Rent Subsidies Increase Due to Labor Shortage

With the labor shortage, more and more companies are offering rental subsidies: if a company where you work pays 150,000 yen for rent subsidizes 100,000 yen, your monthly payment will only be 50,000 yen. It sounds like a good deal, and it is a tasty enough deal to make people think twice about buying a home.

So, what if people with a large amount of rent subsidies do not have to buy a house? What I am wondering is what they will do with their homes when they retire. Considering that they have 30 years of retirement, they will have a very difficult life if they pay rent with their pension. Let us consider the optimal solution in such a case.

First, let us assume the general system of rent subsidies. The company pays a certain percentage or a certain amount of the rent, which often has an age limit (e.g., up to 30 or 40 years old). Its eligibility is often limited to new employees, single non-married, and those from rural areas, and it does not pay for those who live at home with their parents or own their own house. It is a distorted system to begin with.

The design of such a system appears to be based on the following speculation on the part of the corporation;

  • We want to keep young people in the company, but not middle and older workers.
  • We do not want to raise the salary structure because it will affect all age groups.
  • The only way to make it easier to recruit new employees is to offer rent subsidies in line with other companies.
  • The company can offer company housing and rent subsidies that are age-restricted.
  • The company can’t offer the same subsidy for owner-occupied houses, which might hinder transfers and relocations.
  • The company’s relationship with its employees is only until retirement, and after that, it is of no concern of the corporation.

In contrast, the reception on the part of employees would be as follows;

  • Younger people from rural areas will appreciate the rent subsidies because they will have more disposable income.
  • When the rent subsidies expire, then they would start considering owning their own homes

If you care about rent assistance

The thought is you won’t decide to ever buy a home.

This kind of thinking leads many people to delay the time when they consider purchasing a home, even though the price of condominiums has been skyrocketing recently. The high purchase price makes it difficult for them to make a decision. If they put it off too long and reach the age of 45, they will not be able to take out a loan of 35 years because they will not be able to pay off their mortgage before the age of 80.
Shorter loan terms mean higher monthly repayments, which is another headache that further blunts the purchase decision. On top of that, after reaching retirement age, the mortgage repayment term can remain for 20 years or more. Condo prices are already high enough that the repayments are unlikely to be enough to pay while receiving your pension.

As a result of the 11-year rise in condominium prices since Abenomics, some people on the street said it was difficult to determine the right time to buy, while others were worried that the skyrocketing prices would come down. In any case, the decision to purchase an owner-occupied house was still not made.

One reason for hesitating to purchase a condominium because of the rent subsidy is that the immediate cash outflow is small. Between the case of rent subsidies that can definitely curb the cash outflow of 100,000 yen, and the case of purchasing an owner-occupied house and having little hope of building assets beyond rent subsidies until the value of the property increases in the future, many will choose the immediate and reliable rent subsidies.

Calculations show that the owner-occupied market would have to rise by more than 15% to outperform the case with 70% rent subsidies. In terms of results for the last 10 years, the owner-occupied market has risen by over 70%, which means that the owner-occupied market has been better off.

In the end, timing is everything.

Living as a renter all your life can be risky.

However, as for the future, I say, “It will rise by about 20% in the next three years for the time being, but after that I am not sure. This prediction is somewhat certain, but of course it is not 100% certain, since land prices and construction costs for new condominiums are already fixed for the next three years. It remains uncertain for those who think “real estate prices might go down.”

In essence, timing is everything when it comes to deciding whether or not to purchase even with rent subsidies. If a person were to says things like, “Because of how long the rent subsidy will be there,” that person will never be able to make a decision, and the probability of that timing being the best is not high. With that thought instead, if they think the market price will rise in the foreseeable future, they should buy as soon as possible.

Let me summarize the risks of delaying the purchase. First, rent is currently rising, and this is due to high occupancy rates, so there is a high probability that rents will continue to rise. On the other hand, condominium prices will continue to rise, so delaying the purchase of a condominium may make it too expensive to buy.

At the age of 45, in principle, a mortgage cannot be taken out for 35 years, and the monthly repayment amount will increase. Even if they can get a loan, they will be left with a large mortgage payment as they reach retirement age and their annual income declines. In addition, the number of properties that can be rented is limited because owners do not want to continue renting in their old age (because owners do not want their tenants to pass away in their properties). Rental housing is likely to be colder in winter and have a shorter life expectancy because it is less insulated, etc. than a house for sale.

Other basic information is also important to understand. Lifetime housing costs for owner-occupied versus rental housing are 50% higher for renters. Because of the difference in loan rates, this alone translates into a cost difference of about 30%, and then there is the difference in tax burden, which is a definite 50% increase. This has been somewhat antagonized by the rent subsidy. Also, in terms of payment term, there is the same amount of difference between a 35-year loan and a rental with a life expectancy of 50 years or more.

In “late decision” owner-occupied home purchases

Not looking for asset quality

In closing, let me share with you my suggestions. You should buy an owner-occupied house as soon as capable at a time when the increase in real estate prices is likely to be greater than the rent subsidy. If you buy a condo that increases in value over its purchase price, your monthly loan payments will be paid back when you sell it, which is the same as if you lived there for free, making it more profitable than rent subsidies.

In addition, the timing of the resale can be made larger or smaller according to the family structure. If a couple’s children move out of their home, they can reduce the size of the area and use the amount they gain to fund their retirement. In any case, the earlier the initial purchase, the sooner the mortgage is paid off, so the cash flow in retirement will be lighter, and a house which can be lived in for the rest of one’s life will follow.

This proposal is easily adaptable to those without rent subsidies. It is a good idea to purchase a condominium that is small in area but has asset value early on, change residences according to the family structure, and build assets in said home.

However, few people would throw away rent subsidies to purchase an owner-occupied house. Those who think that rent subsidies are a good deal will continue to receive them until they reach the age limit, and by the time they realize it, the price of owner-occupied houses will be too high, the loan burden will be too heavy, it will be difficult to change their residence, and they will live in the house they purchased belatedly for the rest of their lives.

Such people do not need to seek asset value in their homes in the first place. This is because those who cannot consider selling and reshuffling will not realize any benefit from worrying about asset value. In that case, they can choose any house they want without any regard to its property value.

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