Evaluating Investments in Older Detached Houses in Modern Times (2) The Nuclear Family Era is Over! – Lifestyles and Demographics

Articles Published in Akiya Lab | Roopt (Makigumi)

Makigumi, which operates Roopt, constantly researches cases and other information related to the revitalization of vacant homes and publishes them as columns.

When evaluating real estate, it is first necessary to understand the demographic trends in Japan and its regions, as well as changes in lifestyles in the post-COVID era. I will discuss these topics.

Introduction

Noi: Hello everyone, I'm Noi, the host of this channel. In this video, we will be talking with Mr. Ueda, President and Representative Director of Gaiax, about evaluating investments in older detached houses in modern times.

Ueda: Thank you for having me.

Noi: This time, over several sessions, we will discuss the current social situation in four topics to create future models. The first is lifestyles and demographics, the second is workation and remote work, the third is the sharing economy, and the fourth is the evolution of technology. This time, we will discuss lifestyles and demographics.

What kind of lifestyle?

Ueda: Regarding how to evaluate real estate, especially older detached houses, in modern times, lifestyles have truly changed compared to 10, 20, or even 30 or 40 years ago. In short, the reality is that financial institutions' lending attitudes haven't changed that much. I'd like to talk a little about how lifestyles have changed, which is really a matter of course.

First, before even considering lifestyles, the number of people living is decreasing, and in addition to that, when we consider what kind of people are living, the active age group is steadily declining.

This is from the Ministry of Health, Labour and Welfare's website, an older article, showing the projection of the working-age population from around 2015 onwards. This working-age segment will continue to decrease.

This is Taketa City. I passed through it once when I visited Oita. It's a pretty ordinary rural town, but as of 2020, there are 8,675 people aged 15 to 64. As the population itself decreases, and this proportion also decreases, there's a double impact, and in just 25 years, the population aged 15 to 64 will almost halve. I think this is the reality of rural areas.

Indeed, a decreasing population is a significant negative for property utilization. It's obvious, but if there are no people, even a brand new, sparkling property will have no one to use it, ultimately generating no yield and making it impossible to evaluate as collateral. So, I think everyone is concerned about demographic trends, and it will continue to be something we need to pay attention to in the future.

Therefore, we also need to consider where the population will gather, but let's put that aside for now. Among the people who are there, what kind of lifestyles do they have? To talk a little about that, first, in the past, people would marry and live as a family of three or four. This was the so-called nuclear family, but unfortunately, divorce is now commonplace in society. It's commonplace today, so in another 10 or 20 years, it will become even more so. If you look at Europe, there are cases where same-sex marriage is recognized and cases where it is not, but in any case, many people live together without forming a partnership or getting married, simply cohabiting. In addition to families with children and those without, there are also various patterns of families emerging, such as living with children from a previous marriage.

As a result, I think it will become rarer in the future for people to marry once, manage their lives together for 40 or 50 years, and then apply that rent to their situation, as was the case in the past.

I think that if you have a family and children, and they go to elementary school there, the probability of living in that area for a long time is higher. However, as the degree of freedom increases, I think the likelihood of moving also increases. In that sense, it's a given that renting is better than buying, but I think this will become even more prevalent in the future.

About Evaluation

Ueda: So, with such lifestyle changes, how will the evaluation of real estate change? I'd like to move on to that. In this era, Noi, how do you think the evaluation will change from the previous stance of financial institutions?

Noi: That's right. As we discussed last time, I think there's a tendency to evaluate people now, but it's not simply a matter of saying, "This person has money, so it's safe to lend to them." I think it will become an evaluation that needs to consider their personality, their desired lifestyle changes, and so on. That's what I thought after hearing your explanation.

Ueda: Yes, that's exactly right. The first thing is that we need to shift from evaluating people and lending money based on the property being junk, to a different approach. The second is that it used to be common for everyone to buy their own home, but increasingly, renting is becoming the norm.

If you rent, who do you think owns the house?

Noi: If you rent, there's a separate building owner, right?

Ueda: That's right. For example, who?

Noi: For example, people who own such properties, like condominiums or detached houses, and run a business of renting them out?

Ueda: Exactly. That's precisely it. Instead of taking out a loan to buy a house to live in, people are buying real estate to rent out to others, or for others to rent. These are investors. In some cases, someone might have bought a house, then bought another house for themselves to live in, but the old house becomes an investment property, or a property that generates yield, and they rent it out to others. I think such cases will increase.

In the future, people will buy investment properties in that way, and ordinary people will rent those investment properties to live in, but this is where the evaluation has been very low until now.

Actually, when there's an old property and I think about buying it because I'll live in it, the amount I'd pay is different from the amount I'd consider paying if I were to rent it, not buy it, even though I'd still live in it.

When buying versus renting, for example, the tolerance for dilapidation is different, to put it simply.

For example, if Noi were to consider buying a bicycle, she might buy a new one for 100, but she wouldn't want to buy this old, beat-up bicycle. Honestly, it's too old, so while a new one would be 100, she might be willing to buy this used one for 20, even if she doesn't really want to. On the other hand, what if she were to rent it for a month? For example, if renting a new car costs 10, how much would she be willing to pay to rent an old bicycle for a month?

Noi: If I'm renting an old bicycle, it won't become my own, so as long as it fulfills its purpose of getting me there faster than walking for that month, whether it's new or old, there won't be a huge difference in the amount I'd pay. I don't really care if it's new or old, even if it's slightly more expensive or cheaper.

Ueda: That's right. People tend to have such feelings. When buying and selling buildings, especially for personal residence, new ones are very expensive, and as they get older, the price drops sharply. However, when it comes to renting, while older properties certainly have lower prices, they don't plummet as drastically. In terms of feeling, if a new property is 100, it might be valued at 20 for sale, but perhaps 40 for rent. I think there's that kind of sentiment.

The problem is that if an investor buys a property and rents it out, it can generate a sufficient return of 40. But if it's for sale, it's only valued at 20, so they can only lend 20. That's the situation.

Are there people who rent indefinitely? As I mentioned earlier, this is emerging due to changes in lifestyle. More and more people are renting as a family and living in rental properties for about 10 years.

To summarize the above, the current depreciation of old properties, whether 30 or 50 years old, is too severe. They can be valued higher. However, it's important to note that when living in them, if the plumbing, kitchen, toilet, and bath are very old, even if you're renting, you'd probably still be reluctant.

Realistically, what about the renovation cost for that part? For a 30 to 50-year-old plumbing renovation, it would probably be in the range of 5 million yen, right? I think 5 million yen would be sufficient, but that cost needs to be factored in. However, once that cost is factored in, I think it should be fine.

Actually, if you look at the rental market, for example, if a 3LDK rents for 100,000 yen, that's 1.2 million yen over 12 months. Then you calculate the yield. What do you think? If it's 20%, that's 6 million yen for 5 years. If it's 10%, that's 12 million yen. However, the renovation cost is a maximum of 5 million yen, but how much will it actually cost, between 3 million and 5 million yen? The amount after deducting that estimated cost is definitely the value of that property.

Even for properties that people say, "No one would buy this building," it's perfectly fine to recognize at least that much value today, right now. For example, 12 million yen minus 3 million yen for renovation, which is 9 million yen in value.

Noi: You mentioned that the points to consider in evaluation change due to lifestyle changes. How do those on the evaluation side actually verify this?

Ueda: Honestly, if an investor thinks it's worth 9 million yen, they'll go buy it for 9 million yen. In some cases, if buying it for the full 9 million yen isn't profitable, they might go buy it for 5 million or 6 million yen if they think it's worth 9 million. But when they take that to the bank, the bank says, "No, this has zero value. Do you think it will be worth 9 million when you resell it? Well, at most 2 million." And so, they end up buying it with their own savings, without borrowing a single yen from the bank. That's the current situation.

Noi's question, "Is it really worth 9 million yen?" is something that only becomes clear after managing it for 5 or 10 years, but I think we are moving towards a world where the probability is high.

: I see. Thank you, Mr. Ueda, for your talk. This time, we discussed lifestyles and demographics from the current social situation in order to create future models. Next time, Mr. Ueda will talk about workation and remote work. Please watch that video as well. Thank you for watching this time.Noi

Ueda: Thank you very much.

First published: Akiya Lab (2024 - now integrated into this site)