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Sunday, Sept. 26, 2010
Home truths: To buy or not to buy?
During a recent sojourn in the United States, I talked with friends and relatives about the housing situation, specifically the value of their homes in the wake of the subprime fiasco of 2007-08. Those who bought high just before the bubble burst are feeling queasy now that property values have descended to earth, while those who made their purchases longer ago were slightly chagrined at the elation they experienced when the price of their houses skyrocketed briefly before settling to saner levels. None are among the millions of Americans now facing foreclosure, but if they still have mortgages they can't feel totally safe, not in such an uncertain employment environment.
Nevertheless, their homes tend to be the only secure things in their lives, investments that protect them from the vicissitudes of the economy. So it was difficult for them to understand that such security isn't a given in Japan; that here, houses and condominiums lose value as soon as you move into them. The only real security a home provides in Japan is the knowledge that you won't be kicked out; at least not after its paid for.
Most Japanese people understand this situation but don't discuss it openly. The government's decades-old policy of promoting new home ownership in order to keep the economy chugging along has resulted in a surplus of cramped, uncomfortable and sometimes substandard units that will only increase in number as the country's population shrinks.
On Sept. 17, TBS ran a special edition of its regular money-oriented variety show, "Gatchiri Academy" ("Tight-fisted Academy"; Fri., 7 p.m.) that attempted to determine which was more practical, buying or renting. Each week, "Gatchiri" assembles a panel of economists and financial writers who give advice on consumer issues, while a group of celebrities listen and offer personal witness to the information the panel provides.
It was immediately apparent that, despite the accepted universal aspiration for home ownership, no one on the show conceived of this aspiration in terms of investment. As the stated theme of the special made clear, the argument was simply over which is more expensive in the long run, renting or buying. Four of the seven experts on the show advocated buying, while the remaining three recommended renting.
One member of the buying team presented a simulation that compared what two couples would pay over the course of 35 years for the same 66-sq.-meter condominium if one bought and the other rented. The buyers, who took out a 35-year loan, would end up paying ¥56 million altogether, while the renters would pay ¥61 million.
However, it was pointed out that the simulation didn't reflect real circumstances, since it was unlikely that a renting couple would stay in the same condominium for 35 years. More likely they would rent a smaller place until they had children, at which point they would move into a larger unit, and then when the kids moved out move back into a smaller apartment. But even with these variables factored in, it turned out that buying was cheaper than renting.
The renting team then countered with a gambit that wasn't necessarily relevant to the fundamental cost argument but was more relevant to life as we know it. Economist Kazuyo Katsuma asked what would happen if a buying couple, at the end of 35 years, decided their home was too big for them and tried to sell it and use the cash to purchase a small condominium. Depending on where they lived, they probably wouldn't get enough money for their property to be able to purchase a condo without taking out another loan.
Former baseball star Eiji Bando elaborated on this point through personal experience: "When you sell your house, you think the price will be the same as what you paid for it," he said (note that he didn't say more than what you pay for it). "But in the end you're always forced to sell for less."
The panel then tackled the question of which was "riskier," buying or renting. This seemed a no-brainer, though one financial adviser said that renting was riskier because "if the breadwinner died" the surviving spouse couldn't pay the rent; if they had bought their home the loan would be paid off, because mortgages in Japan require insurance that guarantees such if the debtor dies.
Though the information she provided was enlightening, it didn't really support her point, since it seemed by definition an exceptional situation. Obviously, for most people, buying is riskier since a loan is involved, and as one member of the renting team pointed out the number of foreclosures in Japan in 2009 was 30 percent higher than what it was in 2008.
The last criterion for comparison was "freedom," which the buying group won hands down. Though exceptions were shown, renters in Japan typically can't remodel or own pets or even hammer nails into walls, though they do have more "freedom" to move, as one of the panelists pointed out. Once you buy a house or condominium, you're saddled with a mortgage that keeps you there for life, so if you discover after you move in that the building is a lemon, or the parking lot next to your condo is being replaced by a 30-story tower that obstructs your view of Mount Fuji, or your neighbors are jerks, there's nothing you can do about it.
The show's participants predictably reached no conclusion as to which was better, renting or buying. It depends on your individual situation and needs, which was a wimpy way of saying that when it comes to housing, Japanese consumers are at the mercy of policies that favor the real-estate/construction industries and property owners. To please them the government encourages people to purchase homes that depreciate faster than you can say "variable interest rates," and provides no legal protections from predatory landlords to people who can't afford to buy homes. Buy or rent, you're screwed.