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March 23, 2011

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Wow, I've never heard of houses going down in value over over the long term! First how interesting!

If it were me, and I was really happy in the location, I probably would buy it anyway, since it's saving you a few hundred dollars a month.

I guess it would really depend on how much you travel and if you think you would stay there many years. After all, I doubt if after 30 years you house would be worthless (like cars would).

Houses always have been depreciating assets. Americans have just been in denial about that for awhile. Within 5-10 years, that will be the mindset here as well.

To answer your question, if you have the money and are willing to pay for the stability, go for it. Otherwise, stay flexible and rent.

Japanese home prices increased at exponential rates for a decades and multi generational mortgages were created to increase affordability. I dont know a whole lot about Japanese real estate, but I would bet the nations views of house have changed since then. The "lost decade" and economic hardship have also contributed to views of real estate.

Buy a house if you want. Your primary home is not an investment and you shouldnt buy a home for financial reasons.

The problem in Japan is likely one of deflation or stagnation. As to tlm's comment about houses always being a depreciating asset that is kind of true. In the strictest since of course a house used over 100 years will get worth less and less if it is never maintained or upgraded. In practice this rarely happens. Except for 17 year olds, people don't generally upgrade their cars and they have parts that truly stop to function after a few decades. Houses do too but those things (furnace & appliances) are minor parts of the house and are regularily replaced. As such in practice houses do not generally depreciate (or do so very little over very long lengths of time).

Now the difference that makes it appear that they do not appreciate are due to two things. First is the land they sit on, that appreciates. Second is the economy, if the economy is growing and the GDP is expanding then the minimal depreciation in real terms will be overwhelmed by the expanding GDP such that in nominal terms the property will appreciate. The long term appreciation in nominal dollar terms in a well maintained and upgraded house is generally capped at the rate of expansion of wages (there are exceptions due to local regulations and land or building supply shortages but generally this is true). This is how anyone with any understanding of this should have been able to see that the housing market of the past 15 years was a huge bubble.

So to the question being possed, Japan has been in a deflationary/stagnation cycle as the author says since the late 80's. Until that changes houses in Japan will not go up in value and may go down. In that environment I see no reason whatsoever to buy a house. The minimal rent premium described here makes it a far better financial decision to rent. If the Japanese economy can start inflating again that would change the picture but we have been waiting for that for 2 decades. It's anyone's guess when that might start happening again.

As to tlm's comment that in 5-10 years we will have the same problem in the U.S., I highly doubt that. Certainly the last 4 years might give people reason to believe that but the over-valued market needs time to correct. The correction is not yet done. But our economy does not seem likely to enter the Japanese deflation/stagnation cycle. Stagflation perhaps, but we had that in the 1970's. See a housing chart during that period to notice that houses rapidly appreciated during stagflation.

So for all of people's concern about inflation, reasonable inflation is far preferable to deflation or stagnation. The U.S. easy money policy is likely to lead to increased inflation in a few years. If not and we end up in a Japanese style deflationary liquidity trap then tlm might be right. Currently that doesn't look to be the case.

When the economy is expanding and inflation is increasing you want to own assets that will be carried with that cycle. In the reverse you want to stay far away from those assets and that is where Japan still finds itself after 20 years. I would avoid any hard assets tied to a deflating economy. Someday Japan will probably leave that cycle. People thought that would happen in the early 90's. They are still waiting....

Home ownership has many 'hidden' or unanticipated expenses, which could easily add up to and exceed the "$100 to $200 per month" you expect to save compared to renting, such as property taxes, insurance and maintenance. When you rent and the hot water heater dies, you call the property manager, and he repairs and pays for the new heater. When you own, you call the plumber yourself and pay the bill for the new heater out of your pocket.

What about the value of the land -- do you own the land outright, or do you rent from the government or something?

If you want to live in a location forever then buying could make sense if you will own the land. While a house will depreciate, I think the value of land will probably generally trend upwards. There's only so much space, and if there's a location you like other people probably like it too.

Obviously there are factors that will reduce your land's value (nuclear leaked land, anyone?).

"...land values either maintain or slowly go down"

Akin to the Japanese population. It's all about supply and demand.

Housing is probably the nearest thing we have to a true free market. (For various reasons there's no such thing as a completely free market, but some things come close.) A house is worth whatever a seller and a buyer agree that it's worth. If you have too many people with too much money chasing too few houses, prices will skyrocket. This happened in the US in the 70s and 80s (in most places, some much more than others) for reasons well explained in the book The Dual-Income Trap. Short version: when women's job options and the salaries they were able to command expanded and two-income couples became common, housing prices grew to match the demand. Likewise, Japan has a big population in a small space, so again with rapidly growing incomes you had a high demand for a small supply.

In Japan you now have lower demand because people have less money to throw around (deflation) and houses are less desirable because of the perceived need to rebuild. Housing prices won't go up unless demand starts outpacing supply again. In a normal market (if there is such a thing) housing prices generally track inflation pretty closely, i.e. a house isn't such a great investment. So I'd say if you love a house, buy it, but don't expect to make money on it.

Or, shorter me, what Tyler said.

It depends on whether you can buy the house in cash or not.

If you can buy in cash, then you will save money ($100-$200 per month, as you said) by buying a home. You will not pay interest on a depreciating asset. You can invest the cash you save each month. And if the house gets shattered, you're not obligated to rebuild it -- you can sell it for pennies and walk away.

If you have to finance it, then keep renting. Never pay interest on a depreciating asset.

AffordAnything points out the most important thing here: if it falls apart, you're not obligated to rebuild it. If it lasts until it's paid off, and paying it off (plus maintenance etc.) is cheaper than renting for the same time period, then you can think of it as renting at a slight discount.

If you are going to stay in the same place and find a place you like, I'd say go for it. Provided you have the cash to buy it outright without financing.

Do you have to pay annual property taxes there?

Apex's comments were very insightful. Thanks. Are you an economics professor?

@Paul,

No, but I did stay at a Holiday Inn last night. :)

Seems likely the recent disaster there may greatly affect the decision-making process.

@Apex

That is the funniest response I've read in a long time.

Well played old chap.

I'm also a reader of the blog and 5 years resident of Japan. I would never buy any real estate here (here being Tokyo area) because of the poor construction quality in general and way overpriced land. I don't like the economics of it because I could see us changing our decision to stay in Japan as we don't plan to stay forever. For that reason alone, we continue to rent and feel happy about it. If you plan to stay for the expected life of your house (30 years), then it makes more sense to me to consider buying something (preferably new construction or within 5 years built).

Your house and land will not be worth zero after you live there 30 years. You will retain some equity. True the land will be worth more than the house, but I think things are slowly changing in this country. Building standards have dramatically risen over the last 20 years and the building code is much better than before. If you have a house built with a reliable construction company, you may be surprised how long it would stay safe and livable. This would directly translate into retained market value.

Interest rates are also so low that purchasing can often be cheaper than renting for the same square meters of livable space. If you hardly pay any interest because the banks can borrow for free, why not consider buying? You don't need much leverage at all to gain equity over 30 year mortgage. You mention $100-200 savings over renting. Invest that extra money (but account for property taxes, maintenance, insurance, etc.) and you will find over 30 years of living in the same house that you will come out ahead with house/land equity and extra savings. Beats giving your money away to a landlord.

But can you get approved for the mortgage? That can be an issue for non-Japanese depending on your work, visa and family status. The original poster does not mention nationality so could very well be Japanese anyways. My point of view is as a foreigner married to Japanese with 1 child.

I believe land in countryside (inaka) is quite cheap and could be a very good deal, which is an option if you are more flexible on where you live. If you buy land and build your own house, then you can control the quality aspect to a certain degree by choosing a better homebuilder. There are some which have higher standards and some even who put in central heating and insulation! Americans will be surprised that this is not standard by far in this country. The problem for most of us is the distance from countryside to gainful employment mainly in the big cities.

Good luck with your decision.

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