The Land Without Appreciation: Investing in Japan

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"In most countries, houses get more valuable over time. In Japan, a new buyer will often bulldoze the home. ... There is virtually no market for pre-owned homes in Japan, and 60 percent of all homes were built after 1980."

I just finished re-listening to a phenomenal podcast about the consumer real estate market in japan: http://freakonomics.com/2014/02/27/why-are-japanes... They explore a wide variety of reasons behind the apparent lack of appreciation of a single family homes value over time. Now, as far as I can tell, that doesn't mean that LAND doesn't gain value, just that the building hasn't.

What I find myself wondering is if this is true for multi-family rentals or commercial / retail or if those markets operate on an entirely different set of economic drivers closer to what I am familiar with? Do rentals appreciate in Japan?

-S

I've heard of slow appreciation but not zero. I'm curious now to listen to the podcast.

Confirming once again that there is no such thing as economic, only mass psychology.

Interesting post, Shane. I agree with Townsend in the Podcast. Since materials have improved, it seems logical to expect the value of houses and buildings to increase. Yet, value depreciates each year (with a tax depreciation term of  25 years for houses and 47 years for reinforced concrete buildings). Interestingly enough, the market value of a freehold apartment never depreciates to zero, however. It holds its land value, even though the land portion is tiny by comparison.

So, the question remains, why do buildings and houses drop in value? From my understanding, at the start of the lost decades, the Japanese were badly burned by property losses and passed their skepticism to their children. To this day, the Japanese don’t tend to buy enough properties for value to increase. Land remains the only asset that gains value. Even the last few buoyant years haven't changed things.

That being said, when it comes to a purchase, the best option would be attractive locations. In the right location, owners of entire blocks can enjoy both - less depreciation of structures and highest appreciation of land. However, they will have to settle for lower cash flow.

Ultimately what this means is that in Japan, a cash flow investment becomes a much better option over capital gain. Thanks for posting!

@shane did you ever dig in to this to understand what's unique to Japan's market?

@Shane Pearlman the purchase of property in Japan is fairly complex for foreigners.  My wife is from Japan and her family owns property there, and my parents also own a condo in Japan.  Like with any other real estate, the issue is all about location.  Even within "Tokyo" there is a difference between Tokyo "proper" and the expanded definition of Tokyo.  There is significant appreciation in value if you are in the right location... but this is like in any other market.

However, the difference in SFR's is that the cost and time it takes to scrape an old building and build a new home. The actual time required is significantly less then in the US. My brother in-law built a 3 bed 2 bath home within a span of a few months in an area called Kaminoge.

My in-laws get unsolicited calls from agents to sell their property on a monthly basis.  They have a fairly large lot, in Japanese standards, in Kaminoge, which is a very nice area of Tokyo.  I am sure that they could make a substantial amount of money if they ever sold and moved to the country side.

My parents on the other hand purchased an old condo in an area that was not that great, but it was still within Tokyo proper.  We did a full renovation of the property and they use it several times a year.  That property has substantially increased in value because we purchased in the path of gentrification.  That property is in an area called Daikayama.

Tokyo is out of land, just like any other large city.  If you can find a nice lot in a nice area I believe you will enjoy appreciation growth.

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