What are the absolute conditions for maintaining asset value and not losing money when buying?

Compared to 2012, the price of existing condominiums doubled. In the last six months (August 2023 to January 2024). Prices were 190% higher nationwide, 189% higher in the Tokyo metropolitan area, and 187% higher in the Kansai region. In contrast, prices for existing detached houses were 119% higher nationwide, 126% higher in the Tokyo metropolitan area, and 122% higher in the Kansai region. Why have condominium prices risen significantly more than detached houses?

There are several factors contributing to this, but it is necessary to understand what determines the price. The price of a new building, whether a condominium or a detached house, is determined by adding up the cost of the land plus the cost of the building. This is called the “total price.” When the price of new construction goes up, the price of used houses in the surrounding area go up as well.

Detached houses are depreciated over 22 years

On the other hand, the used price is determined by a different mechanism for condominiums and detached houses. As with new construction, the price of a detached house is determined by adding up the cost of the land and the cost of the building, but because the building is made of wood, it is assumed to depreciate over a 22-year period. In other words, the property value is calculated to become zero in 22 years, or a 4.5% decline per year. In many cases, the land cost remains the same as when the property was purchased, so the older the building is, the cheaper it becomes.

This is also a problem with the bank’s valuation method. Banks evaluate real estate when they issue mortgages, but they do so based on total value for detached houses, and based on transaction examples for condominiums.

Depreciation is a taxation measure to be expensed, not the actual property value. If property values were to drop in such a short period of time, there would be no such thing as a “long-term quality housing.” It is simply that the bank’s valuation method does not correspond to economic value. However, if the amount owed on a mortgage is at the top of the list, the sales price cannot go up.

Incidentally, in the U.S., although expenses are allowed to be recorded through depreciation, asset values are assessed separately. In the U.K., since there are almost no earthquakes, there is not even the idea that buildings deteriorate, and the depreciation system itself does not exist.

Reasons why it is difficult to conform the cost-included value to an existing condominium

The consumption tax in real estate is not applied to the land cost, but only to the building. For this reason, the building cost is clear when buying or selling, whether new or used. In this respect, detached houses and condominiums are the same, but condominiums do not have a real sense of land; even if they are said to have land equivalent to “10m2,” it is not clear which part of the land they own, and they cannot sell only that land itself.

And since there are no similar cases, there is no way to assess the land (condominium examples). In addition, condominiums are reinforced concrete structure, therefore its useful lifespan is as long as 47 years, and it only drops 2.1% per year. If the price of the land and the building were half each, the downward pressure would only be about 1% of the property price.

This would make it difficult to conform the total price to the existing condominium. As a result, the price is determined by comparing it with other examples (history) in the surrounding area. This is called a “comparable price.” In this case, when a new building with a higher price appears in the neighborhood, the price is likely to rise in comparison with the new building.

Based on this premise, it is not surprising that condominiums are at an all-time high. Construction costs are higher for reinforced concrete structures than for wooden structures. The cost of land for detached houses is incomparably different from that for condominiums. Land for detached houses has no use other than for detached houses.

In many cases, the sellers will be the elderly who already owned their homes. The land that is sold upon inheritance is proportional to the population of deaths, while those who wish to purchase detached houses are limited to family households. In other words, supply is proportional to the population of deaths, while demand is proportional to the population of births.

In Japan, where the birthrate is rapidly aging and the birthrate continues to decline, the deathrate has exceeded the birthrate since 2008, and the total population continues to decline. In this situation, the supply-demand balance for land for detached houses will not move in the direction of tightening.

The pandemic put a temporary halt to this trend, but…

This was temporarily halted by the pandemic. With the increase in remote work, there was a surge in demand for relocating homes which lacked work space. At this time, the price of land for single-family homes rose. Newly built houses for sale sold, and real estate agents in town entered the business of buying land, having builders construct the houses, and selling them in a short period of time.

In this way, the price of land for detached houses soared, but now that sales have slowed down, the number of land inventories is rapidly increasing, and prices are beginning to fall, as they will be in 2024.

On the other hand, land for condominiums could become not only apartments but also office buildings, commercial buildings, and hotels. Now, it would be difficult for condominiums to surpass the profitability of hotels, which are likely to raise prices due to strong inbound demand that has picked up after the pandemic.

Then, new condominiums for sale would have to be located in the city center or away from train stations to be supplied. It simply means that the location is inferior to what it has been in the past. Nevertheless, land with many buyers for such high-rises will be purchased at the highest price through competitive bidding.

Thus, prices soar in areas that are not suitable for offices or hotels, but where condominiums are built in high concentrations. A typical example is the tower condominiums in the bay areas.

The key perspective is “Is the location excellent?”

Let’s look at the example of Kachidoki Station. The market price of the existing property increased by 30% in just two years. Property A and B, which were put on the market at the same time, had different sales periods.

Property A was sold out early, while property B was sold over a period of eight years, with the new construction sales price rounded up to match the market price increase. although property A is in a better location, property B is higher as a new construction unit price due to the sales timing gap. Therefore, the current existing unit price is higher for B. This is because a person who is trying to sell the property sets the selling price based on the price at which he/she purchased it, hoping to sell it at a higher price.

This is likely to happen again in the future. In such cases, the important point of view is which is superior in terms of location. For a product like condominiums, which can go up to “any price” if the surrounding transactions become more expensive, those who understand the essence of the price mechanism will be in a better position to benefit. It boils down to this: the better the location of the condominium, the easier it is to raise the price.

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