Month: February 2025

(here I am attempting to compel AI to compare Japan to North America. Unfortunately, once we hit Toronto, the LLM collapsed. So we’ll stay in Japan for now. If I need to cross-examine an LLM, then there better be someone to object to my questions… No really, I don’t have to do research before interrogating an LLM. It defeats the purpose.)

Residential real estate in Japan is often seen as a depreciating asset due to a combination of cultural, economic, and governmental factors.Historically, Japanese homes are built with the expectation that they will depreciate significantly over time, with an average lifespan of around 27 to 30 years for wooden houses and longer for concrete buildings.

One key reason is the cultural mindset that emphasizes the impermanence of buildings, influenced by Buddhist notions of ephemerality and the concept of mono no aware, which is a sense of the sadness of things due to impermanence.This cultural perspective has led to a practice where homeowners often demolish and rebuild their homes rather than maintaining and renovating them.

Additionally, Japanese tax laws treat land and buildings separately, allowing buildings to depreciate rapidly for tax purposes.This system favors new constructions and can lead to a cycle of demolition and rebuilding, as it provides tax benefits for new buildings.The depreciation rate of structures in Japan is estimated to be around 6% for housing and 10% for commercial structures.

Furthermore, the government’s post-World War II policies aimed to encourage rapid rebuilding and technological advancement, which included tax incentives and low-interest loans for new constructions.These policies have contributed to a market where new constructions are favored over maintaining older buildings.

In summary, the perception of Japanese residential real estate as a depreciating asset is deeply rooted incultural attitudes, tax policies, and economic incentives that favor new construction over renovation and maintenance.

Follow-up: but isn’t real estate a depreciating asset anyway, regardless of culture? 

Real estate depreciation rates vary significantly across different countries and property types. For instance, in Japan, the depreciation rate for housing is approximately 6%, while for commercial structures, it is around 10%.In contrast, the depreciation rate for U.S. housing is much lower, at about 1%.

These differences in depreciation rates can impact investment decisions and returns. For example, higher depreciation rates can decrease capital gains from real estate investment but increase income returns, as demonstrated by Poterba (1984).Additionally, the depreciation rate of real estate varies based on factors such as the value share of structures, city size, location within a city, building age, and density.

In the context of global real estate, the total value of real estate is more than the combined value of global equities and bond markets, and is almost four times the size of global GDP.Residential property accounts for just over three-quarters of the total value, with commercial and agricultural land making up the remaining portions.

The depreciation of real estate also has implications for the global economy, particularly in the context of currency fluctuations. For example, a weaker U.S. dollar can make U.S. real estate more attractive to foreign investors, potentially leading to higher real estate prices in prime locations.However, it can also result in higher interest rates, which may decrease demand and affect property values.

Understanding these global variations and their economic impacts is crucial for investors and policymakers in making informed decisions about real estate investments and financial planning.