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Does Japanese Real Estate Decrease In Value?

Japanese real estate financial planning low-risk investment Does Japanese Real Estate Decrease In Value?

Does Japanese real estate decrease in value? Well, it’s complicated. Some parts of Japanese real estate are likely to decrease in value, while others are likely to increase. Furthermore, the statement “Japanese real estate decreases in value” is a loaded one. It assumes that in other popular investment destinations, real estate doesn’t (or won’t in the future) decrease in value. This assumption isn’t always true. Even if an investor’s real estate is decreasing in value, at what rate is it decreasing? Can an investor still profit handsomely even under a negative capital appreciation situation?

Do Japanese Buildings, Specifically, Decrease In Value, And If So, By How Much?

tokyo modern homeReal estate consists of land and buildings. Regardless of country, buildings have a limited lifespan and depreciate over time (unless the building has value specifically because of how old it is). The Colosseum of Rome or Kiyomizudera (a famous temple in Kyoto) probably haven’t lost value over the millennia. However, in all countries, most buildings have limited lifespans. In the US, the average age of a house at demolition is 66.6 years, 80.6 for the UK. Japanese houses are infamous for their estimated lifespans of 27~30 years (or 40~50 years for concrete buildings), but… …keep in mind that these statistics are largely referencing the 1950s~1970s postwar era, when construction standards were lower. The Waseda University Faculty of Science and Engineering estimates the lifespan of the average Japanese house at 64 years, nowadays. Therefore, for recently-built buildings, lifespans are similar across the three developed nations.

Do Japanese buildings depreciate, then? Sure, on average, they do. However, the idea that “Japanese buildings depreciate while American and British buildings appreciate” is false. One of the reasons for this misconception is that in Japan, Japanese houses and buildings are separate. For example, for tax purposes, they are two different entities. In the US and the UK, land and buildings are together; there is no visible separation. This masks the decrease in value of the building itself with the increasing value of the land. This is a commonly misunderstood fact, and key component to Japanese real estate investment.

japanese real estate depreciationWhat About Japanese Land?

Japanese land, on the other hand, does not inherently degrade with time. The land of Japan first surfaced out of the ocean in the mid-Silurian to the Pleistocene period. It has seen such species as Fukuiraptor and mamenchisaurus. Extremely recently, a small, warm-blooded species related to mice and macaques known as “man” has appeared on the islands. Man bases the value of the land on supply and demand. The Japanese land supply has stayed more or less the same, save for occasional geological events, land reclamation, etc. The demand has decreased in most rural areas and suburbs, but increased in cities. For example, Tokyo grew by ~148,000 people in 2019. Osaka and Nagoya grew, too. Land has recently risen in value in six major cities. Land price retains value and tracks inflation, hence the long-term tendency to increase in value.

Is A Home Really An Investment? What About In Japan?

In some countries, homeowners think of their homes (primary residences) as “assets”. However, when we factor in property taxes, maintenance and repairs, etc. a home (regardless of country) may be a liability. For example, for a $500,000 house, with 2% property tax, and 1% maintenance and repairs, it costs $15,000 per year:

$500,000 × 0.02 in property tax = $10,000 in property tax a year

$500,000 × 0.01 in maintenance/repairs = $5,000 in maintenance/repairs per year

 

The above model could be New Jersey, where property tax is currently over 2% (much higher than Japan). Is this home an “asset” or a “liability?” As long as the land appreciates, then it’s an asset, but only if the owner sells it. Until he/she sells it, unless renting it out, it’s a -$15,000-per-year liability. Will land appreciation in the US happen indefinitely? No, probably not, because the average number of children born per woman is only 1.73 on average in 2019. The number is even lower in the UK. Both the US and UK have Total Fertility Rates (TFRs) rapidly approaching Japan’s.

In spite of the low birth rates in all three nations, land values have continued to increase. Yes, you read that right. In Japan, land values have continued to increase.

tokyo real estate price history

Does Japanese Real Estate Decrease In Value Due To Vacancy Rates Caused By Demand Going Down?

Japan, the US, and the UK all have comparable vacancy rates. The US vacancy rate is currently around 12.7%. This is higher than Tokyo Metropolis’ 11.1%, or <5% in the 23 Special Wards. For Japan as a whole, the number is 13~13.5%, less than 1% difference from the US.

Purchases of pre-owned homes differ, but the numbers are changing. In the US in 2008, 90% of homes bought were pre-owned (84% in the UK). This number is only 13.5% in Japan, but is increasing. Traditionally, Japanese like to tear down buildings and build new ones. Just look at Ise Grand Shrine (伊勢神宮, Ise Jingū), rebuilt every 20 years. However, this is changing rapidly. Younger Japanese are far more likely than their elders to buy a pre-owned home. Daiwa House, Sekisui House, and Muji are making a fortune refurbishing homes that they wouldn’t have in the past.

Don’t Japanese Houses Last Only 30 Years, Though?

The government and construction industry wish they did. Indeed you can tax-deduct depreciation expenses for a wooden house for 22 years (47 for a reinforced concrete building). This saves you lots of money on your personal income tax. However, the number “30” has little basis in reality now. A properly-cared-for Japanese wooden house should last 64~65 years, even 70 years. The reason for the 30-year myth is that in the 1950s~1970s postwar years, there was a housing shortage. Therefore, construction companies built many cheap houses with poor earthquake resistance. This has since changed. Another reason for the 30-year myth is that the government, many years ago, only wrote down numbers for demolished buildings. Therefore, a 40-, 50-, or 60-year-old building that was still standing didn’t enter into the statistics.

Many such buildings exist; their owners don’t even want to tear them down. This is because vacant land property tax is six times higher than land with a building on it. The property tax for vacant land is also three times that for agricultural land. Therefore, there’s no shortage of buildings in Japan that are much, much older than 30 years old. They don’t, however, enter into the statistics, because they’re still standing.

Wooden Japanese houses typically depreciate fairly quickly for the first 15 years. After that, the depreciation levels off. As long as the home is still functional and doesn’t have any serious problems (e.g. termites)… …it’ll retain most of its value for as long as it continues to remain functional. The government draws this line (for tax depreciation deduction purposes) at 22 years. Using both rules of thumb, suppose you buy a 25 year-old wooden house. It still has a solid foundation, strong frame, etc. It’ll decrease in value only very slowly. Its land may increase in value too.

What About The Claim That “Japanese Houses Have Lost All Their Value After 30 Years?”

Rumors that “after 30 years, a Japanese house is worthless” are groundless and contrary to facts. As long as a building is still safe, liveable, and capable of generating passive rental income, it’s not “worthless” and will command an appropriate price in the market from buyers.

The Quality of Japanese Buildings Has Increased Substantially

building earthquake codes

The Japanese government has promulgated new earthquake resistance codes repeatedly. This has resulted in the strength of buildings increasing. The government wrote earthquake codes in 1971. However, in the 1978 Miyagi earthquake, these proved not to be enough. Therefore, in 1981, the government created the Shintaishin (新耐震) codes, which are much stricter. They updated these codes in 1995 and 2000. Japanese buildings are now stronger than ever.

Conclusion: So, Does Japanese Real Estate Decrease In Value?

Real estate, including Japanese real estate, consists of buildings and land. Historically, Japanese land increases in value. Buildings degrade over time regardless of the country. Although the media repeatedly claims that Japanese houses only last 30 years, this is out-of-date, based on flawed statistical methods. These methods only count demolished properties. Most of those properties date back to the postwar era, a time of low-quality construction. However, construction standards have increased substantially, especially since 1981’s Shintaishin earthquake codes. A properly-cared-for Japanese house should now last upwards of 70 years, which is similar to the US or the UK.

Another concern is birth rate. However, the US and UK birth rates are also dropping. They are now closer to Japan’s than they are to replacement level. In Japan, thanks to rural-urban migration, the population is shifting from rural and suburban to urban areas. We recommend buying real estate in big cities, with strong population demographics, which are still growing.

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