Buying a House
We’re not quite there yet, but we’re appreciably on the way, and might be 90% of the way should nothing untoward happen. We’ve been looking to buy a home for either a few months or a year now, depending on how you count it. We started about a year ago, looking in Kanagawa, when the bank told us that I didn’t have much of a chance of getting a loan until I got my permanent residency. So I got that, and we started looking again late last year.
We’ve been going around to properties in the area since December, looking at several properties each weekend. We’re using a real estate agency known as “Suumo,” a Seibu firm. We tried looking at some properties in neighboring towns, but they just didn’t work out for us. The area we live in now, Hibarigaoka, is nice: two large department stores, lots of supermarkets, restaurants, and other shops. The train station is an express stop, and connects up with two subway lines, connecting to almost any other lines you could think of. It’s not too close to Tokyo, but not too far, either–about the right balance. Sachi didn’t want to live any farther out, and any farther in would be too expensive. The next station in, Hoya, had some possible properties, but the area was just too plain–not much there at all, just houses for a long way.
There was a place we looked at a few months back which had a nice location, but it was just a foundation under construction, and was out of our price range anyway. However, our agent called up and said that the property’s owner–a developer who bought a larger property from the prior owner and split the land into two lots (a very common thing in Tokyo)–was cutting the price by about $25,000. It was still a bit high for us, but the agent talked him down another $15,000, and it came in to our price range.
The land parcel is 102 m2 (31 tsubo), which is fairly average for this area. The location, however, is very good, and you know what they say about location. It’s a 7 or 8-minute walk from Hibarigaoka station, along a road that almost hits the station. There are tons of restaurants and small shops in the area. There are a few small grocery shops along the way, but 5 minutes in the other direction is a cluster of shops which includes a large, nice supermarket/store, a few video rental shops, and a few more nice restaurants.
The house we’re looking at is just off the roads that lead places, but it’s pretty quiet, so far as we can tell. The back of the house looks over a parking lot for a fitness canter, but it’s on the opposite side from the bedroom (which overlooks a small, quiet street), and the parking lot doesn’t seem to be very noisy at all–though we’ll have to check that. (The agent says he’ll take us for looks over the next few weeks at different times of the day, opportunities we’ll take to inspect the house very closely as well. I’ll also be camping out by the house at other times to check noise levels.)
In short, the location, while not perfect, is excellent. The main down side we can see is that there are no parks nearby–a bit of a disappointment, as we plan on getting a dog very soon. We can still visit parks, just not on an everyday basis.
Now, the house design is nothing special. No high ceilings, no stylish frills. Not even a dishwashing machine, something a lot of new places seem to have. It has a very standard look, nothing that would turn your head. The layout didn’t knock our socks off, but looking at a floor plan doesn’t always tell the whole story.
In fact, I thought that the floor plans were rather dull. One thing I do when I move in to a new place, though, is to plan out how the furniture will go. It helps me understand how the space can be utilized, and really helps with the moving. So I took the layout of this place into InDesign, made sure I had drawings of all our furniture to scale, and then started arranging things. I found that they fit quite nicely. We would utilize the upstairs most of all, and that would be the bedroom–big enough for our bed and furniture plus room to move around–a room for me, like a home office, about 10′ square, quite nice–and another room, about 9′ x 12′, very open and sunny, which we would make into a kind of second-floor living room, with a sofa, table, and the big TV.
Still, the design wasn’t knocking my socks off. So to compare, I took the floor plans for an “ideal” house that had been drawn up just for us. When we were looking at a plot of land in Hoya, a housebuilding firm drew up plans for us based on what we said we wanted. It looked really nice, and we were very interested in building it on some plot of land we might find in the future. Just for comparison, I also put it into InDesign, and started arranging the furniture.
It was terrible. Nothing fit, the living room had no way to comfortably set a sofa and television, and a dogleg between the living and dining areas completely wasted a large amount of space. The rooms for Sachi and I were just too small, and didn’t work for us very well.
Despite being sexier, the “ideal” layout didn’t live up to expectations–and the “dull” layout suddenly started showing promise. That, along with the location being as good as it is, started making the property look a lot more attractive.
Then there was the price; there was nothing wrong with the property (nothing we’ve been able to detect so far, at least), but the price was very good for that area. Just a block or so to the south, about the same distance from the station, were properties opening up–plots of land without houses yet–which were going for about the same as the housed property we’re looking at. Yes, they are about 10% larger, but the prices ranged from 25% to 45% more than our estimate of the land we were purchasing. That seemed to set the local land values such that our land seemed nicely priced, even if you allow for the close-by land plots to also be discounted.
One possible snag–or fringe benefit, depending on how it plays–is that the city of West Tokyo has plans for creating new roads through the town, and one of the planned roads goes through the property we’re looking at. However, the plan will probably not be realized for a few decades at least, if even ever. If it does materialize, it might come at just about at the time we could be looking to sell the house and retire elsewhere. Our agent told us that such eminent domain purchases were usually for good prices, better than market value, and that some people even speculated on such land. However, I’m still a bit suspicious–that the property should be offered to us for a lower price than most in the neighborhood already, plus there being this possible “benefit” way in the future… it’s something I want to look into, though I have to admit I am not sure how I would do it. But I have to wonder if the easier answer might be true–that we’re being sold a plot of land that others may not want because of possible future development in the area.
In any case, there are many steps along the way to buying a house, and we didn’t want to just sit by and possibly watch this one go by, should it be what we want. So we agreed to start the process of purchasing, comfortable that we could back out at any time over the next month. That involved putting up a million yen on the down payment, though it is fully refundable (the process does include signing contracts requiring 15,000 yen in revenue stamps, non-refundable of course). But in doing so, we have dibs on the property, and can still back out anytime up until March 14.
So we went in to the real estate office and spent much of the day there, as the agent walked us through 12 pages of legal and technical details, telling us the history and quality of the property, how the road in front is not city property so we will have to work with neighbors if it needs work, as well as a host of zoning details and contractual obligations.
Then we signed the forms, handed over the deposit, and arranged to see the house again later this week.
Either we could discover that the place is not what we want, or the bank might fail to give us the loan, or we could be moving into our new house by early April.
I think Roy G bought a house in the area semi-recently.
I can shoot you his email if you want to get his advice.
My housemate in Santa Cruz was always getting hit up for maintaining the private road — there were 7 houses and this was a dead-end but it costs him thousands of dollars in the three years I was there . . .
Sounds like a great area, Luis.
How much is a million yen deposit? About $10,000?
About $2,000 is standard for a down payment here in the States.
But 15-30 days to walk away from the deal after signing is about the same here.
Are real estate prices falling in Japan the way they are in the States?
Hope your bank approves your loan without issue.
–kensensei
Troy:
Well, in this case, we would hold title to just half the road in front of our place, just a 20-30 feet stretch, though I think road work in general would be shared amongst neighbors. The road looks OK, and is not a traffic-bearer, so I don’t foresee much difficulty there.
Ken:
Yeah, it’s about $12,000 by today’s rates. What, are you looking for a place too? In your area, I’d think the prices would be prohibitive. As for Japan real estate prices, I simply don’t know. I probably should, but never took the time to note the trends. Looking at it now (This seems like a good article), it looks like prices are at a fairly reasonable low, and were starting to bounce back till the US subprime thing hit, and they took a dive–but the feeling I get is that they will probably recover over time. Of course, who knows.
For me, the convincing point is that if we rent over the next 20-30 years, the money disappears and we have nothing. But if we buy a house, we pay less (about 30-40% less) for the same size floor space (not counting maintenance or property taxes, which would not make up the difference), and in the end we own the property. Even if it falls to half the current value, we’d still have an asset worth about $200,000. So, considering the monthly savings and the fact that we end up owning the land, I simply cannot see how renting would make us come out better, even in the worst-case scenario. And in the best-case scenario, we might even find land prices higher when we sell than they were when we bought.
I simply cannot see how renting would make us come out better
I tend to totally agree. One should not worry about timing markets, trying to find that ultimate cheapest point to buy.
One should just look at the 20 year horizon, where you want to be in 20 years.
In looking over this 20 year horizon, interest rates are so cheap in Japan that buying is basically a no brainer, since the monthly housing cost is much less than area rents.
So looking over this 20 year horizon one must estimate the total cost of renting vs. the total cost of owning (not counting principal repayment, which is a form of savings as long as your home value doesn’t tank from here).
What rents do this decade and next is hard to predict — they could go up, down, or stay the same. Rents are pulled three ways — between supply, demand, and how much people can afford to spend on housing.
The trend of this dynamic is down I guess, as Japan depopulates and employment and wages keeps falling from the 1980s highs.
Here are two diagrams showing the demographic change of 1995-2010 and the coming decline of 2005-2050.
http://imgur.com/a/6fybe
(solid color is added population, transparent color is lost population)
Eg. in the top graph comparing 2005 to 2050 you can see that all population cohorts are going to decline over the next 40 years, except the age 70+ cohorts — the number of 30-34 yo men is going to fall from 5 million in 2005 to around 2 million in 2050!
That means bad news for housing demand — but only nationwide. Tokyo itself is a different market, and it is possible for the population of Japan to continue to concentrate in Tokyo as young people continue to move there.
The bottom diagram compares 1995 to 2010 and shows something of a demographic bulge in middle-age adults, as the baby boom echo from the 1970s has made its appearance into adulthood.
Here we can see the age 35-39 male cohort has GROWN from 4M to 5M since 1995.
Mori Research (they own a LOT of Tokyo real estate) expects the population of Tokyo (23-ku) to continue growing until 2025 or so, levelling off at 9.2M (up from 8.8M today)
They expect foreigners to increase by 150k, children to decrease by 100k, and elderly increasing 700,000 (!). So the “growth” of Tokyo is expected to be just old people!
Mori, being a builder, does expect continued infill in Tokyo, as buildings near the city center get taller and more deluxe. (I love looking at Tokyo in google streetview and I’m shocked at all the development that’s gone on in the 10 years I’ve been gone)
The centrifugal demographic movements of the nation may be repeated within Tokyo-to, to, as population moves from the periphery to the center.
Housing adds one more dimension to the price dynamic of renting, and that’s interest rates. Ceteris paribus, higher interest rates lower home prices, and lower interest rates raise home prices. So if rates go up from here, you may find prices go down.
But since you are going to borrow money, this shouldn’t change your purchase decision since it takes time for this interest rate/price dynamic to work itself out.
The key uncertainty I see in the Japan land market is nominal (non-inflation adjusted ) disposable income (takehome pay). Japan hasn’t seen any wage inflation for a while and I don’t think they’re going to, but what I do think might happen is income taxes, health insurance, and pension contributions might be raised dramatically, in order to start paying down the massive government debt.
The Japanese national debt is simply insane — 900 trillion yen. That’s $10T on a country with roughly 1/3 the population of the US, meaning Japan’s fiscal situation is TWICE as bad as the US’s.
So, if Japan finds it necessary to actually raise tax rates a lot, then I think rents and land prices would fall in response.
This is why I asked you what your tax rates were : )
Here’s another one: 2010-2020:
http://i.imgur.com/M6pci.png
In this chart you can see the Japanese population age 0-44 fade away between 2010 and 2020, with the biggest hit to the 30-somethings, ~5M of this age group is simply disappearing this decade! This is as bad as the German experience on the OstFront!
This is certainly not inflative to rents and home prices — though, as mentioned above, Tokyo is different since it is a youth magnet, and the “U-Turn” and “I-Turn” movement isn’t getting much traction AFAIK.
It might be hard to see in the chart, but ages 45-54 are growing slightly (that’s us!), ages 55-64 are falling by the same amount, and there will be 5M more old people, including 3M more age 80+.
I do think as the number of young people falls, the youth job market will improve dramatically, which might mean wage inflation as corporations start actually needing to hire people again.
On the flip-side, industries that are youth-focused are going to see continued pressure, though from the 1995-2010 chart one can see that the major demographic collapse in youth has just about run itself out — there is no demographic decline in the 15-19 cohort this next decade (yeay!)
But the 0-4 cohort in the 2010-2020 chart is ominous — that’s a 16% decline from 6M to 5M coming, though as the 2050 diagram shows it is expected that this cohort will stabilize at 4M by 2050.
We are in fact “looking”, which is not necessarily the same as buying. Although real estate is still “prohibitive” in the Bay Area in terms of its pricing, these are the cheapest pricing we have seen here in a decade.
On the prohibitive side, we also have a timing issue; since my wife is currently working on her degree, we may end up waiting until she graduates. Then we will have more income and can qualify for a better loan. We really would rather not live in the areas we presently qualify for because we are afraid the commute will kill us over time. So we are definitely interested in keep within our present neighborhood. That puts us in a bit of a bind.
…which is no doubt a serious consideration for making the move to home ownership. But the drawback is the property taxes you need to pay to the state every month. Those taxes continue to increase annually and do not go away once the mortgage is paid off…
A typical 30yr loan, $300,000 3BR home in the Bay Area would total about $1,250/mo in mortgage payments (plus insurance) and $325/mo in state taxes (@$4,000/yr).
http://www.redfin.com/CA/Fremont/40460-Citrus-Dr-94538/home/1691062
So I agree it’s very nice to own a home, but also very nice to avoid all those never-ending state taxes as a renter!
What can you tell us about home-owner taxes in Japan? Scary?
Yeah, it looks like Troy and I had the same question about property taxes in Japan. Could be a major consideration…
I wonder, does Japan sell its debt to China the way the US does? Or does it just print out more currency to handle its debts? Apparently, we have done that a few times since Obama took office. Just like bags of cash falling out of the sky hehe…!
Property taxes are VERY low in Japan, almost non-existant.
Not really. The BOJ was complaining when China started buying JGBs (Japanese Government Bonds)
http://www.ft.com/cms/s/0/47ce9942-bbe4-11df-a972-00144feab49a.html
I don’t really know what’s going on. Japan has run a big trade surplus against the US for decades now:
http://www.census.gov/foreign-trade/balance/c5880.html
which tends to strengthen its yen, so to fight this it has to lend out yen at low interest rates (drawing foreigners to buy yen with their currency) plus print yen to back all this flim-flam stuff (they invented the term “quantum easing”).
we have done that a few times since Obama
actually there have been two monetizing events, in 2009 the Fed bought a trillion dollars worth of mortgage-backed securities, adding much-needed liquidity into the banking system, and this year the Fed is printing $100B/month of new money and injecting it into the economy by buying long-term US Treasuries. This is an attempt to get the longer-term interest rates down to match the near-zero shorter-term interest rates.
The only thing I really understand is that the US economy is really screwed, just like Japan’s. Which is actually worse is an interesting question that I really have no idea now.
Yeah. The estimate our agent gave us said we’d be paying only a 1.075% interest rate on the loan, after applying a “Yuugu,” or “favorable condition” (that’s what my dictionary said, I guess it’s simply a discount) to the normal rate of what I believe was 2.475%.
The agent couldn’t tell us exactly, as the city has to come after 2-3 months and assess the value for tax purposes, but the agent told us that it’s usually within the range of 100,000 and 150,000 yen ($1200 and $1800) per year, or roughly 10,000 yen per month. He also mentioned that we would probably be refunded at least some of that via our federal taxes, though I am not 100% sure about how that is worked out.
Currently, we rent a 90m2 apartment, 15-18 minutes’ walk from the station, for 160,000 yen a month. The loan, should it go through, will be for a house with almost exactly the same floor space, but only 7-8 minute’s walk from the station. The monthly loan payment will be about 110,000 yen, so as you can see, the property tax alone still doesn’t even come close to making up the difference.
I think there may be a city property tax as well, but only 1/4 or 1/5th of the property tax rate. If there are other taxes, we don’t know about them yet–but you make a good point, we should find out!!
Dont forget home owners insurance!
Yeah, that’s actually built into our loan, or at least it can be. At least the basic insurance–fire insurance, or kasai hoken–we got a quote of 500,000 yen for 20 years, roughly 25,000 yen (about $300) per year. We will see an insurance agent about other types of insurance, such as insurance against robbery and earthquakes. I imagine that won’t be prohibitive, either–but I could be wrong…
Thanks, Luis, for chiming in on the home-owner taxes in Japan. Quite a productive discussion.
It was really surprising to discover how different the lending system is over there. Although land is still a relative luxury in Japan, I was glad to hear the lending rates are more affordable. All that and inexpensive health care, too? Moving to Japan was a smart move, dude! (Now if they could bring down the Shinkansen/airplane travel fees a bit, Japan could be an affordable tourist destination as well…)
I wish you and Sachi happiness in your new living environment!
Ken, the problem is they’re not taxing anyone enough to actually pay for all this cool stuff.
I don’t know the end-game with this — what it is or when it’s coming — but it may not be good. I think it’s more likely that rents will continue falling for a long time as stagnant Japanese salaries continue to get eaten up by taxes and social transfer payments.
The low interest rates are part of the government intervention to prop up the housing market after the bubble craziness of the late 1980s, when people started taking a mild inflation and the benefits of the yen doubling in strength and chase land values.
I watched a Japanese TV drama about this in the early 90s: “Even through that we bought the house” . . . the episodes were:
1. Can we get into company housing?
2. We have to buy now!
3. Rumors are flying!
4. How about a used condo?
5. Purchase contract is settled
6. Just like back then
7. No 2nd chance
8. Lies would be OK
9. 1cm in front
10. Last chance
11. Home Sweet Home
http://ja.wikipedia.org/wiki/それでも家を買いました
The story ended with the protagonists paying way too much for a new condo development being built more than an hour out of town.
Part of the 1980s Japanese bubble was the demographics of the baby boom entering the maximum need for housing:
http://tfw.cachefly.net/snm/images/nm/pyramids/ja-1990.png
In 1990 the peak boomer was 40-44 and their boomer echo was in their teens — everybody needed a bigger house. But in 2010, the boomer echo has taken the place of the boomers, and there is no echo echo:
http://tfw.cachefly.net/snm/images/nm/pyramids/ja-2010.png
There are 4M — 40% — less teenagers now than in 1990!
Make no mistake, land is still really expensive in Japan. Here Luis is talking about paying a lot for just 100 square meters of Tokyo dirt + house ~20 minutes away from Seibu Ikebukuro station.
I won’t get into the numbers but the total residential land value is around $200,000 per person in Tokyo, at 3% interest rates that $500/mo, about what people can “afford”. But if interest rates double for some reason, that $500/mo “affordability” level means land prices will fall up to ~50% to compensate, since land can only clear at what the buyer can afford, and this affordability is largely driven by the available interest rate.
While that’s possible, I don’t see any great danger of that happening, and I do think it’s better to finally nest and have a place you can call your own, at a much lower monthly cost (compared to renting) to boot.
The funny thing is that there’s only about 25 square meters of residential land available per person right now in Tokyo, so 2 people buying 100 of it is above average!
“Japan’s bond sales may surpass 50 trillion yen in the year starting April 2013, the Finance Ministry said yesterday. That suggests Kan may not meet a pledge of capping sales at 44.3 trillion yen. Public debt will probably increase 5.8 percent to 997.7 trillion yen in the year starting April 1, from a projected 943.1 trillion yen this year, the ministry said.”
http://www.investmentnews.com/article/20110127/FREE/110129953
997.7 – 943.1 = 54.6, or $550B at 100 JPY/USD, probably what the yen should be at.
And this is being done when the population of aged 70+:
http://i.imgur.com/M6pci.png
is going to increase 5M people in the next 10 years.
and the population of men aged 20-44 is going to fall 3.5M. . .
Going with a working age population of 20-54 yo men of 26M, that $550B/yr deficit is about $20,000 per working man.
That’s how much higher taxes have to be on everyone to balance the government budget.
Now, I don’t know if any change is going to be made in this direction, or if Japan can just keep on borrowing and printing, but that’s basically the only argument for not buying now.
I hate to keep dragging this on & on but I’m also trying to figure this out here and am using this comment section as a notepad : )
Oddly enough, I think few people actually intuitively understand this relationship between after-tax income, interest rates, and land prices.
The thought that they could be related really didn’t cross my mind 10-20 years ago.
It’s more a “thesis” than an iron law now, but maybe possibly buying now isn’t the best idea.
It’s impossible to see the future though, so I may be just adding unnecessary worry here.
What could also happen is that some strange form of wage inflation starts happening, where wages double and triple in response to rising taxes, and Japan successfully inflates down the national debt like the US did in the 1970s.
That’s also “possible” I suppose, and would make buying now an awesome thing.
Nobody knows : )
This buy vs rent is of course influenced by location. Just look at this map:
http://lifehacker.com/#!5742713/trulias-rent-vs-buy-map-colorizes-the-crucial-housing-decision
Where on that map would your position fit, Luis?
Luis’ list price vs rent ratio is around 21 ($400,000 / $1600*12), but that’s deceptive since interest rates are only 1-2% in Japan, and taxes are also much lower, well under 1%.
If Luis can get a new house for around $400,000, the rent-vs-buy calculation is looking very very good — the actual cost-of-ownership of buying a $400,000 place is only around $800/mo in Japan thanks to the rock-bottom interest rates and taxes.
And if Luis can pay down an extra $1000/mo over the next 10 years he could lower the interest cost another $250/mo.
So buying is pretty much a no-brainer now, unless Japan’s fiscal situation just completely falls apart, but that’s like worrying about a massive earthquake or Mothra.
If it happens, it happens, it’s not something one has any control over.
Man, Japan’s budget situation is just as screwed up as the US’s.
http://www.asahi.com/english/TKY201102040289.html
Compared to buying, you’re losingY80,000/mo ( ~Y1,000,000/yr) renting maybe, so home prices would have to fall ~3%/yr for you to lose money buying (~3% of ~Y36,000,000 = Y1,000,000).
Here’s a cool graph:
http://i.imgur.com/jZjtm.png
from:
from http://www.ier.hit-u.ac.jp/~ifd/doc/IFD_WP41.pdf
showing the estimated history of price moves in Tokyo. Looks like there was a wave of appreciation in 2005-2007 that may be coming off now.
http://www.mercurynews.com/business/ci_17479295
shows general deflation is still going on, and if they try to raise the consumption tax again, you can expect another wave of deflation to hit.
Generally when things are so shi–y as now, it’s a good idea to watch a market for a year or two to really get a feel for how long it takes properties to sell.
But I’m always a Debbie Downer on real estate matters so feel free to ignore me : )
Have you considered just the land, and having a house built? The land prices here are so high, the house is the cheap part.
We were looking around at houses a while back, and we found one construction company that does some really nice work. By far, some of the nicest houses I’ve seen in Japan. They really work with their clients through the whole planning and construction stages, so you’ll get exactly what you want. Since the houses are concrete, they can put a lot of house, on a pretty small lot.
You might want to check them out. The url is https://www.h-kobo.co.jp/index.html
Even if you don’t plan to build, it’s worthwhile checking them out if you have some free time. It’s pretty rare to see that quality of construction.
Drew:
We absolutely considered that. At first, when we looked in Kosugi in Kanagawa, the realtor told us that building on a plot was out of our price range–and with special builders, probably your Kobo included, that was true. One we would have loved to use was Sweden House, for example–but their prices started at about 25,000,000 yen, and with the right-sized plot of land in the area we want, it was too much.
However, our current realtor connected us with a housebuilding firm which, if not fancy, seemed to do good work, and were within our potential range. They even made a sample house plan for us based on our stated needs. The plan looked great–until I started trying to place furniture within the floor plan, then it kind of fell apart. Now, that was just a first go; I am sure that working together, we could get a much better plan and see a nice result with the builder.
Our problem now, though, is to guess what our potential options are. It’s kind of like The Price is Right: do you want to keep the lovely living room set, or go for what’s behind Door Number Three? It might be a brand-new car–but it could also be a year’s supply of pickled cabbage. The property we’re looking at right now has a decent structure, but what looks to be an excellent location at a good price. I would love to wait until we find a plot of land we could build on with a location just as good or better with a similar price–but that might not happen. For example, empty plots just a block away are going for prices that are clearly out of our range. We could wait five years and not find a better location–or we could find one next month.
That’s the gamble we’re looking at. It’s a pretty tough one to figure out, when we’re this close to owning a place we would probably be very comfortable in.