Another writer, Chris Dillon, Dillon Communications, has advanced the value of investing in foreclosed property in Japan, so I wanted to assess some of his logic for recommending such an investment. Firstly, buying property in Japan for me is not simply about making money, as I am sure some of you are not out primarily to make money. Japan is a nice place to live or stay, so you would like a 'base station' in order to partake in some foreign experiences, whether its bars, bird watching or touring around, or simply retiring.
I agree with him that if you are looking for capital growth its hard not to look outside the cities. I think there are certain areas outside which appeal for lifestyle reasons, i.e. Holiday houses in the west of Tokyo and Saitama, which make excellent weekend 'get-a-ways'.
He likes old apartments because they offer great yields. I would be inclined to steer away from such old places because you are paying out too much in property management fees, over which you have no control. Why buy an apartment on good yields when you can buy a house on good yields, and pay only low taxes.
In a sense I agree with him about the bad news about Japan. All the bad news has effectively been priced into the market. What else can go wrong? Well, on the basis of his argument, I would have to say the currency. He says the 'yen's strength is not a major issue'. Indeed, because it is not strong, so much as "relatively strong" against other very weak major currencies, namely the Euro and USD. They are hardly a good standard if you are looking at currency diversification. If you were looking at strong or 'hard' currencies, you would be looking at the AUD. Incidentally, Australia has recorded the strongest property market over the last year. Another good property market is the Philippines, with its 7% GDP growth, 2% population growth and strong property price growth and still reasonable yields. It is also a relatively strong currency. More importantly, Japan has a public sector debt of 200% of GDP. There is every reason to believe a fair slug of that will be repaid by debasing the currency in the next decade, as the US and Euro zones do likewise.
He does make a good point:
"One of the biggest is in the preference for new property. In Japan, used homes represent about 13% of total sales, compared to 78% in the United States and 89% in Britain. That is changing, as the Japanese government encourages the construction of long-life homes, but many people still see homes as consumable items".
The significance of this is that a steep discount applies to old housing, such that you can buy an old house for essentially less than zero in the foreclosed market. People do not want old housing, particularly due to the lack of insulation, but also shoddy building practices, lesser durability.
He makes a good point about buying rural property. The population rate is expected to collapse in rural areas, so the closer you can live to major cities the better. The flipside is that wasteful use of infrastructure might result in either tax incentives for rural areas, or eventually stronger migration. The cheaper that rural property becomes the more attractive it becomes for other purposes, whether lifestyle activities or other activities. It must be acknowledged that people have a far higher level of mobility than in the past, so we do have to question old paradigms.
