In my last post I described the experiences of a Japanese and foreign national who bought a property on the southern edge of Tokyo. This was a particularly interesting transaction for several reasons:
1. It was a very cheap inner city property
2. It involved the purchase of a 2-storey home on land leasehold
There are a number of reasons why you ought to consider such a proposition. Normally, I would not be particularly interested in leasing land, but this is different...the terms are very good. There are a number of appealing elements:
1. If you are buying a new apartment, you are buying alot of building value, which is destined to depreciate a great deal over coming years. In the case of these buyers, they were paying a nominal Y500,000 (USD5,000) for the 3br house, which if they spent a little money might rent for Y125,000 a month, given its proximity to Tokyo City.
2. They are not paying a huge about for land. Now, owning land in Tokyo might be considered an appealing idea because whilst Japan's population is falling, Tokyo's is increasing, and some areas more than others. The problem as I see it is that those new residences are moving into new high rise apartments, and there is plenty of room for more. Future buildings might even be cheaper to build due to the development of new high strength TiV-based steels. This could greatly reduce the materials needed to construct a home. The old homes will not have the features of the new homes, however given the steep discount in the price of the older homes, its worth considering the 'low-cost' property option. Its a different issue of course if money is no object. You can expect those new 'high priced' homes to depreciate significantly in value.
3. Saving money on capital allows you to place the bulk of your capital in better performing asset classes like gold stocks - and if you are an Australian or New Zealander, than there are few better places than my recommended explorers. ASX gold stocks with upside. Canada, the USA and Britain of course have similar opportunities. Some years ago I projected a gold price of $2400/oz. We are still some way off based on a DowJones/gold ratio of 5.
One of course has to remember that its good to use others money...but remember that does not always hold. Its been good for the last 15 years because of low interest rates. A pertinent issue is your capacity to access those low-interest loans in Japan. This might not be as easy for foreigners. Nevertheless, I would caution against the appeal of these loans because Japan will need to finance its deficits in future, so they are looking at a higher interest rate environment as their savings rate falls and their debts rise.
Today Japan has a public debt of 200% of GDP, requiring a combination of taxation, national income growth (immigration???) and monetary debasement to repay it. That is going to cause a rush into tangible assets like property or a shift of money offshore. I would suggest Japanese accustomed to foreign markets will buy assets in places like Australia, NZ, Thailand and the Philippines. I am surrounded by Japanese retirees as I speak in this apartment complex in Queenstown, NZ.
For most people however, they will more realistically stay in Japan to be close to family. Most will buy property given the high yields. But they have to buy the right property. Apartments are not going to appreciate in value....least of all the over-priced premium property off-the-plan. You are buying a box in the sky. If you are getting a box, better an old box on ground floor, and 30minutes from the city centre. Why?
You might pay as little as Y3,000 for a land lease, having paid just Y6mil for the house. Even if you have to pay Y5,000 per month under a new lease, its a far better deal than sinking money into a high priced modern apartment which can only depreciate. Given the prospects of inflation in coming years, and I think Japan will be as bad, if not worse than the USA and Europe, you will want to hold property. The reason is that Japanese property is not over-valued. It is very cheap, so higher interest rates are not going to compel people to sell. In fact cash savings will be rush into property. What are they waiting for? I have no idea.
The problem is Japanese are buying the wrong type of property. They ought to be buying fringe properties in lifestyle locations, or leaseholds in the inner city. There are issues to consider:
1. The lease term - you want to negotiate with the owner before you buy at foreclosed property tender. Nice to do before....but in fact buyers have rights. Since there is leasehold owing, and the property rights of leasees is solid, there is a good chance to extend the lease....albeit at higher rates. Short of a revolution, this situation is unlikely to be resolved by legislation I think. In any case, the terms are pretty sound.
2. The cheapness of the lease payments - it is staggering that they are as little as Y5,000 and fixed for 20 years. After 20 years of inflation without adjustment (remember they might not expect inflation after 15 years with none), that is quite a financial benefit
3. Your use of the property - What do you do with a leased property if you decide to move to the USA? You have several options: (a) You can sell the land, which might be difficult as people like to own the underlying land in Japan (b) You can rent it out, but that might be more difficult if the house is 46-55 years old. (c) You can negotiate to sell back the lease...the owner might ask you to pay reparations, i.e. money for cancelling the agreement, or more likely to demolish the old house that no one wants to live in. (d) You can turn the place into a 'gaijin house' for people who care little about the quality of the place where they live. This at least requires a strategic long term plan.
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