resale value

Negative legacies

Posted on by catforehead

We’ve often talked about how the media has glossed over the worsening housing crisis. Though newspapers, magazines, and TV will occasionally run stories about specific cases of foreclosure in order to illustrate structual economic problems, they almost never connect these examples to the structural problems inherent in the nation’s housing policy, which hasn’t really changed for forty years. Our feeling is that the media itself has too much at stake in terms of advertising to point out these structural problems and that, fundamentally, the idea that new housing fuels the economy as a whole is so unassailable that it doesn’t even occur to many reporters that problems related to housing could be systemic and related to other social problems. But a few weeks ago, Shukan Bunshun ran an article that reflected, at least in part, much of what we’ve been trying to explain on this blog.

The article was about properties as legacies, which most people tend to view as “assets.” However, the reporter discovered that in many cases properties have turned out to be considerable liabilities for heirs, some of whom would prefer not inheriting them at all. The first illustration they give is the most potent. A 53-year-old man who lives and works in Tokyo recently traveled to his home town in Hiroshima Prefecture to dispose of his parents’ house, a 50-year-old wooden structure built on a steep grade. His father died six years ago and his mother, who suffers from dementia, entered a nursing home two years ago. The house is in disrepair and the small piece of land around it is overgrown with vegetation. The neighbors have repeatedly complained to local authorities, and the son understands that he has to do something. He decided to tear the structure down, but the lowest demolition estimate he could get was ¥2 million, owing to the fact that access to the property is difficult. Since he had no intention of using the land and couldn’t afford the demolition, he put it off. One could reasonably assume the cost might have been covered by selling the land, but that was another problem. The title was still under his father’s name, which meant, according to the law, it belonged to his mother. Since she was not legally competent to handle the matter, it fell to the next in line, his older brother, who had been estranged from the family for many years. No one knew how to get in touch with him. So in order for the second son to dispose of the property, he would first have to go to court to assume title, a process that would require a great deal of time and money, neither of which he had. Meanwhile, the neighbors become more angry, but the local authorities can’t do anything. Read More

First-timers

Posted on by catforehead

In real estate parlance, there is a term for people who are buying a home for the first time: ichiji shutokusha. In fact, there are homes that are specially designated for these buyers. Almost all are condominiums, and to qualify for the ichiji shutokusha designation they have to have at least 60 square meters of floor area and cost less than ¥35 million. To put it succinctly, they are designed for families and are cheap.

According to the Asahi Shimbun, in 2010 80,204 brand new condominiums designated for ichiji shotuksha were put on sale in the Tokyo metropolitan area. That’s a little more than 18 percent of all the new condos that went on sale in the area that year and a little more than one percent less than the number put on sale in 2009. In fact, the share of new first-time condos among all new condos in Tokyo and its environs has been dropping since the turn of the millennium. In 2001, they accounted for 38 percent of all new condos, and for the next five years the share remained in the 30 percentile range. In 2007, the share dropped to about 25 percent and has been steadily dropping ever since.

The Asahi article doesn’t analyze why this is happening, though one could get a fairly good idea of why such condominiums would become less popular. The above-mentioned criteria would exclude the vast majority of new condos built within Tokyo proper, which is where most people in the region work. The majority of first-time condos are probably located in the far suburbs on inconvenient train lines, which means that their value depreciates even more quickly than condos in Tokyo or other major cities. They are also more difficult to sell, thus contradicting one of the salient features of a first home–it’s appeal as an investment, as a stepping stone to a larger house down the line. The standard middle class narrative says you buy a first house young and then trade up to something better and larger as your family grows. But if the value of your property shrinks over time, that sort of upward mobility is difficult to achieve, since you’re not going to get as much money as you paid for it; and the longer you hold on to the property, the less it’s worth and the less likely you can use the sale money to buy a “better” place. At least with a detached home, the land value may at least stay the same, but there is very little land value involved in condo sales. And since developers are always building new first-time condos that are more appealing than used ones, it becomes almost a self-fulfilling prophecy.

The farther Japan gets from the bubble period of the late 1980s–the last time when condo owners believed the value of their homes would increase–the more likely first-time condo buyers will opt for something that they think they can live in their whole lives, and that doesn’t necessarily include condos designated for ichiji shutokusha. Or, at least, that’s our analysis.

Reform or die

Posted on by catforehead

Change is gonna come: Old kitchen with new (cheap) cabinets

As we’ve pointed out ad nauseum on this blog, it’s becoming more and more difficult to sell older homes and apartments. Obviously, owners who want to unload their properties have to do something to make them more attractive than the next seller’s, which is one of the reasons for the “reform boom.” Though remodeling and home improvement has always been an important factor in the housing market, it’s no longer a matter of added value. It’s considered almost a necessity, given how bad most of the product is and how competitive the market has become.

During our inspections of older properties we’ve seen many that had undergone “reform” for the sake of boosting the sale potential. In most cases, the work done was purely cosmetic–new wallpaper, maybe new cabinets in the kitchen. (New tatami and fusuma are standard in all housing transactions and don’t really count as reform) Some go a little farther by replacing the flooring and putting in a new bathtub, but in almost all the instances where we inspected a reformed property the changes didn’t really amount to anything that made us want that property any more. Though the physical condition of the place is certainly important, the location, layout, environment, and general “image” of the house are, taken together, probably more important. More significantly, a house that has been remodeled just for the sake of improving its chances of being sold is, by definition, discouraging. As a potential owner, we would want to make those changes ourselves, so buying a home that’s already been remodeled in a half-hearted way based on generic tastes seems like a waste, especially if the price has been jacked up to absorb the difference.

As an example, we inspected a twenty-year-old kodan several months ago with an asking price of ¥11.6 million. It was large and sunny, and the layout was sensible. Though the apartment had not been remodeled, the asking price included “reform” that involved new walls and new floors and which would be carried out after the contract was signed. We told the salesperson that we would prefer to do the remodeling ourselves, in which case how much cheaper would the price be? She called us back that night and told us: ¥11 million. That means, theoretically, they were going to spend ¥600,000 on new walls and new floors. Based on what we’ve learned about reform, replacing walls and floors in an apartment that size would have probably cost much more, so it’s likely the remodeling would have been perfunctory at best.

In 2010, the land ministry surveyed people who had sold or were trying to sell their homes. Of those who sold their homes and had carried out home improvements in order to increase the value or simply make them more desirable, 73 percent said they sold their properties for more money than they originally asked for prior to the reform. However, the average boost in price these improvements provided was ¥1.66 million, though the average amount of money spent on said reform was ¥3.13 million. So in actuality, these homeowners lost money, since they paid more for the improvements than they received in added value. Of course, a more pertinent question is: Did the reform actually make it easier for them to sell the house? Our feeling is that they probably would have been able to sell the house anyway without the reform, but that the real estate company talked them into carrying out improvements to make it easier to do so, and then brokered a deal with a remodeling company. (We’ve seen homes that were remodeled for sale only five years after they were built!) It’s a common practice, and one that doesn’t always work. There’s one real estate company called Mount that has hundreds of properties on its website, many of which have been reformed. We know, because we’ve visited a number of them. Most were undesirable because of location and general design; the reform, which was half-assed to begin with, made no difference. And many of those houses still remain vacant after a year on the market.