This Japanese house is selling for less than a dollar. (https://uozu-akiya.jp/what-is-100yen/)

So was this (https://akiya-gateway.com/vacant-house/160-2/)

And this (https://akiya-gateway.com/vacant-house/086-2/)

But do you know what is more abundant in Japan than $1 houses? Free houses. Indeed all of these houses were listed for free (https://www.town.kamiichi.toyama.jp/page/1934.html). Most have already been taken, but some are still available.

And if you are so kind as to take one of them, you might even qualify for subsidies. In other words, you are getting paid to take these houses.

But why?

For context, I’m speaking to you from Canada where many of our cities are in the midst of a full-blown housing crisis.

Not long ago, there was a college student who decided to live in a different province, and flew into campus on airplanes every week. Because that was still cheaper than renting in the city directly. That’s how bad the cost of housing is around here.

Yet people in Japan are giving houses away for free, what is going on?

Well at its core, Japan’s cheap real estate phenomenon comprises two separate issues:

·         First is the cheap real estate in depopulated areas like rural villages.

·         Second is the cheap real estate in highly populated city centres, like Tokyo and Osaka.

Let’s start with the first one because its causes are simpler to parse.

There are areas in Japan that are currently experiencing depopulation.

Japan’s birth rate has been below replacement for a while. So population naturally declines as more old people pass away and fewer young people are born.

In certain rural areas, this process is accelerated by young people moving away to cities for education or jobs or other opportunities.

As there are fewer people in those towns, there is less demand for housing. But more houses keep coming onto the market, because the people living in them have passed away, or moved away to the cities.

Eventually there is more housing than there are people who need them, driving prices all the way down to zero, and giving rise to a phenomenon called “akiya”. Not to be confused with the Swedish furniture store, Akiya is a Japanese word that literally translates to “empty house”. Akiya are often found in these depopulated areas. Some might even be abandoned and left to fall apart on their own. A lot of the $1 or $0 listings you saw earlier belong in this category.

So it’s easy to understand why Japanese real estate is cheap in depopulated areas.

What is less obvious is why real estate is cheap in densely populated cities.

For example, Tokyo has one of the highest population densities in the world. One would find it hard to believe that housing is cheap around here, especially when they don’t look particularly cheap.

Indeed Tokyo has some of the most expensive property listings in the world.

Except that they are also cheap, even for the expensive ones. But what does that mean? How can real estate be both expensive and cheap at the same time, somehow producing a Schrodinger’s superposition?

Well we can resolve this paradox by conceptualizing real estate as two separate components: the land and the structure.

The land is just a piece of the ground. The structure is whatever we build on top of that ground, the houses, the apartment buildings, and so on.

Now in most parts of the world, people understand this distinction conceptually, but they don’t usually need to make this distinction explicitly in practice.

For example, if you buy a house in the US, it’s implicitly understood that you are buying both the house and the land underneath it. You probably don’t know or care how much you paid for each of them individually. And if your house goes up in value next year, you probably don’t know which part of that appreciation is due to the land or the structure.

But in Japan’s real estate industry, this distinction is much more important. People know how much they’ve paid for the land and the house respectively when they complete a purchase. And they know how much the price of each component changes over time.

And they do this because in Japan, the land and the structure behave very differently as assets.

Land can go up in value, and it does tend to go up in value in population centers. In this way the land part of the real estate behaves like a typical scarce asset, like stocks or precious metals.

Structures, on the other hand, almost always lose value over time, regardless of where they are. They behave like depreciating assets, almost like cars.

So if you buy a house in Japan, and sell it years later and make a lot of money, chances are, you only made money from selling the land, and probably lost money from selling the house. But you just made so much money from selling the land that it dwarfs your loss from the house, and in total you made profit.

Now the mechanics of how land appreciates are straightforward.

Land has a fixed supply. It is not economically feasible to make more land with our current technology.

So as the population grows, and as that population becomes richer, you get more money chasing the same amount of land, causing land values to rise.

Structures, on the other hand, are more complicated.

The supply of structures doesn’t have a hard limit the same way land does.

We can think of land as a limited 2 dimensional plane. Whereas a structure is a 3D object. It has a 3rd vertical dimension that’s not limited by the 2D plane upon which it is built.

So the sky is the limit so to speak. You can build higher and higher buildings, with each additional floor becoming more housing.

In this way you can have a much larger supply of housing despite a limited supply of land.

So it’s possible for the supply of structures to outpace its demand, thereby driving down prices.

Structures are also subject to wear and tear as they age. Houses don’t last forever. Their quality becomes worse over time, which can lower their prices too.

But in practice, these things happen slowly.

For example, we can build higher buildings but not instantly. High-rise constructions are multiyear projects. And the higher the building, the longer it takes to build them.

Same for the wear and tear on existing structures. We don’t build a new house and expect it to crumple tomorrow. That takes decades to happen, even longer with proper maintenance.

In the meantime people continue to need housing. So if the price of structures were to fall at all, we’d expect that to happen slowly. And if demand rises faster than new structures can be created, we’d expect the price of structures to rise.

And the data supports this.

In the US for example, structures depreciate at only 1% per year.

That’s the average for the entire country. But if we look at population centers, which are the big cities, we often see the price of structures go up on average.

This same trend is also observed in cities in Canada and Europe and Australia.

What’s odd about Japan is that their real estate structures almost always lose value.

First, they lose value very fast, about 6 times faster than that of the United States.

Detached houses in particular can lose up to half their value in the first decade alone.

And it’s not unusual to treat a house as completely worthless after about 20 to 25 years. And by the time you sell the house, you sell it by the land value only. Sometimes the buyer would even factor in the cost for demolition into the price.

In other words, your house is treated as a liability at that point, not an asset.

And secondly, Japanese structures lose value everywhere, not just in depopulated rural towns, but also in densely populated cities. Remember these are places where structures tend to go up in value in comparable western cities.

The fact that Japan’s structures depreciate so fast and so consistently across geography is weird. It’s not obvious why this would happen. I will take the rest of this video to answer that question, because there are several different causes at play here.

The first is culture.

Japanese consumers have a cultural preference for newness when it comes to real estate.

People probably like new houses everywhere in the world, but when people in the West shop for one, they tend to care more about things like price, location, and the actual features of the house, like the number of bedrooms. Whether the house is exactly brand new is usually not a priority.

Japan is different. The consumer preference for newness is much stronger there, enough to affect real estate prices at scale.

In a way, Japanese consumers treat secondhand housing almost like secondhand cars, where they expect the house to be cheaper simply because it is secondhand.

Now this cultural preference is not entirely irrational. Cultures often arise from nature. In this case, that is Japan’s geography.

Japan’s islands are located along the northwestern side of a tectonic belt known as the Ring of Fire.

Four major tectonic plates intersect here, giving rise to one of the most active earthquake zones on Earth.

Earthquakes are bad for business when it comes to real estate. Their constant presence in Japan has evolved a building culture with a cautious appreciation for impermanence.

That is, an ingrained understanding that man-made structures don’t last forever. Nature eventually takes it back. At times quickly.

In response to the frequent earthquakes and other natural disasters, Japan has a serious set of seismic building codes. These are earthquake safety standards for new construction, and they get updated over time as technology improves.

This means that older buildings would have been built according to older safety standards. Buyers can perceive older buildings as less safe for this reason.

As a rule of thumb it is not entirely irrational.

For example, a lot of the housing built right after World War II was rushed to solve the severe housing shortage at the time.

Many of them didn’t have the best quality, so it probably wasn’t wrong to depreciate their value quickly. But that’s no longer true with modern construction. Still the market habit of fast depreciation remained.

Japan also doesn’t have the best resale infrastructure for secondhand housing. These are things like inspection protocols, renovation records, warranties, and appraisers.

This is the ecosystem that evaluates secondhand homes, provides trustworthy signals about their quality, and facilitates their sales.

Japan’s real estate market has traditionally been weaker at this than western countries, which contributes to their secondhand real estate being undervalued.

I should say that Japan has been trying to improve this with various reforms in the real estate sector, but market adoption takes time. And for now, prices remain undervalued.

But with all that said, something still doesn’t seem to add up for me.

Given how a competitive free market operates, chronically undervalued real estate properties at scale shouldn’t be possible in theory.

Because this massive amount of undervalued real estate properties should present themselves as lucrative business opportunities, ones that would make any real estate investor salivate.

A sufficiently skillful investor, think of a Japanese Graham Stephan character, could buy up all these secondhand houses at below-market prices, renovate them, then sell them at a higher price or rent them out, and repeat this process until they become insanely rich.

And as more people start doing this, it would bid up the prices for secondhand home, until they are no longer undervalued, and the free market corrects itself.

This is a very typical real estate investment strategy. People do it all around the world. It’s partly why undervalued real estate properties are rare in Western markets. So why isn’t the same thing happening in Japan?

Well the answer to that question is twofold.

First, it is happening in Japan.

People are investing in these underpriced secondhand houses, and some are successful at making profits.

This guy, for example, achieved financial independence by age 31 through this strategy, and even wrote a book about it in the FIRE genre. He would actually be a Japanese Graham Stephan character if he only had a YouTube channel.

This guy is doing it too and he does have a YouTube channel. And he’s not even Japanese. So foreign investors are participating in this too.

In this particular case, Anton was able to create not just a profitable rental portfolio by investing in undervalued Japanese real estate, but also a successful YouTube channel by sharing his journey.

·         Anton Wormann

On a corporate level there are also bigger companies that run this strategy at scale.

This company in particular, KATITAS, even won an award for their efforts.

Now all the caveats about financial gurus and get rich quick schemes apply here. I’m not encouraging you to buy these people’s books or move to Japan to become a real estate investor.

What I am saying is that entrepreneurs, both in Japan and around the world, are not oblivious to Japan’s cheap real estate phenomenon. They recognize it as an opportunity, and they are taking action on it profitably.

But despite all that Japan’s real estate structures are still cheap. So why is that?

Now the answer to that question is simple, at least on the surface.

The reason Japan’s secondhand houses are so stubbornly cheap, despite all the policy reforms and business activities, is simply that it is easier to build new houses in Japan.

But what does that mean? How could it be easier to build in a particular place?

Do the laws of physics work differently over there? They have less gravity to work with than the rest of us?

Well no. If anything, from a physics perspective, it should be harder to build in Japan, given the various natural disasters the area is prone to experience.

When I say it’s easier to build in Japan I mean it from a policy perspective.

In most modern societies, you can’t just start building something on your land.

Most of the time you need to get permission for it, usually in the form of a building permit, and the process of getting a permit varies in complexity depending on the jurisdiction and what you want to build.

For example, if I want to build a guest house in my backyard here, I can’t just go back there and start laying bricks.

In the city of Vancouver, I need to go through a long and tortuous application process.

·         I need to read and understand all of these bylaws, and permit guidelines, and forms.

·         Which I’m not confident that I’ll understand.

·         I need to hire a professional architect and an engineer to create floor plans and structural outlines and other materials needed for the application.

·         I’ll probably need a lawyer and a bunch of different consultants to make sure I’m complying with the rules.

·         In other words, I would be poised to spend tens of thousands of dollars and months of my life before I get to lay my first brick.

And the conclusion is that I won’t build my guest house, thank you very much. I will not spend a significant portion of my life energy building anything in this city. Because I feel like I’m getting punched in the face before I even start here. The opportunity cost is just too high.

And I’m not even a professional developer. This is me in my own backyard. So imagine what the red tape looks like when we scale up the project to real developments, where people are trying to build houses or apartment buildings.

This is called “regulatory tax” in some economic literature. It refers to the extra cost of housing development caused by regulations on top of regular construction (land-use/building regulation, approval delays, compliance costs, fees, uncertainty, etc.).

And often regulatory tax is passed down to consumers through higher housing prices.

The government is also not the only source of obstacles to construction. For example, there are the NIMBYs, which is an acronym for Not In My Backyard.

It refers to people who may appear to support affordable housing in theory, but oppose it when that housing is built near where they live.

They might have concerns about the proposed building being too tall that it might block their sunlight, or it would house too many people and therefore would be bad for traffic, or it’s too ugly and negatively impacts the character of the neighborhood, etc.

Now maybe these concerns are genuine, or maybe they just want to constrain the housing supply in their neighborhood to jack up the prices of their own house.

In any case, these local residents would come together to pressure the local government to delay the construction project or kill it entirely. And the end result is higher housing costs.

By the way if I appear to be picking on Vancouver and Canada a lot in this video, it’s just because I live here so I feel like I have some skin in the game to make my complaints.

My tax dollars pay for the government services about which I’m currently complaining.

But the issue is not unique to Canada of course. You can switch Canada to your favorite western country, and the shape of the criticism probably still applies, although details may vary.

And I’m also not saying that laws and regulations and NIMBYism are categorically bad. We obviously need laws, and courts that enforce them. We also need local venues for residents to express their concerns. But in many western societies, there are clearly too many of these things. Their presence is so excessive that they suffocate productive work.

But Japan is different.

They still have laws and regulations. But they have less excessive red tape that delays projects for no reason. What they have are more like the seismic codes that give rise to safer buildings.

NIMBYism exists in Japan too, but they don’t hold nearly as much arbitrary power as to randomly obstruct reasonable construction.

And the end result is that, for the most part, builders can just build. Imagine that!

Imagine a society in which developers build houses, rather than becoming lawyers and consultants and lobbyists, because getting a building permit is harder than the building itself.

And as one would expect, Japan gets to have a lot more new housing than the rest of us.

New housing makes up a much larger share of the market in the country, about 6 to 10 times larger compared to its western counterparts. It’s about 85% of the market in Japan, while it is only about 8% for the US, and 13% for the UK.

This means that there’s an abundance of new housing in Japan such that Japanese consumers are kind of spoiled for choice here. They can afford to think: why bother doing all this work evaluating whether a secondhand house is well maintained, when I can just walk a block down the road and look at a brand new house that’s built yesterday.

Whereas if you are buying a house in America, maybe you would very much like a new house, but there are just not that many of them around, because their developers haven’t even gotten their permits yet. They are too busy arguing with NIMBYs in court. So you have no choice but to opt for secondhand houses. The raging housing shortage is so severe that you are lucky to get a house at all, so beggars can’t be choosers.

In other words, the old houses in Japan are subject to fierce competition with an abundance of new houses. And this fierce competition is driving down their prices there.

Compared to the West, this kind of competition is usually absent, because we’ve managed to create an artificial scarcity of housing. And this self-induced supply shortage is in part what is driving up the value of old structures here.

So at this point you might think that what Japan has going on sounds nice. You might be wondering what kind of smart housing policies Japan has that the rest of the world should emulate since it’s worked out so well there.

Now Japan does have some nice policies, but they are not really that special. It’s not so much that Japan has smart policies as much as it doesn’t have dumb ones.

It’s not what Japan is doing, but what it’s not doing that’s giving rise to the abundance of new housing.

Japan is not creating unnecessary red tape. They are not arbitrarily blocking construction projects. They are doing less, not more. The government ceased doing random shit, got out of the way, and let building happen.

Maybe this is counterintuitive, because governments around the world have tended to think that they need to do more. They think they should do more about their housing crisis. More regulations. More laws. More taxes. More programs. Print more money and shove it into those programs. Canada famously spent 3 billion dollars on a housing program and did not produce a single solitary house.

To this day no one really knows what exactly it accomplished. There are guesses, like correlational statistics, but nothing causal?

Anyway, this might sound crazy, but maybe what the government should be doing is less: fewer programs, fewer regulations, and less money printing that gets thrown into programs that produce nothing but inflation.

Now this in some sense is a plot twist I didn’t see coming.

All this time I thought of Japan’s cheap real estate as a strange problem. I set out to make this video to try to figure out what mysterious things Japan is doing to their real estate sector that were causing it.

But maybe it’s not a problem with Japan. Maybe it’s a problem with the rest of the world.

It’s not a problem to have an abundance of affordable housing. What is a problem is for the cost of housing to balloon to the moon to the point where college students are living outside the province and commuting to campus by planes.

And Japan is not doing anything mysterious to their real estate sector. They are doing nothing. They are just letting reasonable construction happen.

It’s the rest of the world that’s doing mysterious things to their housing sector, like blocking new construction for no reason when there is clear and desperate demand for it, all the while investing billions of dollars into programs that produce no results. That’s really mysterious.

You know when I reflect on how this conclusion managed to catch me by surprise, I wonder if I’ve just gotten so used to seeing unaffordable housing prices around the world that when I finally see an affordable one, I’m so surprised that I’m convinced that there’s something wrong with it.

Like I’ve gotten so used to living in societies that are mismanaged beyond belief that when I see a well-functioning one, my brain doesn’t compute.

I feel like I need to belabour this point.

Imagine you walk into a room, and find that the people in that room are punching themselves in the face. For whatever reason this is a group of people who really like punching themselves in the face. They’ve been doing it for decades.

And upon your arrival, they all turn to look at you like there’s something wrong with you.

One of them comes up to you and says:

·         “Hey man, why is your face like that?

·         Why does it look so weird?

·         Like your skin is very smooth, there’s no blood on it, your cheeks aren’t bloated, your eyes are not darkened.

·         That’s very strange.

·         What mysterious things are you doing to your face that made it look like that?

So of course you say:

·         Brother, my face isn’t the weird one. Yours is.

·         I’m not the one doing mysterious things to my face. That’s you.

·         You’ve been punching yourself in the face repeatedly. Haven’t you noticed?

·         My face is what a face is supposed to look like in the absence of constant artificial trauma.

·         And your face will look the same, in time, if you’ll only just stop punching yourself.

But upon hearing that they go:

·         No, no, we can’t stop punching ourselves in the face.

·         But I tell you what, we are going to invest billions of dollars into skin care programs.

·         I’m sure that will make our faces look better.

·         And before you go, remember to give me 50% of your income every year so that I can buy those skin care products.

Okay, I’m only half joking, but here’s what I’ll say in conclusion.

Japan isn’t perfect. I think a lot of their secondhand real estate are undervalued. I think they do sometimes tear down perfectly functioning old houses to build new ones, and that’s indeed wasteful.

I think Japan is aware of this. They are making efforts to change it, both in the public and private sectors. We’ve discussed some of them.

That said, if I have to choose between the problem of having too much housing or having too little housing, I’d choose the former. The former is a quality problem.

I generally prefer the problem of abundance over the problem of scarcity, especially when this specific problem of scarcity, that is the housing crisis in many western cities, is self-inflicted.

It’s like the governments are punching themselves in the face while complaining about the pain. It’s disturbing to watch, and it would be nice if they stopped.

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