Why would you want to?
By Chris Cleary
I was told when requested to write this article that ‘property is a hot topic in Japan’. Hmm. I am not sure that emerging from dormancy qualifies as ‘hot’, but yes in the last couple of years there has been a lot more tone to the residential property market; and ‘in Japan’ perhaps if that designates certain prime areas of Tokyo, and even of Nagoya.
So why would Japan’s residential property become an issue after at least thirteen, and in most places fifteen years, of falling prices? Quite a descent it was: big city residential property in Japan fell in value by 65% from 1990 to 2005. The dimensions of the fall are impressive more for how high prices were at the beginning of this period rather than their out-and-out cheapness at the end. Prices have now turned the corner. There have been three consecutive half-yearly rises from March 2005.
Well, prices in some places have taken an upward turn. In parts of Tokyo they started making their move (i.e., edging up rather than heading on down) in 2003. The centralisation by Toyota of all its office functions in Nagoya has also given a filip to Nagoya prices. The line on the graph that fell from 1991 to 2004 has now flattened out and actually perked up a little, which sets a psychological inducement to buy, i.e., not to miss the boat.
However this is not the whole, as in national, story. The line on the graph of all-Japan residential property has flattened out from steep fall mode, but is still creeping downwards. There is good reason for that: the population of Japan is at its peak. The birth-rate has fallen to 1.28 (per couple). There are dire predictions of a Japan population of 80m by 2050 (i.e. a fall of more than a third), or even of 60m (i.e. more than half). Fewer people means downward pressure on land and housing prices. As the demand on available space reduces, people might start living in bigger places–conceivably; cultural selfperpetuation is a tenacious force, and lot sizes do not get re-defined when properties are individually bought and sold. Nevertheless, urban prices will be supported by ongoing rural depopulation as country-raised young adults move to the cities, much as they do now, which indicates a chronic decline for rural or small-town property, or even for property in large towns/cities fallen on economic hardship. In other words there are demographic reasons for prime urban prices to stay firm at least, but for bustcity, small-town and countryside prices to continue to weaken, the ski-lodge bubble in Niseko aside.
The second good reason why property in Japan is looking attractive is the end of the Zero Interest Rate Policy (ZIRP). We live in a post-ZIRP world. We do not live in a 5.8% 30-year fixed world, but we no longer live in a 1% floating world either. For a country to keep interest rates close to zero for more than ten years is a massive historical anomaly and interest rates have only one way to go, no matter how often politicians strong-arming the Bank of Japan may delay them. We are now at the ‘You don’t know what you got till it’s gone’ phase, except it hasn’t quite gone. City prices have turned, or a least stopped falling and rates, although headed up, are still low. A 3.1% 30-year fixed mortgage will seem a bargain ten years from now. The boat here is obviously leaving, so that's another reason for buying. Depending on your deal, the financing may be more salient than the out-and-out price of the property. Either way, we are towards the end of the sweet spot of finance and price.
The third reason for attractiveness right now, among the foreign community at least, is that it just got easier to buy. Not because of any change in legislation, but because banks are changing their requirements. Shinsei Bank started things off by accepting foreign loan applicants without a permanent residence visa. New nonbank lenders soon emerged who sought applications from a range of people who, although economically viable and therefore credit-worthy, did not conform to the loan criteria of the mainstream banks–people like working single women, the self-employed and foreigners. The mainstream banks quickly saw which way the wind was blowing and amongst the sacrifice offers they were making (as distinct from the floating rate traps), have largely waived permanent residence as a requirement. No, permanent residence is not a legal requirement to obtain a mortgage in this country. Amazing how swiftly a little wind of competition can clean away decades of cartelized obstructionism.
[It is nonetheless required that a 'Process Agent' be assigned to the loan. This agent can be any adult Japanese national who consents to serve notice on the borrower on behalf of the lender in the event of default. This is not to be confused with a guarantor, and the Process Agent has no financial or legal liability.]
None of that actually means you should want to buy property while you are here. If your stay is for the long term, if you want the psychological security of ownership, if you resent the transfer of rental payments into the pockets of a person or corporation that doesn’t actually seem to do very much to deserve them, then it is worth consideration. If you do not have family or partnership obligations that warrant a stable long-term home, if you do not know how long you are going to be here/know you are not going to be here more than a few years, or if you are the type of person who likes to move on a regular basis, you would probably be better off renting.
Should you decide that buying suits your plans and needs, as well as your wallet–and that you are comfortable buying in a country prone to earthquakes, and where it is impossible to fully ensure against earthquake damage, you must also wrap your head around the idiosyncrasies of a property market that behaves differently to one on which your experiences may be based. Land has value and, as observed, the price of prime urban land has probably stopped falling at least. Other land may continue to fall in price. Just because prices have fallen for fifteen years doesn’t mean they can’t continue to do so. Structures have costs but they have no value–no inherent, lasting value anyway. A building older than thirty years is just about worthless. Indeed, a plot with an old house on it may be cheaper than an adjacent identical cleared plot as, it will be assumed, in buying the plot with the old house you will have to pay to demolish the structure. Most people in Japan don’t want to live in old houses, especially other people’s old houses.
The situation with apartments /condominiums is arguably even less promising. There is a market in old apartments, with prices being tiered after purchases at, roughly, every five years of age; they are also related to the age of the building with respect to the dates of mandatory changes in construction standards, as well as to the probity and prudence of the apartment management committee in budgeting for safety, maintenance and refurbishment outlays. At some point in the building’s life the block will become worthless and be rendered into rubble. After the clearance, you will more than likely end up with ownership rights to a piece of land perhaps the same size as a tatami mat. At least if you had bought a house you still have the land.
So, are there reasons for buying apartments over houses? Well, they cost less outright, apartment blocks are usually serviced and maintained, have potentially much greater security, and there's no need to sweep snow off the roof. The property taxes are lower. But apartments are consumption items. The only thing that is going to bring you a gain in this property market is a rising land price. As suggested, if that does happen, it is most likely to happen on prime urban residential land.
There is one other way to make money in this property market, which is buying to rent. Here apartments are the better bet as there is a greater supply of would-be urban condominium dwellers than would-be urban house dwellers (because if you were going to live in a house you would want to buy your own). Indeed banks are more willing to lend for investment purposes on apartments than houses. There is a large market in ‘one room apartments’– 6 mat with kitchenette and bathroom unit - as these are within the rental price range of students, freeters and young company employees with no dormitory facilities available. To make this work, you need to be a professional property investor, build up a portfolio of apartments, be prepared to deal with the maintenance and tenancy issues on an almost daily basis, know the metrics and calculate cash-flow realistically before you start and, of course, pay the taxes. If you wanted property income, you might just be better off buying a JREIT.
If after all the above you are still thinking of buying a property, then you have much more choice available than perhaps even a few years ago: of lender, of loan structure and of duration. New, more flexible and more reasonable lenders have entered the market. There are choices amongst fixed and floating rates and hybrids thereof, as well as timespans that fit your plans, rather than the standard 35 year fixed rate product. If you choose the right lender you will get a listing of the unexplained yet substantial costs that are rolled into conventional offers. You will be offered means to reduce the amount of cash you have to put down if that is how you would like to arrange things. For people with a mortgage there are refinancing opportunities: if you have floating rate and think it wise to save yourself money later in a post-ZIRP world by moving to fixed rate; if you have reached the end of a honeymoon fixed rate loan, and the new rate offered is no longer a honeymoon; thirdly, if your financial circumstances warrant, you will be able to refinance a property that is financially underwater, thereby escaping the punitive interest rates of those 1987-1992 bubble-era specials.
You can even do all this on a bilingual website where you can explore the permutations at your own pace and without a salesperson trying to hurry you along. With your entries being confidential until you decide to submit them. In addition, there is a wealth of information on the mortgage process in Japan freely available. JI