Cancelling the mortgage is the worst-case scenario though, and I don’t know how likely it is. I do know at least one person letting out a manshon under a residential mortgage, but I presume the bank doesn’t know about it.
This is very interesting.
All along I had assumed that there were no legal repercussions should one decide to immediately rent out a property after acquiring it via a low rate residential mortgage.
Guess it sounds too good to be true.
“All along I had assumed that there were no legal repercussions should one decide to immediately rent out a property after acquiring it via a low rate residential mortgage.
Guess it sounds too good to be true. ”
Yes this is not allowed indeed as everyone would do it. Actually I was speaking to a property agent once about buying an investment property and he advised I temporarily change my addess to avail of a low inetrest loan, so seems some people do this. I declined to do this myself as it sounded risky.
However I assumed that if one lives in the property for a while and then has to move because of work(something which may be out of onest control) they would be allowed to rent it to someone else while keeping this low rate. It seems a bit unfair that the bank would not allow this….
Heh, heh. We all know what happens when you assume 😉
If I were to try to rent out our place (I ran the numbers and I think it makes more sense for us to just sell it) I would figure out what the bank’s policy is, how likely they were to notice/care, and also make sure I had enough cash to pay back the mortgage if this was demanded…
“I would figure out what the bank’s policy is, how likely they were to notice/care,”
ok thanks for the advice, I will check into this.
I suspect that buying is almost always better than renting – and it’s probably not that close – unless a) you are likely to be moving within the next few years and/or b) you want to live in an area (property) where you can’t afford to buy. It’s not simply a matter of ‘what’s cheaper month to month’. You have to look at the whole cash flow situation.
For example: Let’s suppose you purchase a Y25 million house. You pay Y5 million up front and get a 1% flat-rate 15-year mortgage for the remaining Y20 million, that works out to Y120,000 a month. Let’s assume it’s a bad market and after 15 years the property (land + house) has declined in value almost 20%. You can continue to live there and pay zero for housing, or you can sell it and after fees etc, you get Y20 million. For our purposes we’ll assume zero inflation for the 15 years.
You pay Y5mn (upfront) + Y21.6mn (loan) plus an extra Y2mn for various costs, so Y28.6mn. You decide to sell, so you get back Y20mn.
So you spent Y8.6mn on housing costs over 15 years – that’s Y48,000 a month – and you have Y20 million in the bank.
Could you rent a similar property (size, location, age) Y48,000 a month? The answer is…probably not.
Let’s suppose the cost to rent a similar property is Y75,000 a month. So you pay Y75,000 a month and invest the remaining Y45,000 each month. Let’s assume zero inflation again – your rent never goes up – and let’s also assume you’re incredibly lucky and you get a 15-year bull market, making 5% a year like clockwork.
I estimate that after 15 years you’d have Y12 million in the bank.
Of course, there are a few minor issues with our scenario. For buying we’ve ignored property taxes (although perhaps that’s offset by the tax break on mortgages; I haven’t run the numbers). If you own, you’re responsible for any and all repairs, so strictly speaking you’re probably spending more than ‘Y48,000 a month’ as in our example. On the other hand, it’s unlikely your rent won’t increase for 15 years, so that probably is also a wash.
And of course, if housing prices are down 20%, you’re not going to have a 15-year bull market with consistent 5% returns; you’re probably going to do significantly worse. If you have a 15-year bull market with consistent 5% returns, your property is probably going to go *up* in value, not down.
Does the house not depreciate more than that? I guess it depends on the area, age of house when bought, etc.
Our manshon cost us 9m, but it was more than 30 new 26 years ago…
Sure, but usually the house accounts for only a small portion of the price of the property. For example, in our case – the property we purchased this summer was Y25 million, of which, the house was appraised at something like Y2 million. Land doesn’t depreciate (but can, of course, go up or down in value…)
You can’t really compare the ‘9mn now vs 30mn then’ difference; it’s not an apples-to-apples comparison. 26 years ago was 1991 when prices were still near the bubble-era peaks. The decline in value isn’t depreciation, it’s that the 30mn was vastly overvalued.
Okay, that makes sense now. So your example is buying a piece of land with a depreciated house on it. I completely agree that is going to work better than renting most of the time.
How about a new property? The numbers don’t work as well if you are spending 20-40m on the house itself, eh?
For new houses in Tokyo, it mostly accounts for 25% of the total price. 75% is for the land. So assuming the land prices wouldn’t go down and you were able to resell it after 15 to 20 years, even with only the price of the land, it would still save you some money compared to renting a property.
Yes, the bubble era inflated property costs 25 to 30 years ago. House/Land prices are much cheaper now compared before.
Do you guys think it’s better to buy a ‘used’ house rather than a new one?
I think it depends. Building new means you get to decide everything. Buying used in cheaper, but much older houses might be structurally weaker and have worse construction standards.
The sweet spot is probably 10-15 years old, where the building will be depreciated but still decent build quality.
In The Guardian now: https://www.theguardian.com/cities/2017/nov/16/japan-reusable-housing-revolution
Thanks! That’s perfect for a post I am working on 🙂
If you rent out a property you bought with a loan based on you living there you are commiting fraud. The bank can demand full repayment for the money they should have got if they had lent a btl loan. I know of cases where a bank employee goes to say hi to the person only to find they no longer live there….rumbled as tanaka san has been replaced my honda on the mail box.
Some of this depends on your location in Japan, as well. I bought a manshon in Tokyo 12 years ago and sold it late last year at a tidy profit (a little over 10 million yen appreciation, plus about 10 million I’d paid off). I bought in an area that was relatively central but as yet largely undeveloped. Got lucky with the timing as well, it seems. But I think if you buy a new manshon in the 23 wards you’re probably going to break even at least, if you sell it within 20 years or so (and after that you should have paid off enough that at least you’re seeing money back, even if you don’t recoup your total investment). The newer ones seem to be built to last, as well, and get regular 10-year external renovations.
We bought another, nicer one, ground floor with a little yard, closer to my wife’s family.
I also think these days there’s much less resistance to renting to foreigners (especially w/ Japanese spouse) in the Tokyo market, whether it be apartment or house.