Reselling your property involves a different set of considerations than your initial search for living space.
Nice, newer condos within a ten-minute walk of the nearest station have consistently proven to hold or grow in value in Tokyo. Currently, the average prices for new and used residences are at all-time highs.
However, this does give some buyers pause—there may not be much room for further price growth. Since 2018 there have been warnings that the market may be ready to tip, but that was five years ago, and demand for living space in Tokyo has never been higher.
Brand New vs. Existing Property
Buying an existing residence requires a different calculus than buying a brand-new one for several reasons. Used properties are generally cheaper than new ones, so less money is required for a down payment, but what happens at resale?
When you buy a home in Japan, you buy the land as well as the building itself (for a condominium, you buy part of the building and the portion of the land corresponding to the area of your condo). The important thing to remember is that the value of the land is typically a majority of the purchase price, and while land does not depreciate, buildings do.
For instance, for freestanding homes, generally, the value of the land is roughly 80% of the total price. This percentage may go up or down, however, depending on the quality of the structure itself and how far it is from the city center.
Freestanding houses are built to last 30-40 years.
As a rule of thumb, most condominium buildings in Japan are built to last 60-70 years. However, top-class structures in desirable locations are usually well-maintained and may be designed to last longer.
Typically, freestanding houses are built to last 30-40 years. After that time, the building is expected to be torn down for new construction. This is largely a result of custom. In the last century, people grew used to buildings only lasting that long, giving construction companies little incentive to build houses that will hold up longer.
But what happens if you buy an existing freestanding home built 30 years ago or a condo in an average building constructed over 50 years ago? Depending on the location, the answers can be very different.
Location Means Everything
If you buy a used condo in a building over 50 years old, it may be hard to resell in 10 years unless it is located on extremely scarce land (e.g., next to Tokyo station). Everyone knows the building will need to be demolished relatively soon, and you will only be left with rights to a portion of the land.
It costs money to demolish, and even more to rebuild. Further, under Japanese law, at least 4/5ths of all owners need to agree to the rebuild, and this can be a lengthy process. Wealthy owners will want to have a new palace built, and less wealthy owners will want a more modest building.
To finance the project, oftentimes owners will agree to build a bigger building and sell the extra units to pay for reconstruction costs. If you are located next to Tokyo station, this will likely be no problem, and in this case, usually, owners will want to maximize the value of the land with as big a building as the law allows.
The land itself makes up most of the value.
However, if you are on the outskirts of Tokyo, you may be worried about future demand. Can you sell the extra units? In sum, if you buy into an older condominium building in a less desirable location, you may be stuck with little to no value in 20 years. After moving in, you may not be able to find a new buyer for any price, since the building is becoming decrepit, and there is no guarantee there will be available money for reconstruction.
Existing freestanding homes are gaining in popularity outside of Tokyo proper precisely because a majority of the value is in the land. If you have to resell in 10-20 years, you may get most of your purchase price back, because you may be able to find someone looking to build their dream home. The land itself makes up most of the value.
However, to entice a buyer you may have to pay for the buyer’s demolition costs, which can easily top one million yen. This still beats an older used condo, which may be largely worthless in 20 years.
My Home is My Castle
One reason why architects love Tokyo is that there are so many idiosyncratic designs of freestanding houses, and there is always significant designing and rebuilding going on. Japanese architects can let their imaginations run wild, even in the center of the city. Since Japanese tax rules cause freestanding homes to depreciate to zero in less than three decades, owners do not have to worry about choosing a house design that appeals to the masses.
It’s always expected that when the time comes, a buyer will demolish an old house and rebuild a new one to their liking. Moreover, newly-constructed buildings have an automatic 10-year developer warranty against defects under Japanese law. Additionally, people sometimes choose to buy a new house because, in many cases, the mortgage payment is only a little more per month when compared to purchasing a used house.
Jeff Wynkoop is a fully bilingual certified real estate broker with over 15 years of experience working in the Japanese real estate business. He is a U.S. attorney (Washington), U.S. CPA (Delaware), U.S. CCIM, ARES Japan Master and author of “Legal Issues in Japanese Real Estate Investment.” Please feel free to contact him for real estate brokerage and consulting at firstname.lastname@example.org.