Author Topic: Japan Case Study - 30 year home loan  (Read 5420 times)

dungoofed

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Japan Case Study - 30 year home loan
« on: May 11, 2015, 08:08:44 PM »
Hi guys - this is my first post in the real estate forum. I'm not a real estate investor myself due to the fact that I have significant exposure "by proxy" through my parents. But I thought you might find this case study a little interesting.

Basically I was chatting with a foreigner here in Japan about his 30 year home loan. He took it out in 1985 and had just finished paying his final payment. It's a condo in a convenient part of the outskirts of Tokyo.

The thing that makes this case study interesting to me is that for the most part, inflation over the entire period has been completely flat. Accordingly, wages have been stagnant. The housing market has also remained flat, except for a little uptick in 2008, and again over the last two years or so as a combination of Japanese QE and anticipation of the 2020 Tokyo Olympics.

I wasn't going to post until I had the amount of the initial loan but I emailed the guy and he hasn't come back to me, and also I think the figure is not necessary in order to get the point across.

Basically, he took the loan in 1985 because for a brand new condo he was paying about USD1500/month in payments, whereas renting the same place would have cost him about USD2000/month. A no-brainer, right?

Not so fast.

For the first 10 years it was a fantastic deal. New place, great mod-cons, etc.

For the second 10 years, 1500/month was about what he would have expected to pay for a 10 year old condo. He did a bit of renovation work on the bathroom and kitchen.

For the last 10 years, it pained him every time he had to pay the 1500 bucks. No-one (including him) wants to live in a 20+ year old condo, and similar rooms in the building were renting out for 800/month.

(using a USDJPY rate of 100 and rounding judiciously for clarity).

Like I said, what made this case study interesting is that this 30 year period didn't have inflation to conflate the figures with nominal gains. And a cursory look at the way real estate is being sold these days, it's still "you could either pay 2000/month for this place in rent, or buy it and your payments are just 1500/month" (alternatively: you can get 2000/month rent while paying 1500/month in loan repayments).

sammybiker

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Re: Japan Case Study - 30 year home loan
« Reply #1 on: May 11, 2015, 11:48:10 PM »
Maybe I'm missing the point but he still now owns something that he can either rent out or pull equity out of, yes?

Where as if he just rented at $2k/mo for 30yrs, he would have paid 700k+ and not see any return?

Not to mention tax write-offs (if applicable?).

And what's wrong with a 20 yr/bldg?  Surely, in a market as compressed as Tokyo (not that I pretend to know anything about this market), there is good demand?

Would love to hear the hard numbers if/when he gets back to you.

marty998

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Re: Japan Case Study - 30 year home loan
« Reply #2 on: May 12, 2015, 03:21:35 AM »
Yes... he now owns the place. If he were renting, he would still be renting now.

cerebus

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Re: Japan Case Study - 30 year home loan
« Reply #3 on: May 12, 2015, 04:03:28 AM »
I recall listening to a podcast where they pointed out that the Japanese have a weird aversion to old homes. They rarely last longer than 20 years and then they tear them down and rebuild. Something to do with earthquake mentality.

Quote
For the last 10 years, it pained him every time he had to pay the 1500 bucks. No-one (including him) wants to live in a 20+ year old condo, and similar rooms in the building were renting out for 800/month.

The problem is, nobody could have predicted that housing would depreciate and income would stagnate over that period of time. 30 years ago Japan was on a tearaway bull run through electronics and vehicle manufacturing. It sounds like your friend bought near the market peak and he's had to witness the sad depreciation of his home valuation. If the opposite had been true and inflation continued on a steady tick, he would now be paying a nominal amount for a sought-after property. This is also why I dislike the idea of a 30 year bond - or maybe, would choose to get a 30 year term and pay down aggressively.

theoverlook

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Re: Japan Case Study - 30 year home loan
« Reply #4 on: May 12, 2015, 08:33:47 AM »
Maybe I'm missing the point but he still now owns something that he can either rent out or pull equity out of, yes?

Where as if he just rented at $2k/mo for 30yrs, he would have paid 700k+ and not see any return?

Not to mention tax write-offs (if applicable?).

And what's wrong with a 20 yr/bldg?  Surely, in a market as compressed as Tokyo (not that I pretend to know anything about this market), there is good demand?

Would love to hear the hard numbers if/when he gets back to you.

I think you missed the drop in rent prices over the period.  So for a comparable place he would have paid $2000/mo for a while, then $1500/mo, then $800/mo.  By the end it's a 30 year old condo that's not worth as much as he paid for it.  Selling or pulling equity out only works if values increase.

kendallf

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Re: Japan Case Study - 30 year home loan
« Reply #5 on: May 12, 2015, 08:54:57 AM »
Still probably not a bad deal, depending on the rate of his mortgage, of course.  From your nominal figures, let's say he's $24k in the hole in "equivalent rent" over that 30 year period, plus the investment return if he'd invested that difference (this is probably negligible as he effectively "front loaded" by living more cheaply than comparable rentals at first).  In return, he has a condo worth $xxx, probably not a nominal sum.

The maintenance, taxes, and transaction fees could make this a bad deal or a good one, but it's probably not a horrible one.

Jmoody10

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Re: Japan Case Study - 30 year home loan
« Reply #6 on: May 12, 2015, 09:06:59 AM »
I recall listening to a podcast where they pointed out that the Japanese have a weird aversion to old homes. They rarely last longer than 20 years and then they tear them down and rebuild. Something to do with earthquake mentality.


http://freakonomics.com/2014/02/27/why-are-japanese-homes-disposable-a-new-freakonomics-radio-podcast-3/

dungoofed

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Re: Japan Case Study - 30 year home loan
« Reply #7 on: May 12, 2015, 05:04:17 PM »
Thanks Jmoody10, that's a great podcast, explains a lot. So it's not just a matter of inflation conflating the returns in countries overseas.

The foreigner in the above case study went in with a Western mindset (in the middle of the Japanese bubble no less). He is currently looking to renovate and possibly sell but his only real market is other foreigners in Japan.

sammybiker

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Re: Japan Case Study - 30 year home loan
« Reply #8 on: May 12, 2015, 06:00:01 PM »
I caught the drop in rent price (although I'm doubtful that you can rent a 2br, 20 yr old condo in Tokyo for only $800/mo).

Selling or pulling equity still works here - and it works a whole lot better than if he had rented all this time.

Renting = he pulls nothing.  He owns nothing.

Buying = he pulls something.  It may not be as much as he paid for it but it's still something.  He owns something.

Maybe I'm missing the point but he still now owns something that he can either rent out or pull equity out of, yes?

Where as if he just rented at $2k/mo for 30yrs, he would have paid 700k+ and not see any return?

Not to mention tax write-offs (if applicable?).

And what's wrong with a 20 yr/bldg?  Surely, in a market as compressed as Tokyo (not that I pretend to know anything about this market), there is good demand?

Would love to hear the hard numbers if/when he gets back to you.

I think you missed the drop in rent prices over the period.  So for a comparable place he would have paid $2000/mo for a while, then $1500/mo, then $800/mo.  By the end it's a 30 year old condo that's not worth as much as he paid for it.  Selling or pulling equity out only works if values increase.

expatartist

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Re: Japan Case Study - 30 year home loan
« Reply #9 on: May 12, 2015, 06:00:59 PM »
Japan is a unique culture, and so is its real estate market. I researched it for a time when we were looking to buy a place or two with a company I found via BiggerPockets, but eventually decided against it.

dungoofed

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Re: Japan Case Study - 30 year home loan
« Reply #10 on: May 12, 2015, 07:18:15 PM »
Hi Sammybiker - don't forget that from the 20 year mark he's paying 1500/month for a place that is worth 800/month. If he wants to pay for and live in a place that is worth 1500/month, what are his options at this junction?

Or am I missing something (as I said, I'm not a home owner), whereby this is normal for all home purchases? ie there is a degree of instant gratification at the beginning.

JamesAt15

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Re: Japan Case Study - 30 year home loan
« Reply #11 on: May 12, 2015, 07:47:48 PM »
I feel like I should probably post, as a Japanese homeowner (as in, owner of a Japanese home), but not quite sure what point I can make.

There are tax breaks for your home loan - I believe for the first ten years, you can deduct about 1% of the full outstanding balance of your home loan from your tax liability amount. This can be pretty significant. I believe there are additional deductions if you are buying a home that is built to certain long-lasting construction standards (and is certified as such) but I don't know the details on them. Most houses are not, I believe. (At least in the Tokyo area. I imagine other areas might have other construction methods being more common.)

I'm looking at this link, which points out that this deduction is for new homes, and secondhand homes built in the last 20-25 years or which comply with earthquake resistant standards and have a warranty. Older properties probably would not qualify, so this suggests there would be a significant tax advantage in buying a newer property over an older one.

I want to listen to that Freakonomics podcast, but it is true that the prevailing mindset seems to be that the value of your building depreciates to zero over a period of 15-30 years, and the remaining value is based on the land itself. Hopefully the value of owning land in the Tokyo area will generally increase over time, but for someone who bought during the late-eighties bubble, that may not be true. (Or it may have only recently recovered.)

One can argue that this is ridiculous, but if everyone in your country believes that your 20-year old home is worth basically nothing, you won't be able to sell it for much, regardless of how much you disagree.

Owners of high-rise apartments often technically own a small plot of the land it resides on (tens of centimeters on a side, say.) I imagine this helps put a floor on the perceived value of your unit in the building, since it is tied to the land value. I'm not sure, but I assume in other cases owners only purchase the building area and don't have the land ownership. I imagine you could get a cheaper price for those types of apartments but then they will depreciate more heavily.

sammybiker

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Re: Japan Case Study - 30 year home loan
« Reply #12 on: May 12, 2015, 10:40:33 PM »
Hi Sammybiker - don't forget that from the 20 year mark he's paying 1500/month for a place that is worth 800/month. If he wants to pay for and live in a place that is worth 1500/month, what are his options at this junction?

Or am I missing something (as I said, I'm not a home owner), whereby this is normal for all home purchases? ie there is a degree of instant gratification at the beginning.

Agreed, this isn't normal, at least per most US standards that I've seen.  But given the alternative (having no equity/pissing away 700k+ in rents over the years), being a homeowner, even at the devaluation of values/rents, is still advantageous.


StockBeard

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Re: Japan Case Study - 30 year home loan
« Reply #13 on: May 14, 2015, 10:15:12 AM »
Selling or pulling equity still works here - and it works a whole lot better than if he had rented all this time.

Renting = he pulls nothing.  He owns nothing.

Buying = he pulls something.  It may not be as much as he paid for it but it's still something.  He owns something.


(Note: I lived in Japan for 10 years, and owned an apartment for 2 years)

The problem is that you own something that nobody wants. The Japanese mindset is that the value of a house depreciates dramatically with time, so houses and apartments are built with that mindset. Old houses are inherently dangerous in Japan, because they were built to be destroyed within 20 years. It means that with a 35 years mortgage, you still have to pay quite a lot for the last 15 years, when nobody would give a dime for the place you're in.

In that country, the land has value, not the house on it. When people buy an old house in Tokyo, the first thing they do is destroy it and build a new one. They purchase the land, whatever is on top of it is actually a liability, not an asset.

Considering all of this, there are still benefits to owning vs renting:
- as you said, at the end you still own something. It's crappy, old and dangerous, but it's still a roof
- When you rent in Japan, you have to pay an insanely expensive fee to the landlord every two years. (up to 2 months of rent). This is called the "key money". People tend to forget to include that in their calculations when they compare the fees of renting to owning.

That being said, I feel renting in Japan is a better deal, as you can move regularly and live in something "new" every 2 years, at close to no cost difference

zephyr911

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Re: Japan Case Study - 30 year home loan
« Reply #14 on: May 15, 2015, 11:37:48 AM »
Hi Sammybiker - don't forget that from the 20 year mark he's paying 1500/month for a place that is worth 800/month. If he wants to pay for and live in a place that is worth 1500/month, what are his options at this junction?

Or am I missing something (as I said, I'm not a home owner), whereby this is normal for all home purchases? ie there is a degree of instant gratification at the beginning.
How much is he paying in principal at this point?
20 years into the loan, it should be *most* of his payment. If the payment itself is the issue, he could reamortize and probably get under $800.

Megma

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Re: Japan Case Study - 30 year home loan
« Reply #15 on: May 24, 2015, 05:34:58 PM »
Well even if no one wants his old condo now, he can still live in it for free now. Though I imagine there is also a prestige factor here, we mustaschians wouldn't care but I have the sense this could be a big deal in Japan...very interesting mindset about housing age.

StockBeard

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Re: Japan Case Study - 30 year home loan
« Reply #16 on: May 24, 2015, 08:46:45 PM »
Well even if no one wants his old condo now, he can still live in it for free now.
Not necessarily. When I bought my condo in Japan in 2011, I was told there could be some sort of vote after 25 years or so to destroy the building. It was presented to me as some "standard procedure". The "weight" of one's voice is proportional to the size of their apartment. At that point, a possible scenario is that your house is destroyed, and you get paid whatever share of the land you own (hint: nowhere near what you paid for the condo).

Would be interested to know if I was the only person living in Japan who was told that.

(note: this is not true for single houses)

dungoofed

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Re: Japan Case Study - 30 year home loan
« Reply #17 on: May 25, 2015, 06:24:07 PM »
Wololo - my understanding is that is standard contract these days, but I wasn't aware they could force you to sell the land at the end.

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Re: Japan Case Study - 30 year home loan
« Reply #18 on: May 25, 2015, 07:13:35 PM »
I actually quite like the Japanese approach.  I remember homestaying with a family, and they decided to change their bathroom.  It was a modular house, so the old one was pulled out, and a new one slid in.  Browsing home catalogues is always fun. 

Haven't listened to the podcast, but it is partly cultural/ geographic (historically, houses were paper & wood, and the Ise Shrine has been destroyed and rebuilt on a regular cycle for thousands of years now, and earthquakes meant that a solid building was more dangerous than a lightweight one) and partly economic. 

Here in HK, there is something similar where banks are extremely reluctant (as in usually won't) give a mortgage on pre-1975 buildings.  That's because that is when the anti-corruption bureau finally got teeth.  Stuff built before then - who knows what corners the contractors cut.