Yen for Living: Houses As (non-)Assets

For sale? Good luck.

The following article was submitted as the July entry in our Yen for Living column for the Japan Times. However, it was rejected by the editors.

One of the issues facing voters in this month’s Upper House election is the national pension system. The government received criticism after the Financial Services Agency announced that a couple would need at least ¥20 million in savings when they retire to supplement their pensions. Opposition parties are using this figure to point out flaws in the pension system, and the ruling Liberal Democratic Party is challenging the FSA, saying that current pension benefits are adequate to support people after they retire.

In a letter published in the Asahi Shimbun on July 1, a 63-year-old dentist wrote about the ¥20 million figure, saying that when he was 30 he started saving for his old age. As a self-employed person he knew a public pension would not be enough when he retired, and so he joined a cooperative that, in return for monthly premiums, guaranteed a one-time payment when he reached a certain age. Over the course of 30 years, he paid a total of ¥18 million into the fund in the belief that he would receive ¥40 million in the end. But he received only ¥20 million. He also paid into a private pension plan, convinced that when he turned 60 he would start receiving ¥280,000 a month for a limited time. As it turns out, he is only getting ¥120,000, because interest rates have plummetted since he was 30. When he’s 65, he will start receiving benefits from his national pension, but since he belongs to the kokumin nenkin system for the self-employed and others who weren’t employed by large companies, he will only receive ¥65,000 a month. So even though he basically “invested” in private plans and paid his obligatory national pension premiums, he is not going to have as much income in his retirement as he once thought he would receive.

It’s obvious many people are worried. However, there is one point missing from the coverage and the government’s position on pensions and savings: When “assets” are mentioned, it mostly refers to cash. People’s homes are rarely mentioned, and there is a reason. According to Nomura Securities, the average Japanese house loses all its value in 22 years.

An article that appeared in Nikkei Business on Feb. 23, 2016, stated that since 1969, when the government started keeping housing statistics, Japanese homeowners had lost a total of ¥500 trillion in value on their houses. That equity has just vanished, though most homeowners don’t know their house has lost value until they attempt to sell it.

Nikkei used as an example a couple in their 60s living in a suburb of Yokohama. The couple bought their house in 1986, just as the asset-inflated bubble period was beginning, for ¥55 million—¥26 million for the land and ¥29 million for the house. After 20 years, the couple noticed plumbing problems and carried out major renovations to replace the toilet, kitchen, bath, flooring and wallpaper. The total cost was ¥8.5 million. In 2014, after their daughter moved out, the couple decided the house was too big for them and would sell it and buy a condominium. A realtor told them they could get ¥26 million.

They were dumbfounded. Only ¥26 million? So they talked to other realtors and got the same estimate: ¥26 million for the land. The house was worth nothing, even though they had spent ¥37.5 million on it, meaning the original price of the house plus the cost of renovations, and that doesn’t include the interest they paid on their housing loan.

As Nikkei pointed out, this couple was lucky, because by the time they sold their house and land they had already paid off their mortgage, which for most people takes 35 years. For someone who is still making payments, selling could be a problem. Usually, a homeowner pays off the interest first and then the principal, meaning the price of the house. But in Japan the value of a house starts decreasing the moment the owner moves into it, so they are not going to receive the same amount of money that they paid for it, even though the mortgage amount doesn’t change. The money they receive for the house and land may not be enough to pay off their mortgage, depending on how long it’s been since they bought their house. In some cases, homeowners have to take out another loan to pay off their mortgage just so that they can sell their property.

By the same token, if you default on your mortgage and the bank repossesses your house, you are still obligated to pay off the remaining debt even though you have no house and land to sell. That’s because most mortgages in Japan are recourse loans. In other developed countries, mortgages tend to be non-recourse loans, meaning when a financial institution repossesses a property, the debt obligation of the former homeowner is finished. In Japan, it remains, so the former homeowner not only has no place to live, they also still have debt.

It should be noted that the ¥500 trillion in lost value cited by Nikkei does not include interest on the loans used to buy the homes, so the burden on homeowners is even more onerous.

In the end, unless they live in a large city, retired people cannot count on their homes to return the value they put into it the way retired people in other countries do. That is one of the main reasons for buying a home, as an investment for the future. In Japan, the benefit of buying a home is that the owner has a place to live as long as they keep up the payments, but in that sense how much of an advantage does a homeowner have over a renter? Once the house is paid for, the owner can live in it without paying rent, but given Japan’s present housing market the owner may never be able to sell their house. And regardless of the assessed value, a house that can’t be sold is financially worthless.

Valueless structures is one of the main reasons for the steady rise in abandoned homes, which now stands at more than 8 million*. Homeowners are still obliged to pay property taxes, so in many cases if they can’t find a buyer the property remains empty. There are many reasons why Japanese people do not buy existing homes—shoddy quality, changing building codes—but the main one is that Japan’s housing policy prioritizes new construction even as the population drops. Existing housing is mostly ignored.

Japanese homeowners cannot rely on their houses as sources of equity the way Americans and Europeans do. In recent years, Japanese banks have been offering reverse mortgages to seniors. According to this plan, a homeowner takes out a loan with their home as collateral, and then starts making interest payments on the loan. (This system is different in the U.S.) When they die, the spouse or child who has inherited the house has to pay off the loan in cash. If the new owner or heir defaults, the bank sells the property. With this scheme, retired homeowners have more cash to spend in their old age, but interest rates are relatively high and the lending institution decides the value of the property and the amount of the loan, so only people whose land value is high enough to make the loan worthwhile for the bank will likely be approved for a reverse mortgage. That’s why condos don’t qualify.

The tacit understanding that homes do not have any long-term value is another reason why the Japanese public has such a high savings rate. People accumulate cash over time because it’s the only thing they trust, and they haven’t been conditioned to think they can rely on their homes for financial security the way Americans and Europeans do. Consequently, this cash is not in circulation as money spent. Nor is it benefiting the economy through investment, since the government and the financial industry has been unsuccessful in getting the general public to buy into mutual funds and other financial instruments. Most Japanese people think such investments are too risky. In that regard, Japan’s housing policy of favoring new buildings is actually bad for the economy, regardless of its benefits to the construction industry. When people have no equity in homes they are paying off for 35 years, they naturally economize and spend less.

As freelancers without a guaranteed income, we decided years ago that it would be difficult to buy a home in Japan, and divided our savings betweeen a low-risk U.S. stock/bond portfolio and a Japanese annuity that went bust in the 1990s. When we eventually did buy a house, we bought one that we could afford to pay cash for, knowing that it would eventually be worth nothing—five years after moving in, it is now assessed at one-third the price we paid for it. As our twilight years approach, we seem to be in relatively good shape in that our portfolio generates a modest but steady income, enough to live off if and when we choose to stop working. We have no debt.

Our situation may be special, but to accept the government’s claim that people can rely solely on their national pensions to live out their lives requires a suspension of disbelief when the biggest purchase they will ever make, a home, could become a burden rather than an asset.

*Correction: Originally, the post said the number of vacant homes was more than 13 million. The actual number is more than 8 million, which represents 13 percent of existing housing stock.

22 comments

  1. James · July 19

    I always enjoy reading the articles you write on this blog and this one was also enlightening. A pity it was rejected by the newspaper.

    I do have a few questions though. I have read many articles over the years about how homes in Japan become worthless and the real estate market is a fool’s errand to invest in. What I want to know is, what is going on with the values of real estate in the major cities? Is it also dropping, stable or increasing? Is there a border somewhere that defines the areas that lose and the areas that stay stable or gain? Is there anywhere that publishes this information?
    Thanks and I look forward for many posts to come.

    Like

  2. excellent. Do you take personal emails and give personal advice?

    Sincerely, Michael Fogarty

    mail: micfogarty@gmail.com cell/SMS: 090-1600-2835 fax: 0436-37-3841 Minamikokubunjidai 4-5-11 Ichihara-shi Chiba, Japan 290-0075

    >

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  3. snarkingtofreedom · July 19

    Yes yes yes! This is exactly why I will never buy property in Japan. (Well, this an the fact that a lot of the country will be submerged due to global warming…)

    Liked by 1 person

  4. Sebastian · July 19

    Great read Phil! I’m looking at putting my Tokyo apartment on the market and the agents I’ve met with all seem to think I should get around 20% more than what I paid for it 10 years ago. I guess we’ll see!

    Like

  5. Rachelle · July 19

    Thank you for this. I’ve been debating about buying my own property here in Japan, but I’ve never been able to figure out the benefit of doing so given the devaluation of the property over time. I figure it’s probably better to invest my money in other ways so that I can eventually retire somewhere cheaper, without having to worry about whether or not I’ll be able to sell my place when its time to do so. The preference for new housing and the steadily declining population just seems to be a recipe for disaster.

    Liked by 1 person

  6. Sean · July 19

    Great article, I too am curious about why the editors at the Japan Times rejected it.

    While I agree with your overall point about how housing being a non asset is a drag on the larger economy it is also worth pointing out the comparative benefits of Japan’s housing market which somewhat mitigate the effects of that on society and the economy. The big one to me is that home ownership remains attainable even for young working families in major cities which you can’t say about many urban areas in countries where housing as an asset class has increased in value at a higher rate than incomes have and most young families have been priced out of the market. If housing in Japan was viewed as an investment asset like it is in Europe and North America you wouldn’t have the akiya problem but you would have a “families making 5 million yen a year not being able to afford a 100 million Yen median house price” problem.

    Another point is the fact that interest rates are so low in Japan, which means that a large portion of what Japanese homeowners lose in depreciation compared to their American, etc counterparts is offset by not having to throw anywhere near as much money away on interest payments over the course of a 30-35 year loan. When I bought my house here I paid about 15% of the price in cash and got a 30 year loan for the rest. Even in the first year of the loan the vast majority of my monthly payments were paying down principle rather than being burned up by interest and over the life of it I will only pay a small fraction of what a North American would have in interest.

    Also, the rate of depreciation is a bit exaggerated in the examples you give. While the assessed value of your home might be a third of what you paid for it, that is of course just determined for tax purposes and is not the same as the market value which is almost always much higher. Housing does depreciate in Japan, but not THAT fast. Likewise the example of someone buying a house in 1986 and trying to sell it today is also a bit atypical since it is someone buying at peak bubble era prices and selling in the post bubble world, which represents an extreme.

    None of this detracts from your larger point, which is valid and quite useful to discuss in the context of the recent debate on the adequacy of pensions.

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    • wondering · July 22

      “…(1) home ownership remains attainable even for young working families in major cities which you can’t say about (2) many urban areas in countries where housing as an asset class has increased in value at a higher rate than incomes have and most young families have been priced out of the market.”

      (1) Yes. Eg, one of our kids (under 30) bought a reasonably nice house in Kanagawa. Not new, but it had had some remodeling done and even I was jealous. People in the US are dumbfounded by the mortgage rate they got.

      (2) Not an aussie, but I think this is what has happened there–while their parents and grandparents may be sitting pretty, young people can no longer buy, and even rents are exorbitant. Also, property is an out-sized part of the aussie economy, and I hope nobody upsets that applecart.

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      • Sean · July 22

        My situation is a bit similar (though I’m older than that!) We bought a used house (10 years old) in Nagoya since it was much cheaper than a new house.

        I can draw two comparisons as a homeowner in Japan from personal experience: one to living in Canada and the other to living as a renter in Japan.

        In comparison to Canada, where I’m from, buying a detached house in a major city would have been beyond our means on my salary (which isn’t bad). Prices have gone up so much over the past 20-30 years that for young families buying a house just isn’t an option unless you have inherited wealth (parents who rode the real estate boom) or an extremely high paying job. I have neither so I’d likely be renting an apartment if I still lived there. Not only are the property prices too high, the interest rates also are, so buying a similarly situated house there (small house suburbs of a major city with easy access to downtown) would mean a loan that required monthly repayments three times higher than what I pay on my house here.

        In comparison to renting here, no question that home ownership is way better (at least if you plan to stay in one place for the mid-long term). Renters get the short end of the stick in Japan in most areas except for protection against eviction. I was paying 130,000 Yen per month on a cramped 2LDK place before buying my house. My monthly loan payments, insurance, and property taxes combined are now only about 100,000 Yen per month. And I live in a house that is about twice the size of my old apartment and has a yard for my kids to play in (its a bit further out in the suburbs than the apartment though, but still near a station that connects right to downtown in under 20 minutes). The only additional cost I have is maintenance, but the 30,000 Yen per month is easily enough to offset that (and also have to add on the tax refund I get as a result of the loan). So even though the house is depreciating in value and will probably be at or near zero by the time the loan is paid off (though the land will still have some value) I still come out quite a bit ahead.

        The only way that home ownership loses out compared to Canada or being a renter in Japan is if you have to relocate in the short term, since the transaction costs are pretty high. I figure if you plan to stay in place for at least 10 years though it makes sense.

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      • ShonanSurfer · July 22

        I think you can deduct the mortgage interest for 15 years. 24 years ago it was only four years and then they changed it to 15 but did not allow those already in the loan situation to get the 15-year deal. A friend of mine bought one month after me. He got the 15, I was only allowed the four. What a slap in the face.

        My mansion is 24 years old, but to me, it looks like it is in very good shape. But if prices always go down…but I see older places going up now in Kanagawa, why don’t property taxes go down as well? Are not property taxes based on the value of the property?

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      • Sean · July 22

        I think the deduction lasts for the first 10 years of the loan. Its a significant benefit, the amount I get back each year (I am 3 years into mine) is more than what I pay in property taxes!

        I think the property taxes will go down depending on the assessment. The assessed value of my house is way less than the market value which keeps my property taxes low (about 10,000 yen per month). I don’t know what formula they use to come up with the assessed value of a property.

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      • Driver seat · 18 Days Ago

        One of the problems facing Aussies in the property market is the entry of hot money from Chinese property buyers/speculators over the last 15 years or so including the flouting of laws meant to establish identities of real buyers and protect neighborhoods from being turned into slummy areas where bought properties lie vacant and decay until they are destroyed and replaced with concrete blocks.
        In my own city I was shocked to see high quality housing which is the opposite of the poorly constructed, third world-resembling rubbish so common in a first world country like Japan being bought by foreign speculators precisely to be run down and then destroyed.
        Belatedly the Australian government has come down on the practice of those with an Australian and a foreign passport using their Aussie citizenship to purchase properties for unknown persons in China and other Asian countries. However, so much damage has been done.
        I have lived in Australian houses that were 120 or 80 years old at the time and the quality of everything from materials to plumbing was far superior to any relatively new/new housing you find in Asia including Japan.
        The fast growth of the Australian population has also impacted the general population. Sure we need immigration but each year taking in around 200,000 new immigrants, not all of whom have jobs waiting plus around 70,000 refugees who will live on welfare for most of their lives in Australia including being given priority access to cheaper housing and heavily subsidised rents, is unsustainable in many ways.
        As for ‘exorbitant rents’ – while indeed even in the central wards of Tokyo you can find reasonable rents, the quality of living is poor. 80,000 yen per month for a wooden framed apartment with such wonderful strong materials as board and paper is only great value in Tokyo and other large cities.
        For not so much more you can live in a clay brick ‘flat’ in an Australian city, not freeze in winter and cook in summer because of thin walls, not hear every movement made by your neighbours and have a living space that does not rapidly deteriorate and look tacky because of the poor quality of materials. Not to mention the atrocious plumbing etc.

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  7. ShonanSurfer · July 20

    My last loan payment was yesterday. I had three loans for 35 years but finished it in 24. Kept me on a tight budget, but that is the way it goes. Bought this mansion (not) for ¥42,000,000. Have a fabulous roof garden. I have seen other mansions for sale now older than mine going for near ¥30,000,000. Same size without the fabulous roof garden. But as most of us foreigners know, most people here are cave dwellers and shut themselves into cement boxes, god forbid they go outside unless in their car. So, is the huge roof garden with all my vegetables, etc. be an asset if I want to sell? I wonder if I will ever be able to get my cashback. I guess I could always rent it out to military people as I am close to US bases.

    Like

  8. wondering · July 20

    It sounds like the dentist made poor investment choices, none of which were land/housing. Other than implying that other means of saving and investing are/were limited, I don’t see how the dentist’s experience bears on the overall thesis that houses are non-assets. Did his letter to the Asahi Shinbun mention his residence (condo/house), or his clinic (if he bought a clinic, or rented space instead)?

    Like

    • ShonanSurfer · July 20

      Keep in mind doctors in general here are not rich like American doctors.

      Like

    • shnoopy · July 23

      that part of the article is about the general problem of retirement costs. The dentist is no example for housing investment

      Like

  9. Paul D. · July 21

    We bought a house in Japan about two years ago, but since we couldn’t afford a new one, we ended up with a 40-year-old house that was quite well constructed. Hopefully it will last the duration of our 35-year mortgage; at any rate, 90% of the value was in the land, and I expect the land to be worth the same or more in the future.

    Liked by 1 person

  10. wondering · July 22

    “Valueless structures is one of the main reasons for the steady rise in abandoned homes, which now stands at more than 13 million.”

    A separate reason is the property tax system. A decrepit, abandoned house will be taxed less than if that same plot was bare land. I guess this doesn’t account for a rise in the number of abandoned homes, but it does help reveal why homes are left empty, and not razed (which itself would cost a fair amount of money).

    Like

    • catforehead · July 22

      That’s right. We wrote about that in more detail several years ago: https://bit.ly/2y1b3Ap

      Also, we corrected the number of abandoned homes in the text, which is actually more than 8 million, or 13 percent of existing housing stock.

      Like

      • ShonanSurfer · July 22

        I think you can deduct the mortgage interest for 15 years. 24 years ago it was only four years and then they changed it to 15 but did not allow those already in the loan situation to get the 15-year deal. A friend of mine bought one month after me. He got the 15, I was only allowed the four. What a slap in the face.

        My mansion is 24 years old, but to me, it looks like it is in very good shape. But if prices always go down…but I see older places going up now in Kanagawa, why don’t property taxes go down as well? Are not property taxes based on the value of the property?

        Like

  11. Chris KW · July 22

    This is a really interesting article and the comments posted make some good points too.
    We recently bought a house as we will be here for the next 10 years or so. It seemed the sensible option rather than paying rent, no?
    Yes, there was a lot to pay in fees etc. to buy the house but our mortgage is less than the rent so we should make that back over time. Also, with a house, at the end of the mortgage you should have the value of the land and a place to live, but if you just pay rent then at the end you have nothing.

    Like

  12. Guenter · July 22

    While I agree with the article. I would like to point out that buying an old house Japan may not be a bad deal. When I was buying my house I looked around and found indeed that most old houses in Japan are worthless and sometimes extreme overpriced. However, if you take your time and look around, there are gems that are worth buying. We found 2 old houses that we thought we could buy, but we looked further. Then we found our house. It was such a good deal that we paid an advance the next day after we found it. It was 3 mio Yen and another 3 mio for renovations. Of course it is in the deep country side. We live here since 15 years and another renovation seems necessary, but we never regretted buying the place. So I guess it has to be judged case by case.

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  13. Pingback: Yen for Living: Houses As (non-)Assets — Cat Foreheads & Rabbit Hutches – Seven Seasons of Japan

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