Ok, I think it's worth going deeper into my own personal reasoning and also clearing up that this reasoning does *absolutely not* apply to everyone.
So for starters, I'm fortunate enough to be making enough that I will have no issue paying up a mortgage even if I get no return on the investments. This is an important thing to consider since returns are NOT guarranteed on the stock market. The risk is significantly lessened over long periods of time, but there is no guarrantee.(see notes)
Second, I absolutely agree that most debts should come before investments. Absolutely pay off your credit cards before anything else. Hell, anything with an interest of say 3% or more should be payed down asap. But if you can get cheap interest and can afford not to win on investments then you should probably use that as an opportunity.
1) The investments are a calculated risk to allow me to retire earlier, that's my objective. If they go really well(10+ a year, unlikely), I can retire in 15 years. If they do moderately(~6% a year), ~20, and if they produce no return, I retire around 25-30 years from now.
Whichever pattern they do take, I will be able to pay off the house so long as I do not lose my job, and the only realistic scenario for that is covered by danshin hoken that is built into pretty much every serious home loan out there.
2) say you have 10mil lying around in cash, and have 300k a month after other costs to put aside for rent/mortgage/savings and want to buy a 40mil home. You can either
a) keep on renting to avoid debt until you can outright buy a home. Lets say you decide to really push this hard and move into a 10man rent manshon(which if you're living in tokyo is really pushing it for a family). That leaves you 200k to set aside each month. You can either i) invest that(and your initial savings) or ii) set it aside in savings
b) you take out a loan for the remaining 30mil, buy the home and pay it off asap. Once you're done paying for the home you start investing.
c) you take off the longest loan you can(35 years) for the full sum buy the home with no up front payment, investing the rest. I'm just going to use a fixed interest of 1.5% for this as it's the lower risk choice.
I've simulated ai), aii) and c). b) is just going to be in between the two. My work is here
https://docs.google.com/spreadsheets/d/ ... sp=sharing
It's not perfect(e.g. the remaining mortgage calculation is slightly off), but it's good enough to get a reasonable idea. It could use with additions for property tax and fees but that's beyond the amount of work I'm willing to do on this, please make a copy, edit, and share if you'd like to do that work.
Results:
For a modest return on investments of 3%:
rent+save->buy->invest: 35 year return of 112mil plus a 23 year old home, spent 12 years in a modest rental
rent+invest->buy->invest: 35 year return of 135mil plus a 25 year old home, spent 10 years in a modest rental
mortgage+invest: 35 year return of 165mil.
For an average return of 6%:
164mil,
238mil, buy after 8 years
334mil
for an average return of 0%:
80mil,
80mil,
88mil (surprising? Not paying rent turns out to be more important than paying interest!)
for an average return of -3%(extremely unlikely):
58mil (not being in the market is obviously a good thing),
41mil,
51mil (not paying rent beats out losses in the market)
finally, if you get lucky and get 10% annual returns(you'd be very lucky):
286mil
568mil
921mil
The long and short of it?
Time in the market matters. By saving up for a home you're reducing your time in the market. By making a full payment on the house, you're reducing the time(and volume) in the market. And finally, by paying rent for ~10 years, that's money that's never returning. Compounded interests are powerful.
One point however is that with buying later you do have a newer house so it retains some more value. But the difference between a 25 year old home and a 35 year old home will not make up for these big differences. You can also add on an insignificant amount of costs to the bank for the loan itself, but it's not going to change the numbers in any significant way. Property taxes will do some more damage, but not enough to change the outcomes outside of the worst case scenarios..
Another important note here: If you are definitely going to buy(there are plenty of valid reasons for not buying including mobility) so long as home prices stay the same or rise, and interest on mortgage is reasonable,
buying sooner will be cheaper than buying later.
notes:
http://observationsandnotes.blogspot.jp ... arket.html
Observer that the best and worst 35 year returns aren't that far apart. And that even through the great depression the 35 year returns were significantly positive. Does that mean that they could never go bad? No. The US economy could collapse entirely. But they probably will be decent.
Population growth in Tokyo, population decrease everywhere else drives prices