The Japan Question

This year I’m going to make the worst investment decision in my life.

Japan is the last place on earth you want to invest in property. It has the world’s highest debt to GDP ratio, and explains why they can’t escape deflation. When you’re deep in debt, you spend less. The BOJ, the equivalent of the RBA, has the cash rate set at –0.1%.

Then there’s the population decline. A third gone by 2060. That’s the entire population of Australia vanishing, two times over.

Then there’s home values. Around the world a house is considered a capital good. That is over the long term, provided it's well maintained, it increases in value. In Japan, after 15 years the typical house is worth nothing. Half of all homes in Japan are demolished within 38 years. Houses in Japan are a durable consumer good, not a capital good, and this is another primary reason Japan can't escape deflation. (There’s a great Freakonomics podcast on the subject here: http://freakonomics.com/podcast/why...isposable-a-new-freakonomics-radio-podcast-3/ and detailed analysis here: http://www.nri.com/global/opinion/papers/2008/pdf/np2008137.pdf)

This year I’m going to buy a house in Japan.

My wife is Japanese and my son almost school-ready, and I’ll spend the rest of my life hopping between the two countries. We may live in Australia for years at a time, which just makes the idea of renting long term in Japan unthinkable to me, even if it doesn’t necessarily make great financial sense. While monthly rent will be compatible to mortgage repayments, it’s the land tax and upfront fees of buying (roughly 10% of the purchase price, in my case around AUD$60k + deposit), that is going to hurt.

The home loan product we’re looking at is the most popular in Japan, it's called a Flat 35. LVR up to 95% and a fixed interest rate of – wait for it – 1.2%.

Sounds great until you consider the value of the house shrinks far more rapidly than the outstanding principal on the loan, even if the land value remains constant. I’m still trying to wrap my head around whether or not I will be at risk of negative compound interest or not (Deflation - How a Mortgage Can Destroy Your Real Estate Wealth). And if anyone has a good handle on that, please fill me in.

Feel free to try and talk me out of it!

 

Then you probably look at it like an expensive sports car. You buy not because it's an investment decision but because you have decided for that utility, you are willing to pay that price (whatever that price is).

Yes, your summary of the situation in Japan does sound like this is a bad financial investment. But it's going to be hard to talk you out of it if it ticks some other happiness box that only you can quantify.

That said, I love Japan and I can see the lifestyle attraction in owning a holiday home there (preferably near the mountains)...

 

Love Japan
Logic goes out the door if it's lifestyle

 

Yep, lifestyle decision so no point being logical about it.
It's probably a better investment than a boat.

 

Yes boats never ending money pitt

 

I would suggest not to buy, as Japan markets is different, because a house is depreciating annually because of the structure, like a car.

 

How much does it cost to buy a place?

If it's expensive then it's dumb. If it's cheap its a boat....if it's really cheap. It could be a winner?

How.much you have to spend makes a huge difference to the viability and risk of it....

 

There was a BA on Steve McKnights forum buying up in Japan, lots of interesting posts
Under - investing overseas

 

@Craig Rozynski Where in Japan are you considering?

 

In some cases you'd get more square metreage out of a luxury car.

 

In my mind it's expensive because it wipes out my cash reserve, and I'm buying a depreciating asset while in my accumulation phase. It puts my next IP purchase in Australia off a couple of years. Perhaps that's not a bad thing given how overheated it is in Australia's capital growth hotspots now.

 

East Tokyo area: Setagaya, Mitaka, Chofu. Trying to find the sweet spot between being close to central Tokyo and having floor space.

 

Weird. I'll look it up. Rental yield in Tokyo is around 5%. Nothing special.

 

You have a - in front of the 1.2%
Is it really negative 1.2% ?

 

I know people buying commercial properties there yielding over 10%. Not sure about residential though. I heard tenant have to pay you extra one month of rent as a 'gift' to thank you for letting them rent the place. Not sure if that's still true...

 

I was going to ask as well, was that a 1.2% or -ve 1.2%, because it wouldn't be uncommon!

I have a friend who lives in Japan, has a Japanese wife, has a business there and loves it. Ultimately, it does come down to a lifestyle choice, more so than anything else.

Another way to look at it financially, would be:
i. What is the rent compared to the mortgage that you would need to pay? If the mortgage is cheaper than the rent, then there's a good argument to buy the property. (Note in the UK, interest rates are really low, yields on rental properties are typically 5% - 7%, and the tenant pays the council tax, in the UK it is often cheaper to have a mortgage then rent but because of the lending criteria, a lot of people can't get a loan).
ii. For the deposit you would need to pay, how many years rent would that get you? Often in very low yielding environments, where foreigners need to pay big deposits, not uncommon for the deposit to be like 5 to 10 years rent.
iii. If you could get a bargain sports car in Japan, and still have money left over for the house - then could have both!

 

I looked him up. Some good info in there but his gig is selling high yield high volume totally irrespective of capital growth (i.e. none or negative even). Doesn't sound like a good long term strategy to me.

 

Ok, got it

 

Ha! No sorry @Beano that's just deceptive grammar. Still, 1.2% is pretty good!

 

You have given an argument against buying in Japan.. Which most here would agree with from a purely financial viewpoint.
What is your objection to not wanting to rent there?