Property

Investing in property in Japan doesn’t make sense to me

Property can be a good investment because it allows you to use leverage (use other people’s money) and because it is often treated favourably by the tax code.

Unfortunately property in Japan is somewhat unique and I don’t think it makes sense to invest in it at the moment. I have tried to make it work, but no matter how I do the sums they just don’t add up.

Now, if you want to buy a place for you or your family to live in, that makes perfect sense to me. Just be aware of why you are doing it, do the maths and figure out how much it is going to cost you over the period of time you live in the house, and make sure you are happy with that before committing to anything.

The benefits of buying property in Japan

  • low interest rates
  • older properties are heavily discounted if you are buying second-hand
  • favorable tax treatment of mortgages

The drawbacks of buying property in Japan

  • buildings depreciate to ￥0 over 20-30 years
  • the demographics indicate a future collapse of land prices
  • current zoning laws artificially inflate land prices but could be changed in the future
  • high property taxes
  • low rents
  • renters enjoy considerable protection under the law
  • natural disasters can damage or destroy buildings, insurance can be difficult to claim in that situation
  • Japan’s social and political future is uncertain

Looking at the above, I think the financial case against buying is strong. I may be biased having experienced the earthquake in Sendai a couple of years ago, but I am much more inclined to rent and invest any extra money.

A couple of years ago I started investigating the possibility of buying property to let in Sendai. I found that the yields on apartments and ‘mansions’ were so low that again, it made little sense to me to buy -I could get a better return with much higher liquidity and less risk elsewhere.

Unfortunately, it seems to me that property as an investment in Japan is a non-starter.

What do you think? Let me know in the comments.

4 Responses

  1. I’ve been thinking about the same thing the last few months but have not come to any conclusion. It’s an interesting avenue to ponder though. In Kitakyushu, you can by a older used ‘mansion’ for rental purposes -prices range from 250man to 3000man with a published return rate range of 8-16% (according to the real estate agency). You can also buy a whole apt building (near universities, quick turnover) for 3000man to 5000man for a similar return rate. Problem is, the buildings are typically at least 20 years old (in this price range). Still, picking up a room or two may not be a bad idea if you choose carefully, right? What are your thoughts?

    1. Hi Robert
      Thanks for commenting! I would love to borrow money cheaply to buy an income-producing asset, but I can’t seem to make it work here in Sendai.
      My main thoughts are:
      -we already know the price of the property is going to go down (this is a major difference to most property markets)
      -I would be very doubtful about that 8-16% thing, but I guess you can check it by looking at prices vs. rents in your local area
      -with mansions, once occupancy falls below a certain level, they become ‘ghost mansions’ and the maintenance fees go through the roof. Also, eventually they get demolished at the owners’ expense!
      -I am very wary of anything illiquid in Japan
      -the only people I know who are landlords inherited the land or bought it way before the bubble years
      I think there are better ways to make money (albeit without the leverage). We’ll be talking about them in future posts 🙂

  2. See the logic and agree that renting vs buying is, in general the right choice. I think there are situations where buying makes good sense though. Some points: 1) If you are likely to live in Japan forever and need to have at least part of your portfolio in unfortunately low returning yen-based instruments, the investment decision criteria change, ie. buying a house vs investing in other yen-based assets, a house doesnt look as bad. 2) Although the house depreciates to zero over the years, you need to look at this vs. renting which is a pure expense. 3) Land in the suburbs of big cities near stations has held it value over the long term and will likely do so even as the population declines and the economy slows. The nature of the demand for this kind of land is very different from the average. 4) Houses/apartments near stations and close to city centers can generally be rented for 3 to 4% return after all costs. This is as good as you will get for a yen-based relatively stable investment. 5) Having the option to rent it out for income or sell to recover your investment is a kind of flexibility that is often the key to successful financial planning.
    I bought my house with cash about 6 years ago. Paid roughly 50mil for it. Similar houses in my neighborhood rent for 20man/month The land it sits on is worth 30mil and will probably not go up or down. Not a great investment, but over a 10 or 20 year period it makes much more sense than renting. In 20 years it will have essentially paid for itself in rent.

    1. Hi P!
      Excellent points. Actually, my own situation is trending towards buying (my wife really wants a garden and it doesn’t seem like we are going anywhere), but we want put money away for at least five more years.
      Impressive you managed to buy in cash! Any reason to do so compared to a low-interest mortgage?