Factors for Deciding Whether to Buy or Rent an Apartment

I considered buying an apartment, but even when I asked people at real estate agencies, no one could give me a clear answer about how much risk and reward buying carries compared to renting, so I looked into it myself to help me decide. This article is a summary of the notes I took at that time. The calculations here assume the purchase of a typical newly built apartment within Tokyo's 23 wards. If you are buying in another area or a different type of property, please adjust the figures accordingly.

Breakdown of the Apartment Price

It is common to divide an apartment's price into the land price and the building price, but this time, since I want to compare against renting, I break the price down by useful life in order to more faithfully represent how an apartment's value changes. (Consumption tax is excluded from the calculation, since it is exempted at the time of sale and can therefore be thought of as being amortized over the long term.)

40% is the land price
- For a typical apartment it is around 40%, and for a tower apartment it is around 30%. In areas with high land prices the floor-area ratio increases, so there does not seem to be a large difference.
35% is the building price (useful life of 60 years)
- The useful life of apartments in Tokyo has been increasing in recent years, and they are said to require no major renovation for three generations (75 to 90 years) (reference), but here I estimate conservatively at 60 years.
10% is the interior price (useful life of 30 years)
- This is the price of a full renovation that makes the interior completely new.
15% is the new-construction premium (only when newly built)
- It is said to be around 15% in central areas and around 20% in the suburbs.

To summarize, one can consider that a 15% depreciation occurs at the time of a new purchase, and a 0.9%/year depreciation occurs thereafter.

Various Expenses and Running Costs

Various Expenses

Various expenses (registration fees, etc.) are said to be 3% to 7% for a newly built property and 6% to 10% for a used property (reference). Here I assume 4%.

Running Costs

Management fees and repair reserve funds are about 0.35%/year
Property tax and city planning tax are about 0.2%/year

Mortgage

The mortgage tax deduction averages -0.85%/year over a maximum of 10 years
- It is at most 1%/year on the remaining balance, and even with a 35-year loan the deduction is capped at 8.5%/year at most
Mortgage interest rates are currently about 0.5%/year for variable rates and about 1.0%/year for fixed rates
- As repayment progresses, the ratio relative to the new-construction price decreases.
Group credit life insurance is currently about 0.3%/year (this is equivalent to taking out additional life insurance, so it is not included in the calculation)

Summary

According to the Real Estate Investor Survey conducted in April 2017, the gross yield on residences in Tokyo is currently about 4.5%/year (Jonan area, studio type, as of April 2017, expected yield). Since the new-construction price includes the new-construction premium, I consider it to be about 3.8%/year relative to the new-construction price.

For a newly built property,

a 19% depreciation for initial costs (the new-construction premium and various expenses)
a 1.45%/year depreciation thereafter for building depreciation and running costs
a 0.5%/year depreciation for mortgage interest
if you take the mortgage tax deduction, you need to pay 5% interest over 10 years, but you can receive up to an 8.5% tax deduction

apply, which means buying becomes advantageous if you live there long,

8 years or more if you do not take out a loan,
7 years or more if you take out a loan and receive the maximum mortgage tax deduction,
11 years or more if you take out a loan and do not receive the mortgage tax deduction.

Purchasing a property carries the risk of fluctuations in land and building prices as well as the risk of disasters such as earthquakes, but since mortgage interest rates are sufficiently low, it can be considered advantageous if you expect to hold it for 10 years or more.

Appendix (Notes)

The mortgage tax deduction applies only to rooms of 50 square meters or more (interior measurement), so it is considered difficult to use for living alone in Tokyo.
The mortgage tax deduction is at most 400,000 yen/year, but by splitting the loan amount between a married couple, you can receive a refund of up to 800,000 yen/year.
The mortgage tax deduction requires a tax amount of 500,000 yen or more, so you cannot receive the refund if your income becomes low due to parental leave, etc. There is also an income limit, though it is sufficiently high.