The awful truth

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We often go out in the field to do research, but it’s always a two-pronged activity. On the one hand we study the housing situation and the market in an up close and personal manner. On the other hand, we’re still thinking about buying property ourselves someday, and though after more than fifteen years of searching off-and-on we haven’t bought anything, it doesn’t mean we never will. Still, the longer this goes on and the more we learn, the more frustrated we become, especially as our income situation remains precarious owing to the ongoing recession. Having a permanent abode that we can’t be kicked out of, regardless of our job circumstances, is a vital consideration, but looking at what we can afford we invariably fall into a funk wondering why we have to settle for such places. Inevitably, you prevaricate: This may be livable.

Our latest subject is old danchi/kodan for sale, which have become semi-popular due to media coverage of “danchi moe,” or fans of old public housing. We’ve written before about enterprising people who’ve bought old apartments in buildings constructed during the 50s-70s and remodeled them as attractive modern spaces, which they often sell for a profit. Because they only cost a few million yen to buy and a few million yen to fix up, they can be had quite cheap in the end, but most of the units that have been covered on TV and in magazines are small; fine for a single person but still a bit cramped for a couple and certainly not big enough for a family, though in all likelihood they were occupied by a family when they were new.

When you get out of the main cities, these danchi and kodan get bigger and even cheaper. And in most cases they’re also newer, which means more amenities. However, they still look like danchi, meaning they’re usually contained in dull concrete buildings of three to five stories without elevators. The fact that they are designed with these parameters in mind means that the apartment layouts tend to be more sensible than those in newer buildings. The classic kodan design has a staircase and apartment entrances on each side of the landings, which means you usually enter at ninety degrees to the length of the apartment. That allows for windows on both ends of the apartment, which means there is not only more sunlight, but cross-ventilation, an important consideration until the 1980s, when air conditioning started to become a fixture of apartment life. It also means the rooms are more practically positioned, unlike modern apartments where the entrances open up to a common outside hallway or light well, which means all the light and air comes from only one direction. In order to maximize space for commercial purposes, the rooms are basically carved out of a boxy shape, thus creating what is often referred to as “kamaboko” living spaces. Kamaboko are those rectangular fish paste loaves that you divide into smaller rectangular pieces.

So discounting the unappetizing exteriors, older danchi, especially when they’ve been fixed up, can be quite desirable, and in this spirit we called a few real estate agents and had them show us some in northern Chiba.

Accompanied by a young male real estate agent we inspected two kodan in different but almost neighboring housing complexes. The first one, vacant, was built in the late 1980s and was going for about ¥10 million for 87 square meters. It had been remodeled with spongey sound-proof “flooring” (fake wood grain) and a better grade of white wallpaper, but the kitchen was quite large and had its own window. Cross ventilation was good owing to the fact that the apartment was situated in line with the building orientation, so air could travel through the apartment in all the rooms. One drawback for us was the ceilings, which were, in the fashion of the time it was built, lower than what we were used to, and while every room had a window or sliding doors to the outside, the light wasn’t as bright as you might think. Still, for the price it was roomy and well appointed.

The second place we visited was built around the same time and while it was two square meters larger it was also about a million yen cheaper. The sellers were still living there, a middle aged woman and her daughter, so we got the rare chance of seeing one of these kodan actually being used. The difference is instructive. In the previous apartment, the fact that is was completely empty enhanced the feeling of roominess, while this place seemed cramped. Of course, many Japanese people, especially those living in older apartments, live cramped lifestyles by necessity, but both apartments had, uncharacteristically for their age, a lot of storage space. The cramped feeling was due not so much to the amount of stuff the occupants owned, but to the lower ceilings and slightly smaller windows.

Throughout our inspection the real estate agent was courteous but distant. He’d been through this ritual before and as soon as he saw us obviously pegged us as non-starters. This may explain his defensive and abrupt tone when we started asking him later about the general market for such properties in the area. We mentioned that kodan and danchi in this part of Chiba seemed cheaper than ones in other areas, even those farther from Tokyo. He disagreed without elaborating and also refuted our supposition that the lower price may have had something to do with demand: There seemed to be a lot of properties on the market. He became slightly agitated, saying that the market was robust and that the area, because of its dense concentration of corporate computer centers that operated round the clock, was an excellent place to “invest.” This assertion shocked us. Any interest we may have had in buying a kodan was purely for living purposes. We entertained no hope of ever selling such a place for more money than we bought it for. In fact, one of the questions we wanted to ask him is what danchi owners did if they couldn’t sell at all, since we assumed it was a common problem given the surplus of vacant properties throughout Japan. He said strongly that that would never happen. There was always a buyer. Besides, you could rent it out easily if you decided not to live there. And if worse came to worse, “my company would buy it from you,” but in general he treated our concerns as not just unfounded but unhinged.

In a sense, his attitude is understandable. As a person whose livelihood depends on the movement of real estate, he can’t acknowledge the perception that some real estate just isn’t moving and probably never will. He may have been right about the danchi situation in this area, but his vehement denial that somewhere down the road a crisis couldn’t happen was also a denial of the prevailing mood. This is the sort of thing we’ve always had to deal with when talking to realtors, most of whom are much more polite and understanding than this guy was but who nevertheless refuse to discuss this coming crisis. Is it our imagination?

We had a better response the next day when we visited another kodan in a neighboring city. Like the kodan we visited the previous day, this one was situated in a crowded complex that, while filled with nicely maintained park areas with lots of trees and shrubs, looked its age. Built in 1981, the structures presumably just made it under the wire to incorporate the nation’s new earthquake-proof building codes. (In all fairness, public housing in Japan, even those buildings put up before 1981, has performed very well in earthquakes) The unit we looked at was not in one of the long main buildings but in a side structure that contained only one central staircase and two apartments per floor, which means each unit had three sides of sunlight instead of two. The unit we looked at was on the fourth floor, meaning the top floor.

The agent this time was a young woman who wore a frightening amount of foundation. She was much more pleasant then the guy we had the day before (it was a different company) and we were able to talk to her freely without drawing a stiff reaction. The apartment itself was partly remodeled, but even bigger than the places we saw the day before, and much sunnier, though it would require a bit more work to make it comfortable. It also cost about ¥10 million though the agent hinted that this was still negotiable. Apparently, the owners put it on the market without improvements at ¥10 million and received absolutely no offers of any promise, so they invested a minimal amount in remodeling the kitchen and changing the wallpaper in most of the rooms. The agent wouldn’t tell us how long it had been on the market altogether, but we assumed it was a long time. We thought it strange, since the layout was attractive. A few million more would have made it quite comfortable, and since it was only five minutes from the train station it could have been considered a steal.

So we again brought up the matter of how marketable any old residence in the area is, regardless of the price. She was not resistant to our questions but hadn’t really seemed to have thought about it, which we found odd but accepted at face value. Emboldened by her receptivity, we put it to her plainly: If we bought this place and, ten years down the line, decided we didn’t want it any more, what were our chances of unloading it, not selling it for more or even selling it for the price we paid for it, but selling it at all? She said she’d ask her colleagues. Her attitude was more pleasing than the other agent’s, but that was only because her aims were different. The previous day’s realtor had given up on us as a potential customer almost immediately. This woman thought we still had possibility, and in the week since we saw her she’s already sent us layouts of other properties within the same area and within our very limited price range. As if to prove our fears, there are a hell of a lot.

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16 Responses to “The awful truth”

  1. AlohaDylan Says:

    So how does this story end? Is there a floor to the prices? If folks are growing older, population is declining, and danchi can be had for 10M yen, at some point does the land become more valuable than the building on top? Then the building is razed and the land is employed for other purposes yes? Newer seems to sell in Japan. Older seems to lag. The trend is inevitable. What does your research indicate?

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    • catforehead Says:

      That’s a good question. In the case of single-family homes in many cases where the structure is more than, say, thirty or even twenty years old, the house is literally worthless and only the land has value. We once looked at a property that was worth ¥5 million with the house and ¥7 million without it, meaning the present owner would have had to spend ¥2 million to destroy the house. In the case of group housing like danchi and condos, things get messier. Usually these apartments collect monthly “rebuilding” fees that go into a fund toward rebuilding an entire complex somewhere down the road, but since Japan’s modern housing history didn’t start until after the war, there is no real experience available with this matter, and lot of buildings are reaching their end point now. The problem is everyone in a building has to agree to rebuild, which is why so few have been rebuilt so far. It’s going to be even more a mess in the near future.

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  2. mek Says:

    What are the management and other monthly fees with these buildings? These are already 30 years old and I would guess it safe to say they are going to be demolished in ten years or so.

    When you take that into the calculations then the 10 million does not sound that cheap anymore.

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    • catforehead Says:

      Management fees for older kodan are not very high simply because they don’t have elevators. For newer kodan and private “mansion” (condos) they can get pretty steep; and then there’s the “shuzenhi,” or “common area repair fees.” which can get pretty expensive. But you make a good point about the price of an old apartment not being very cheap. Since Japanese buildings were never meant to last, it becomes more and more difficult to sell older kodan and condos because potential buyers wonder how long it will be before they’ll have to rebuild. According to the law, you have to secure 80 percent of the approval of the inhabitants of a building to rebuild it, and since many of the people in the older kodan are themselves old, they probably won’t think it’s worth it. That means they don’t get rebuilt and in the long run are just abandoned. In the meantime, the people who own the title to the individual apartments have to continue paying property taxes (which are actually higher in terms of area than property taxes for older stand-alone houses) and management fees. If you can’t sell, or if your heirs can’t sell, they’re stuck with a worthless property. We heard of one scheme that such people have come up with to unload their worthless apartments. What they do is advertise for a foreign exchange student, usually from China, who is looking for a cheap rental. They then give the apartment to the student as a gift and put the title in his name. The student pays the fees, which are probably cheaper than rent would be, while he goes to school. After he finishes and goes back to his country he simple abandons the property. The local authorities don’t have the resources to pursue him in a foreign country.

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  3. Miko Says:

    Why do you have to live around Tokyo(ish)? Is that non-negotiable? You’d probably have a lot more wriggle-room if you looked at other regions.

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    • catforehead Says:

      At the moment we still have some obligations in Tokyo making it necessary to go into town once or twice a week. We moved to northern Chiba in June, about an hour from Nihonbashi. But we’ve looked in farther outlying areas. The point is that this problem is pretty national. In fact, the closer you are to Tokyo the more likely it is that the place you buy will be sellable in the future.

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  4. Dionisio Franca (@DionisioFranca) Says:

    Interesting article!
    I prefer older buildings with cross ventilation too. There are some beautiful 5 story buildings in Hikarigaoka. The higher floors are pretty cheap for the region.

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  5. Zoe Says:

    As a prospective buyer if you want an accurate portrayal of the current market, you probably shouldn’t ask a real estate agent. They are obligated to paint a rosy picture. As for predicting the market 10 years down the track, no one can accurately predict that so I don’t think any agent is going to be able to honestly answer that question.

    By the way, a building completed in 1981 would have started planning and construction several years prior to the introduction of the shin-taishin building codes so there is a good chance it was not built to the new earthquake construction laws as they were introduced in June 1981, although it may be built just as strong. If it is built to the new standards, it will have a building certificate to prove it (a kensa-zumisho).

    Not all danchi are immune from earthquake damage. Several danchi actually suffered partial or full destruction in the 1995 Hanshin earthquake and had to be demolished.

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    • catforehead Says:

      We didn’t really expect a straight answer about the future market for apartments and condominiums from real estate agents, but we at least wanted them to acknowledge the unique situation it now faces. There was no real apartment-for-sale market until the 1960s in Japan, and those units, as well as units built in the 1970s and even 80s, are now coming up on their sell-by date, meaning they have to be torn down and rebuilt if the people who live in them want to stay there. But nobody seems to want to talk about these thousands and thousands of buildings. How can they be worth anything when construction of new condos continues apace as the population shrinks? There are more than 7 million vacant residences in Japan, single family homes and apartments, and the number increases every year.

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  6. Keith Says:

    > We heard of one scheme that such people have
    > come up with to unload their worthless apartments.

    There are virtually always schools and supermarkets near to danchi, so they are convenient to live in. In some areas–like drab Chiba–there are many places that people cannot sell on the market, so you can surely bargain the price down by as much as 20% if not more. The “too small” complaint could be solved by buying two adjacent places (or finding two adjacent places that are vacant; buying one, and buying the other later when you can afford it).

    Your writing and your research have really become world class.
    Keep up the good work.

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  7. Keith Says:

    > The closer you are to Tokyo the more likely it is that the place you buy will be sellable in the future.

    On the other hand, the closer you are to Tokyo the more likely it is that it will be either too small or unaffordably expensive. But at an interest rate of about 2%, if–rather than paying say JPY 150,000 in monthly rent–you were paying JPY 150,000 in monthly interest (JPY1.8M a year) then this would correspond to a loan of about JPY 90M.
    Of course if you are looking at a loan of about JPY 6-8M (which should be easy to get) then at 2.5% the monthly interest payment would be about JPY 14-17,000. If you use the rest of your budget (150,000-14,000=136,000 per month) to pay off the loan, then in three years you have paid off JPY 5.2M.
    However, if you get (say) a ten-year loan then you have less worry. You only need to be able to pay JPY 57,000 per month to keep a place of your own and repay a JPY 6M loan at 2.5% over ten years. That’s much cheaper than you’d pay to rent. The bank and insurance company carry any risk. The key issue: even if you were to abandon or give away the place after ten years, it has cost you far less than you would have paid if you were renting. (The same argument applies for a five-year repayment period).
    But of course you’d be wise to look for a *desirable* area that is only about a one-hour commute so that you can resell if you wish to move elsewhere or get a better place.
    You can do calculations like the above using a calculator like the Sharp EL-K622.

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  8. Keith Says:

    > The key issue: even if you were to abandon or give away the place after ten years, it has cost you far less than you would have paid if you were renting. (The same argument applies for a five-year repayment period).

    For the ten-year-loan case, you are paying 57,000 per month (interest plus principal repayment) instead of paying 150,000 per month in rent. so are saving 93,000 yen per month compared with renting.

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  9. Keith Says:

    may be of interest ;-)

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  10. Keith Says:

    I’d think that the reason why it’s hard to sell in Chiba would be the drab urban environment (compared with an hour out of Shinjuku on the Odakyu line or Chuo line, for example).

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  11. Keith Says:

    There’s an interesting article on the “C51″ 2DK danchi design in tonight’s Asahi Shimbun.

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  12. rinshi Says:

    I started reading your blog last night from the beginning and could not stop. Great reading. I’m up to this story now and have several questions.

    Why are all these homes covered with wall papers? Is there home improvement centers one can go to buy all the items to remodel on own? We have added on 500 sq foot area to our home as well as gutted the interior and redone completely on our own. The building inspector was there at each phase of remodeling and and construction of new space.

    I am originally from Tokyo and seriously considering buying a property in Tokyo area as our vacation home. It does not have to be 23 wards, it can be in Kanagawa or near Hachioji or Ome. We do not like staying in hotels and thought having a permanent place we can call ourselves will make it easier as we age,

    Thank you for your excellent blog. I continue to read and learn from it.

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