Buying secondhand properties in Japan’s deflationary environment

On March 22, the 2012 Koji-Chika assessed land values were announced. While the average land value had fallen for the fourth year in a row following the Lehman Shock, the rate of the fall had reduced slightly.

The MLIT reported that the 2011 Tohoku disaster caused the real estate market to stall temporarily, but indicated that there are signs we are in the early stages of a market recovery.

The first nationwide land valuations following the earthquake were the land price surveys conducted on July 1, 2011. These valuations showed that the biggest price falls were limited to the disaster-hit areas. The Koji-Chika land values this year saw a turning point as more areas were reported to either increase or have no change to land values from the year before. The clear trend is that the market is beginning to bottom out.

However, there is another side that does not present such an optimistic outlook. Many of the areas around Tokyo Bay that were affected by liquefaction during last year’s earthquake saw a drop in land values of more than 10%.

A noticeable bipolarization in values within the same areas became evident as a result of the disaster. For example, while some of the elevated residential areas in Miyagi Prefecture saw remarkable increases in land values due to a sharp increase in demand, there were just as many disaster-hit areas that saw land values plummet.

In November 2011, the National Tax Agency announced scaling factors for the 2011 rosenka land values in order to reflect the drop in prices following the Tohoku disaster. In some of the coastal areas that were hit by the tsunami, rosenka land values were adjusted down 70 – 80%. The land around the Fukushima nuclear plant was assumed to have zero value for taxation purposes.

Land values in areas where people do and do not want to live are now showing huge price fluctuations as the shifts in supply and demand are forming prices. The deviation in the balance between supply and demand in the secondhand apartment market following the disaster is striking. While the pressure to sell is high, the realized sale prices are bearish. For those looking to buy secondhand apartments, conditions from here on are favorable. But for those looking to sell, they are facing some stiff headwinds.

The table below shoes the new listings and concluded sales of secondhand apartments in greater Tokyo. The ‘new listings’ are owners who are listing their secondhand apartments for sale, and the ‘contracted sales’ are the actual sales made during that month. Data is provided by REINS.

New Listings and Sales

The data of interest is the percentage change in new listings and actual sale numbers compared to the same month from the year before. In the month immediately following the disaster (April 2011), the number of new listings were 29.2% higher than April 2010. The rate then began to slow each month but still remains almost 20% higher than the year before.

In contrast, the actual number of concluded contracts has been down each month when compared to one year prior. The supply and demand balance is uneven and it is obvious that there is an excessive oversupply.

Because of this, apartment prices are falling. With strong downwards pressure on prices, the asking price and realized prices are also down from the previous year.

The secondhand apartment market is clearly a buyer’s market.

So what should potential buyers be on the lookout for in this market?

Point 1: With the growing risk of an earthquake directly underneath Tokyo, a property with earthquake-resistant measures is essential

Nowadays, the most important aspect is the disaster measures that are in place for the building. Experts recently announced that there is a 70% chance of a magnitude 7 class earthquake directly under Tokyo within the next four years. In the magnitude 7.3 earthquake that hit Kobe in 1995, the majority of the damage was to structures built before 1981 under the former earthquake standards (kyu-taishin). Over 70% of the buildings in Kobe built after 1981 to the new standards (shin-taishin) suffered only slight or no damage.

Buildings constructed to the latest construction standards are designed to withstand a magnitude 7 class earthquake. Although there is no guarantee that shin-taishin buildings will be 100% safe in an earthquake, they do provide a relative sense of security.

In addition, it is also a plus if the building has measures to ensure lifelines, or utilities, are not interrupted during an earthquake. In Miyagi Prefecture it took as long as 10 days to restore power and 20 days to restore gas, water and sewerage to many homes. Under the Cabinet Office’s assumption of a magnitude 7.3 earthquake underneath Tokyo, it could take 14 days to restore power, 30 days to restore water and sewerage and 55 days to restore gas to homes.

Some buildings have been equipped with emergency stores that include water, food, flashlights and portable toilets. To avoid residents becoming trapped on higher floors, some elevators may also have back-up power generators. Other preparations include automatic gas shut-off meters and disaster manuals prepared by the building management companies.

Point 2: In a buyer’s market, make sure to negotiate

As mentioned before, the secondhand apartment market is currently a buyer’s market. There is an oversupply of properties and downward pressure on prices.

When looking at the table above, the difference between the average listing price and average purchase price is approximately 2 million Yen. This difference is due to price negotiations, which is a normal part of the buying process for secondhand properties. In this buyer’s market, it is ideal timing for serious buyers to be strong negotiators.

Point 3: Signs of long-term interest rates rising, so minimize your home loan

A financing plan must also be considered before buying in the current market. Many buyers who prefer secondhand apartments, like them because they are relatively cheaper than brand new properties. This difference in price should be considered in the financing plan for purchase, as you want to pay off the loan as quick as possible.

With the Bank of Japan undertaking additional monetary easing measures in February, the Nikkei Stock Average has returned above 10,000 Yen. As investment funds are shifting from the bond market to the stock market, high stock prices but bearish bond prices can result in an increase in the long-term interest rate. From last December, the long-term interest rate fell below 1% but returned to the 1% range this March. If home loan rates were to increase, paying off the mortgage in as little time as possible will reduce your risk. While many borrowers are offered 35 year mortgages, it is not always necessary to take the longest mortgage term available.

Point 4: Check if there are any unpaid management fees or insufficient funds in the building repair fund

It is absolutely essential to check the details of the building’s management before buying a secondhand apartment. The most important point is to confirm that there are no unpaid management or repair fund fees before signing a contract. It is strongly recommended to check these details if you are purchasing a property that is about to be foreclosed or is being sold as part of a deceased estate.

If there are any unpaid fees, the new owner of the apartment will be responsible to pay them back to the management company.

Any outstanding fees are required by law to be written in the important details and particulars which are signed by the buyer along with the purchase contract. A registered real estate broker will also read these details in front of the buyer and seller at the time of the contract signing.

The buyer should also confirm the amount of funds remaining in the building’s repair fund. This fund is used to conduct any scheduled and unscheduled repairs and maintenance to the building. If the building needs repairs and there are not enough funds, either the repairs are ignored or each owner must pay out of their own pocket at short notice. There are countless buildings with insufficient funds so buyers must be cautious.

It is also possible that a building with an insufficient repair fund may gradually hike up the monthly repair fund fees that each owner must pay. In some cases you may not find out about any fee increases until after you have moved in. Before buying, check if the management company have any long-term repair schedules or any planned fee increases.  The buyer must take extra care to check the status of the management company and repair fund before buying because, as an apartment owner, you cannot refuse to pay repair fund fees. Complaining to the real estate broker is also pointless.

Point 5: Decide on appropriate action in the event that there is a flaw with the property

It is advisable to agree on a course of action and apportion responsibility to the buyer, seller or broker, in the event that a flaw with the property is discovered after purchase.

While developers may offer 10 years of after-service on brand new apartments, these guarantees may have long since expired on older properties.  In that case, if a defect is found after purchase it can be very difficult to determine who is responsible for repairs.

Assuming all three parties agree, a special memorandum can be added to the contract to describe a guarantee period and the items that the guarantee covers.

Source: Nikkei, March 28, 2012.

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