A guest post from Mason Dixon
Today we have a real treat for you: a guest post from Mason Dixon detailing his experience of buying and selling a house in Japan. This kind of post is exactly what RetireJapan is for: to provide information and help people consider their life choices in a positive way. So, is buying a house in Japan a complete waste of money? Maybe not 🙂
Can you make money from buying a house in Japan? I’ve read articles and blog postings (some on the Retire Japan website), and listened to the accounts of friends who have purchased a house or an apartment, new or used, for personal use, for an investment, or for a combination of these. Recently, we sold our home in a suburb of Tokyo, and this posting relates this experience, and documents the economics and in-economics of home ownership.
A very strong case can be made against houses as an investment in Japan. For one thing, the demographics are against it as more housing continues to be built and the vacancy rate in older buildings climbs. According to a Nov 21, 2018 article on the CNBC website, Tokyo has the lowest proportion of vacant homes in the country (13.4%) at 11.1 percent in 2013. But even in Tokyo, that number may increase to 20 percent by 2033. Furthermore, a July 19, 2019 posting on the “Retire Japan” website “Yen for Living: Houses as Non-Assets,” cited a Nomura Securities report that the average Japanese home loses all its value in 22 years, leaving only the underlying land value. This is a much faster depreciation rate than in the U.S. or in Canada (roughly 50 years).The same posting referenced an article in Nikkei Business, Feb. 23, 2016, that since 1969, when the government started keeping housing statistics, Japanese homeowners had lost ¥500 trillion in value on their houses, not even counting the interest paid on mortgages. Finally, the writer of the post went on to describe he and his wife buying their home for cash several years ago and soon finding it worth one-third of their purchase price.
In 2004, we looked for a home in Kawasaki close to where we rented. Neither my wife nor I were permanent residents, but this did not prove to be a barrier at the Mitsubishi UFJ bank. We knew property depreciated quickly in Japan leaving only land value, so we weren’t interested in new houses or apartments. Our realtor was surprised because my university salary easily qualified us for a higher mortgage and therefore a larger and newer home and we would also have my wife’s income as well. We viewed 11 properties (though some of these were 20 or 30 years old which I couldn’t see myself renovating), and in late February, settled on a 3F house, nine years old, with a total area of 92 square meters, which had been initially purchased for ¥40,000,000 earlier, was now listed at ¥29,900,000 and which we finally bought for ¥26,500,000.
No downpayment at all was required, but we had to purchase mortgage insurance of ¥1,000,000. Our payments on a 10-year mortgage were ¥105,000 monthly which was less than our monthly rent had been (¥114,000 for a 2F semi-detached house, 20-30 years old and 60 square meters), and of course we were able to avoid the koushin ryou, the biannual rental renewal fee of ¥114,000. (See Table 1).
The previous owners had had two children and a dog and cat, therefore carpeting and other flooring needed to be replaced, so we hired some trades, and painted the interior ourselves. We also bought new curtains and furniture, purchases we might not have made had we still been renting, and we also put many hours into improving and maintaining the house. Our new home was twice as far from the train station, 20 minutes instead of 10, but we were minutes’ walk from a beautiful park where we spent many happy hours. As mentioned, our house was newer and 30% larger than our rental. The neighbourhood was also much quieter and we had a better relationship with our neighbours for it was our house. We no longer had to ask a landlord’s permission to make changes to our home. We started a garden. We decorated. Over the 15 years we lived in that house, we had the expenses cited in Table 2 but our life improved in many incalculable ways.
In 2019, my wife and I decided to retire, to sell our house, and to move. Sellers in Japan must be very careful with their timing, of course, because unlike overseas real estate markets, most house sales take place between November or December and the end of March and the beginning of the new school term. Our house was competitively priced, and showed well because of some inexpensive pre-sale renovations we had done, repainting some walls, installing a new cabinet and mirror in the shower area and wall papering it. Over a three-week period, only three different parties looked at our house. One couple could not get a loan. The third party had been looking for a house in our area for nearly three years and made an offer.
For both our 2004 house purchase and its 2019 sale, we used an agency with an English-speaking realtor costing us an extra 60,000 each time. However, given the complexities of a house purchase and a sale in Japan, with its considerable paperwork, it was well worth it. One big difference we found between 2004 and the present is that the real estate market in Japan is now all online (among the sites, Suumo, Rakuten Real Estate, and Yahoo! Real Estate) and there is a much larger market for used homes. Our agency’s service included photographing our house and posting it, so we staged the property by decluttering it, adding some touches such as floral arrangements and lighting. Table 3 notes the sale price of our house, realtor’s fees, and taxes as well as the substantial mortgage remaining on the property (we never attempted to pay down the principal and just made monthly payments). The table also shows our net gain from the sale.
If one subtracts the taxes and renovation expenses of ¥3,703,255from ourequity after the sale of ¥8,608 158, the net profit is¥4,904,903. Again, we paid no more on the house than our monthly payments which were less than what our rent would have been during that period. However, one could argue that the ¥3,703,255we spent on taxes and renovations could have been invested overseas in ETFs during that 15 year period and perhaps doubled to ¥7,406,510, perhaps gaining ¥256,107. However, as mentioned earlier, we enjoyed more space and had a far better quality of life than had we remained renters.
There are other arguments for buying real estate as well. For many people, a house, if well chosen, can force savings and provide them with an investment. And potentially there can be other financial benefits. You could use your house as a source of income as some of my acquaintances have done. Of course, many places once listed on Airbnb.com have been removed due to changes in legislation in Japan, but there is still craigslist and “VRBO,” Vacation Rental by Owner. Foreigners, particularly foreign students, have a very hard time finding good accommodation in Japan, so they represent good potential tenants. Some houses have “duplex” potential where you can separate your living space from the rental space and relatively cheaply install a small kitchen or cooking area and plug in a refrigerator. Alternately, you also could operate another business in some of your rooms, perhaps teaching classes, or renting the space to someone else. I know of numerous cases of people doing these things, making considerable profits, and enjoying their own home as well.
Finally, like many investments, buying property is a limited opportunity. Homebuyers in Japan now face much more scrutiny at banks as a result of the 2018 scandal over Suruga Bank. This bank grossly exaggerated the value of its mortgages and accepted individual borrowers who would not have been accepted elsewhere. An even greater obstacle is age as my wife and I learned recently when we investigated buying another property. People with only a few years left of their working life, or who have already retired, can rarely get a mortgage. In the few cases when they can, they are only eligible for a costly second mortgage based on other assets such as existing real estate, equities, and cash.
Property in Tokyo and other big urban centers retains its value much better than property elsewhere. But as a buyer you must take care to avoid buying “more house” than you need or can re-sell without too much loss in the house’s value. Again and again, although they all knew better, I have seen friends and colleagues buy new homes that quickly plummeted in value. Consider purchasing a used or renovated property, at most 10-15 years old, greatly depreciated, but not one that needs too much work. The average person can easily learn to make many small repairs and renovations, such as painting a room or hanging a cupboard or a door. Big box stores such as Keiyo D2, Joyful Honda, or Cainz Home Center offer plenty of tools and building supplies. Compared with Canada, the U.K., or the U.S., hiring tradespeople is much cheaper in Japan. As well, locations near train stations or within Tokyo rather than its suburbs have been rising slightly in price. Try to plan for a future where you will live in the same location and make the same commute to work for at least 10 years, for the longer you keep a house, the better the numbers get. Although the value of a house may soon fall to its land value, replacing it with a similar sized structure would be very expensive. Meanwhile the same apparently worthless house can be lived in and part or all of it used profitably for many years.
Wonderful stuff. Huge thanks to Mason for taking the time to write up his experiences. I think this kind of case study is really interesting and useful, and hopefully will provide food for thought.
How about you? Any experiences of selling real estate in Japan?
A very interesting read. I’m in Kokura, looking for the local equivalent of Toolstation or Screwfix. Where does the trade buy tools, in Kitakyushu or Fukuoka?
I’m in Kokura too. Try ‘Hands Man’. There’s one in Kokura Minami Ku, on the way to the airport.
http://www.handsman.co.jp/
Sully,
Thank you.
Thanks for the detailed writeup Mason. I’d like your thoughts on the following:
I know there are multiple ways to count the “profit” on real estate sales, but from where I stand, you purchased the house for 28’425’000, added 340’000 in renovations (total 28’765’000) , then sold the house for 23’947’000 minus 839’000 of fees = 23’108’000.
I see this as a net loss of 5.7 M yen, not counting taxes.
I do understand that everybody needs a home so it’s unfair to compare it to other investments such as stocks, and I guess it instead means you effectively paid a rent of about 30’000 yen a month for 15 years, but in absolute numbers you lost money, which is not how I think most people think about real estate investments.
I would have appreciated more details on why you chose to calculate it as a benefit, the way you did. It does put things in a different light from my own way of calculating this kind of thing.
I was thinking the same thing. It is a positive way of looking at it and, yes, if you sort of think of mortgage payments as being money you would have spent on rent anyway I can see the logic. But for me I would think I sold something for less than I bought it and hence that is a loss. But that said, It would be a loss I would probably be reasonably happy with considering the ‘would have been paying rent anyway’ view. The kicker is that in many countries, you would have saved on rent and made a capital gain and a very real profit on the property. In Japan, though, I’d probably be content enough with Mason’s turnout.
Re: stockbeard’s comment. I think viewed as a standalone investment house buying in Japan does not have much going for it, as these figures show, and will in most cases result in a loss overall. However, if you instead start from the position that you have to live somewhere in Japan, and if it is not to be in your own house then you will have to pay rent somewhere, then there is then a financial case to be made for buying a house as a means of reducing your rent. Since there are various overheads etc. it will only be worth the hassle if you hold the house for some time at least 5 , maybe more like ten years. However, the financial benefit is clearly expressed in the figures above. If we say that w/out buying then Mason would have been renting paying out 10 man yen per month ( factoring in all the additional fees associated with renting ) , then buying this house saved him 10*12*15 – 565.7 = 1234.3 man yen in cheaper rent over the 15 year period.
In addition there are no doubt other non-financial benefits which were referred to in the article. A golden rule, from a financial viewpoint, is surely not to buy a new property, but if you are going to be living here anyway then carefully choosing an older property could well make financial sense, and possibly also add a little more to your quality of life.
Exactly. I wouldn’t consider it an “investment” in the same way that people in Australia see housing as investment, where there are negative gearing incentives and property, for good or bad, has become stratospherically expensive.
I see owning a home here as an “investment” in lifestyle, as the author noted. You don’t come out of it “making money”, but you haven’t really “lost” anything if you have lived the life you wanted for 15 years for a reasonable fee.
I don’t have as much experience as others, but investing in any kind of property in Japan for the average punter is a mug’s game. Even buying something like a mansion and trying to get rentals looks like a dire proposition. I can see why people just level land and charge for parking on it. Easier all around and less risky.
Great write up!
Buying a house in Japan may not see you profit handsomely 10-20-30 years down the road, like in a place like Vancouver, but it’s absolutely the best way to lower your living costs over those kinds of long-term timespans. Whether that’s an “investment” per se depends on your outlook, but the numbers make it difficult to justify renting over decades.
This isn’t exactly correct.
If you have a negative return on original capital from property you’ve bought in Japan then you probably would have been better sticking the down payment into an S&P 500 ETF and using the proceeds on retirement to fund your rent.
I’m Japan, you can’t really purchase a primary residence and expect to double your money in under a decade (that’s great you did that in London, but using the same measuring stick to assess investment success here is ridiculous). So I agree with what you wrote below that’s it’s not an investment in those terms.
However, I was simply talking about living costs, ie. buying vs. renting, not just buying vs. selling price.
Also, I bought my house with zero down (preferring to keep my cash invested and growing), so I wonder how you would assess that. In monthly outlay I now pay sightly less than I did when renting. When it’s time to move on, I will recoup some money by selling (hopefully more than I paid, but let’s be honest, likely less). However, the fact that I will get something back when selling, rather than the zero I would get back from renting, makes it a better deal than renting. That’s all I’m saying, and I don’t think that’s particularly controversial. Whether saving a significant portion of your living costs constitutes an “investment” or not is a semantic matter.
“Over the 15 years we lived in that house, … our life improved in many incalculable ways.”
That’s that key point. All those numbers are like bikinis–very revealing, but they hide what is critical.
Bought an apartment in Tokyo in 2010 for ~80m. Sold it in 2018 for ~100m. It was rented out in the intervening period. Hardly made any substantial profit. Most of it went on various fees and taxes.
To understand profit properly I recommend looking at return on capital. What was the down payment and how much did you finally get back after accounting for all your costs. Then annualise and compare to alternative investments you could have made in the same period.
If I couldn’t make any money during the biggest ramp up in property prices in Tokyo since the 2008 bubble burst, I see it as unlikely that anyone buying today will see a good return.
In comparison, I bought a London property in 2011 and it’s doubled in value since. It’s much easier to rent out in London and the buying/selling market is far far liquid than Tokyo.
There are good reasons to buy in Tokyo (being able to renovate in the style you want being the main one), buying as an investment is not one of them, however.
Very interesting! Thank you for the candid accounting. I’m sure having a house provided many valuable benefits, though I disagree with those in the comments who have said you would have paid more in rent over that time. When you factor in all the maintenance costs, realtor fees, and mortgage insurance, you ended up paying about 20,000 yen more a month to live in that house than in renting the older, smaller, more geographically convenient space during that same 15 year timeframe (about 140,000/month for the house vs 119,000/month to rent incl. koushinryo). And after those 15 years, you are in the same position as a renter with no house/equity. Perhaps if you had continued to live in the house, the numbers would eventually lean in your favor, though I would think you’d also have to spend more on house renovations as well. There are indeed benefits to owning in Japan, but these appear to be purely related to lifestyle, even in this best case scenario where renting is undoubtedly cheaper no matter how you cut it.
Thank you for sharing your numbers.
In your case it made sense financially to buy this house Vs rent for 15 years.
The numbers prove it.
We have to look at Cash in / Cash out (DCF) to understand that this was a sound investment.
Had you rented you would have spend 21,375,000 over 15 years.
You initial cash out and maintenance costs were 3,703,000
Your mortgage payments over 15 years totaled 1,260,000
Your final cash in after the sale was 8,606,000
Adding all the above, your net positive CF is 7,378,000 over 15 years for an initial investment of 340,000
This is obviously a simplified model as it assumes no discount rate on the CF over the 15 years. We also ignore the fact that, had you rented, you would have invested the initial 340,000 (that would lower your net CF) but also that you might have invested the difference between your rent and your mortgage+taxes+maintenance (that would increase your net CF).
All in all, given the numbers, you would very likely end up with a positive net present value using a realistic discount rate (<2%).
It was a sound financial decision, this is a fact.
I made an excel model with all of the factors above, including missed opportunities in market investment and projected depreciation, before buying my place. I run a few scenarios before deciding on the buy.
Petronius,
I like the idea of evaluating this as a cash in / cash out transaction but I couldn’t follow your math. You wrote “Your mortgage payments over 15 years totaled 1,260,000” but it seems like they were 105,000/month x 12 months x 15 years = 18,900,000. Actually, I’m not fully following the original post because it mentions a 10 year mortgage but that there was still a residual of 14,500,000 mortgage held by the bank when sold. Can you clarify?
10-year mortgage must be a typo. After 10 years of paying 105,000 per month, only 12.6 million would have been repaid on a loan of more than 28 million.
If it was a 30-year loan with an interest rate of 2% then the monthly repayments would be approximately 105,000 per month.
You are right, 1,260,000 is the annual amount, 18,900,000 over 15 years.
I read the wrong line on my excel whilst writing the post. Thank you for pointing it out.
The rest of the numbers are correct
I got very lucky. In 2006 I bought a condominium unit in Tokyo within the 23 wards but in a sleepy neighborhood, 88m2 for 36,000,000 yen, getting a very low interest rate (which I later had adjusted even lower, to under 1%!). 11 years later, I sold it for 46,000,000, having paid down about 11,000,000 on it, for a nice windfall. A few factors figured into this: the neighborhood was around the last really undeveloped stop on the central Yamanote Line loop, so as an area I correctly figured it had nowhere to go but up; another nearby station got connected to Tokyo Station by an express line (unforeseen, but appreciated), and the Olympics coming to Tokyo apparently instigated a small boom in foreign real estate investment, particularly Chinese, driving up values a bit.
Hi, thanks for sharing. I have two comments. One is that you have a typo in “Our payments on a 10-year mortgage were ¥105,000”. From what you wrote elsewhere and the numbers I believe you took 25 year loan. Second, you mention many good reasons for buying a house and I agree with you on all of them. However, I think you left out the most important one. If you do not sell the house, you have a place to live till your time is up. After a retirement, many find it quite challenging to pay rent for another 20 – 40 years. If you keep the house, once you pay off the loan you only need to pay taxes and possible renovations which is incomparable I think. Of course its a bit harder to know your future in these days, but buying a house between 30 – 40 years old makes it great investment for life even if the market value seems to drop. Both in quality of life and long life security, as lets say in the worst case scenario, you could easily live in your own house out of pension only.
My thanks to Mason Dixon for a detailed post which brings up the question of how to evaluate the benefits or costs of real estate investment. I think the first lesson is that we don’t get much appreciation in real estate value here. The real question for me is how to evaluate what the economic costs and benefits were for the transaction. I think the value of a owning your home is:
1) The imputed rent (and in Japan the imputed payments for contract renewal, etc.) which you don’t have to pay (and because this is tax free it’s more valuable than an equivalent value in dividends or interest from a taxable investment).
plus
2) The after tax difference between all you paid for the house (including things like taxes and repairs as well as the purchase itself) minus what you received at sale.
You could adjust each of these by the time value of money but because the risk free return is microscopic here in Japan you could as easily ignore it. I don’t think it’s fair to compare that to what you would have made in a good index fund because you had no way to predict that index fund return in advance. This is only the financial cost or benefit and as pointed out above there were other benefits we can’t measure in yen.
That said, I can’t follow the math in Mason’s original post. What was the total amount paid in monthly mortgage payments? How was there a residual mortgage after 15 years when it mentions a 10 year mortgage?
I agree with the comments that this was a sound decision, unless living in a cardboard box in a park is part of your commitment to freeing up extra cash to invest in the stock market.
Another point I have not seen mentioned above is that having an outstanding mortgage can be claimed as an income tax deduction if certain requirements are met (mainly to do with the house’s age and earthquake-resistance). This deduction was apparently unavailable in 2004, but for houses purchased since 2016, 1% of the outstanding loan balance can be claimed as a tax deduction at the end of each year, for the first 10 years of the loan.
It is not a huge deduction, but for example the person who bought Mason Dixon’s house for 24 million in 2019, if they took out a 30-year loan and are in the 20% income tax bracket, they could reduce their tax bill by about 600,000 yen over the first ten years of the loan.
From this month, the period has been extended to 13 years for houses that are subject to the new 10% consumption tax rate.
I think the tax deduction is more significant than that mentioned in AussiePete’s post as it is a deduction from the amount of tax you actually pay, rather than being an increase to your tax free allowance like that with iDeCo, for example.
So if your average remaining loan balance for the first 10 years is 20 million, you would get back 2 million over the 10 years, which is a pretty significant amount.
With the current interest rates, that means you are getting a pretty much interest free loan for the first 10 years.
Thank you for the correction. But now I am even more annoyed that the place I bought last year didn’t qualify.
I bought second hand house a couple of years ago to live in. Some advantages I see to buying rather than renting, if I die before my wife the remainder of the loan is paid.
Another advantage, which I dont see mentioned here, is that if I lose my job or have a low income in old age, at least I will not be dependent on the review of my income to secure a place to live.
Interesting post on valuing home ownership as compared to other investments:
https://earlyretirementnow.com/2019/10/16/how-to-lie-with-personal-finance-part-2-homeownership/
Interesting article and you’ll notice that post 1980 Japan equity returns have beaten adjusted property returns by around 2% annualized according to the research cited. Those property returns are adjusted for costs, the advantage that you can live in the house etc etc. Nado nado.
You’ll also notice the author of the articles also advocates using an ROE comparison to compare equities and property – something I suggested above.
Someone above said how do you measure ROE if your mortgage is 100%. Quite simply, your return is either going to be positive (i.e. ROE on original capital = infinite) or negative (-infinite). For a practical comparison against renting though, best just to compare net profit/cost against sunk cost of rent.
One other thing that hasn’t really been mentioned a lot is liquidity. Japanese properties are notoriously illiquid. Fine if you know you’ll be living there for the rest of your life, not so great for many of us who lead relatively transient lifestyles. Liquidity has cost.
If I bought Japan property again I’d prefer to do so as a pure investor, buying cheaper places that can rent out more easily with an eye to buy and hold forever, and rent the place I live in so I have flexibility to move as necessary.
Sad to say, but where we live, Japanese do not buy a house where a foreign lives in, and that is a fact.