Why land price is more important than building price in Japan

Japanese attitudes to old buildings differs to those in Anglo countries

In Anglo-speaking countries we are not used to seeing our home and the land beneath it as being separate. This may be because we view buildings as being permanent parts of the landscape. In the UK for example, it is not unusual for a home to be over a hundred years old. Old buildings can often command a premium and are seen as having character, whilst new buildings are often viewed with suspicion and are distained as being trashy or shoddily-built. Many old buildings are protected by law and even making minor changes can require owners to go through a painfully protracted bureaucratic process.

Things are very different in Japan. Many people view Japan as being a land with great respect for its ancient history and traditions, full of ancient temples and shrines. It comes as surprise to many to learn that this is not the case! Japan has no qualms at all about bulldozing historically important buildings to make room for a shiny new mega-mall or highway overpass. Take for example, the iconic Nakagin Capsule Tower in Tokyo. The tower, designed by Kisho Kurokawa, was a unique architectural marvel consisting of 140 capsule units stacked on top of each other. However it's architectural importance was not enough to save it from being torn down in 2022 and replaced by a generic beige tower block (the Pullman hotel, if you are interested).

Similarly, that ancient mountain shrine where Zen-practicing monks silently contemplate the profundities of the cosmos amid the falling cherry petals and the waterfalls' soft spray? It is a plaster reproduction (the original burned down in 1603).

Why do Japanese people prefer newly-built properties?

What accounts for this attitude to old buildings in Japan? There are several reasons, some cultural, and some practical.

First up, Japanese people may have respect for the past, but they love shiny new things more. This includes houses. If you ask any newly-married salary-man or OL (office lady) where they want to live, 99.9% of them are going to say that, of course, they want to live in a newly-built home.

That is because for the Japanese, old things, or things that have been owned by another or lived in by another, can have something like a stain on them from the past (have you seen Ju-On / The Grudge?). This can produce almost a feeling of uncleanliness and even disgust among some, more sensitive Japanese people. On the other hand, a new home is pure and unspoiled by past usage.

This sense of the purification of the old can be seen in Japan's most important shrine, Ise Jingu. The shrine is rebuilt every 20 years as part of a ritual called Shikinen Sengu, which involves a complete rebuilding of the shrine structures and a ceremonial transfer of the deities to the new buildings. This ritual rebuilding is rooted in Shinto beliefs about renewal and the cyclical nature of life.

The second major reason why Japanese love knocking down their buildings and then building them up again is that the country regularly gets pulverized by almost every conceivable natural disaster, including floods, volcanic eruptions, typhoons, and most importantly, earthquakes.

Earthquakes are the supreme terror of the Japanese. They can strike anywhere in the country without warning, can topple even steel-reinforced buildings, and if you are unlucky enough to be living within 6 miles (10 km) of the coast, can cause 40 meter tsunamis to wipe towns of the map.

Now if you were living in a Tokyo, in the hypocentral region of the projected Nankai Trough megathrust earthquake (estimated probability of occurrence: 80% in 30 years, estimated death count: 298,000), would you rather live in a brand new building, constructed with the latest earthquake resistant materials, or would you rather live in a funky, Showa-era apartment built according to 1970s fire safety standards? Naturally, most people would choose to live in a modern building, and that is one of the main reasons why buildings in Japan tend to be knocked down after 30 years, and why they tend to lose value over time rather than appreciate in price like their western counterparts.

In particular, buildings constructed before the last major change to Japanese building codes in 1981 may be viewed as worthless (at least from a tax perspective). Before June 1, 1981, Japanese building codes only required structures to withstand major damage from earthquakes measuring 5 on the Japanese seismic intensity scale. Buildings designed after this date must withstand earthquakes measuring 6-7 on the scale.

Land in Japan can gain in value

With all this in mind, why would anybody in their right mind buy a home in Japan if they knew it would be worthless by the time they had made their last mortgage payment? If all buildings in Japan tend to lose value, how can it be that many properties have seen healthy appreciation over the last decade?

The answer is that the land that properties are built on can retain or even increase in value over time.

Japan is a relatively large island, but the actual areas where you can build stuff is very small. That is because Japan is 70% mountainous. The vast majority of Japanese people are squeezed into the remaining 30%. That means that useable land has a lot of scarcity value. Much of what makes up modern Tokyo is man-made land that was created by dumping rocks and trash into Tokyo bay. "Good" land, by which I mean solid bedrock, rather than the soft mud of a former marsh or alluvial plain, can command huge prices. For example, areas in Tokyo like Aoyama and Roppongi are of a magnitude more expensive than the low-lying shitamachi areas like Arakawa-ku, which suffered far worse damage in the 1923 great Tokyo earthquake.

Good land then, especially if it is in a great location, will always be worth something. So-so land - like that place down by the river in Saitama where your coworker bought his house? Well maybe not so much. Currently, real estate prices in Japan are increasing at a rate not seen since the great asset bubble of the 1980s. However, some have argued that this boom is simply the result of a temporary restriction in the supply of building materials and an increase in the cost of labor. In 30 years time, the effects of Japan's terminally low birthrates will really start to kick in. Demand for housing in the suburbs is sure to fall - and out in the countryside? Forget about it. On the other hand, demand for land in the major cities like Tokyo will continue to be strong. Even if the population falls by 50%, Japan would still have as many people as the UK. Paradoxically, as the small towns in the countryside start to empty out and essential infrastructure like hospitals and public transport starts to disappear, those left will flee to the cities, possibly increasing demand for land.

To wrap up, for reasons partly cultural and partly practical, properties in Japan will almost definitely depreciate in value over time. As a result, if you are thinking about making a long-term investment in real estate here, it's important that you consider the land value of the surrounding area, as this will give you a more accurate view of your properties' true value.