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Jul 30, 2016

Japan’s housing market prices continue to rise, despite sluggish economic growth

by Lalaine C. Delmendo

Japan house prices graphDespite its seemingly negligible impact on the wider economy, “Abenomics” - i.e., the reflationary policies of Prime Minister Shinzo Abe, who came to power in December 2012 – have helped prop up Japan’s property market.

Abenomics stimulates the economy by increasing public infrastructure spending, devaluing the yen and aggressive quantitative easing by the Bank of Japan (BOJ).  Since the introduction of Abenomics, real estate prices have accelerated strongly in Japan. Transactions started to pick up in 2012 and rose rapidly in 2013, as monetary policy kicked in. Residential construction activity is also recovering.

In Tokyo Metropolitan Area:

  • Existing condominium units’ average prices rose by 3.73% to JPY469,700 (US$4,602) per sq. m. during the year to May 2016, according to the Land Institute of Japan (LIJ).
  • New condominium units’ average prices skyrocketed by 21.2% y-o-y to JPY823,000 (US$8,063) per square metre (sq. m.) y-o-y to May 2016.
  • Existing detached houses prices dropped 1.9% to JPY32,410,000 (US$317,512) over the same period.

In Osaka Metropolitan Area:

  • Existing condominium units’ average prices increased by 7.5% to JPY288,000 (US$2,821) per sq. m. during the year to May 2016.
  • New condominium units´ prices fell 11.1% to JPY529,100 (US$5,183) per sq. m. over the same period.
  • Existing detached house prices were up by 6.7% to JPY20,510,000 (US$200,931) over the same period.

Land prices are rising a little, too. During the year to May 2016, average land prices in Tokyo Metropolitan Area rose by 0.5% to JPY198,500 (US$1,945) per sq. m., while in Osaka Metropolitan Area land prices were up by 3.8% to JPY136,000 (US$1,332) per sq. m., according to the LIJ.

House prices are expected to continue rising modestly for the remaining months of 2016, given another round of Abenomics stimulus in the second half. Moreover, Tokyo’s successful bid to host the 2020 Summer Olympics should boost property demand and construction over the next 7 years.

From a US$-based investor´s perspective, the Japanese residential market´s recent gains were bolstered by the appreciation of the Japanese yen from JPY123.725 = US$1 in June 2015, to JPY105.356 = USD1 in June 2016. However, this is not enough to offset the 31% drop in the value of yen against the dollar from 2012 to 2015.

The Japanese economy grew by an annualized rate of 1.7% in Q1 2016, in sharp contrast with the previous quarter´s 1.7% decline - avoiding another technical recession. The economy is expected to grow by a meagre 0.5% this year and to contract by 0.06% in 2017, after expanding by 0.5% in the previous year, according to the International Monetary Fund (IMF).

Residential property sales increasing

Residential property sales continue to rise. During the first five months of 2016:

  • In Tokyo, the number of existing condominiums sold rose by 5.4% to 16,152 units from the same period last year, according to LIJ. Existing detached house sales increased more strongly, by 14.3% y-o-y to 8,224 units.
  • In Osaka, existing condominiums sold rose slightly by 0.3% y-o-y to 7,508 units in the first five months of 2016, while existing detached houses sales rose by 8.4% to 5,642 units.

Japan existing condo sale

Land sales are also surging. In Tokyo, lots sold increased 25.5% to 5,096 units in the first five months of 2016 from the same period last year. In Osaka, land sales surged by 21.7% to 1,162 units over the same period.

Housing supply increasing, but not in Tokyo and Osaka

Japan new dwelling units market

In the first half of 2016, authorized housing starts rose by 5.2% to 463,469 units from the same period last year, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT).  Housing starts started to rise in 2015, by 4.6% y-o-y to 920,537 units, after declining by 10.8% in 2014.

However last year was particularly bad for housing starts in Tokyo Metropolitan Area, with 9.9% less new condominiums (40,449 units) being put on the market – the lowest level since 2010, according to LIJ.

In Osaka Metropolitan Area, 0.6% more new condominiums were put on the market (18,930 units).

During the first five months of 2016, in Tokyo 21.4% less new condominiums were put on the market than the previous year, and 11.1% fewer in Osaka.

Japan’s shrinking population is a major problem.

It is estimated that Japan will lose a third of its population over the next 50 years. In addition, about 40% of the population will be over 65 years old by 2060.

Japan housing starts

The pace of the population decline is expected to reach more than 700,000 annually by 2025, and about 1 million by 2060.

“Based on our projections, the size of the annual decline will keep getting bigger before peaking somewhere between 2060 and 2070,” said Futoshi Ishii of the National Institute of Population and Social Security Research.

The shrinking population is already producing a surplus of housing units. There are many sightings of abandoned homes in Tokyo.  As of 2013, there were already an estimated 8.2 million unoccupied homes in the country, representing a record 13.5% of all residences and an increase of 24.4% from a decade ago, according to MLIT.

Japan total population

However, declining household sizes may mitigate the situation. The average household size is projected to decline to 2.37 by 2025, from 2.67 in 2000, and 5.0 in 1950, according to the Ministry of Internal Affairs and Communication. More Japanese are living alone and fewer are living in multiple-generation households, increasing the demand for quality housing.

In an effort to reduce the total number of abandoned homes, some abandoned houses and apartments are being put back on the market by the Ministry of Land, Infrastructure, Transport and Tourism, as part of its new 10-year national housing plan. The plan also proposes to offer some of these houses to low-income earners and families with children, and to replace aging condominiums.

The government is also trying to stop the Japanese population shrinking:

  • Childcare provision was boosted by the Act on Child and Childcare Support of August 2012.
  • The Comprehensive Support System for Children and Child-rearing, introduced in April 2015, will promote early childhood school education, childcare and child-rearing support services in local communities.
  • The government is expected to approve enhanced support for families with three or more children.
  • Local governments are being encouraged to offer speed dating and other forms of matchmaking, and to support marriage, child-bearing and child-rearing.
  • The government is expanding free nursery care.
  • The government also plans to establish fertility treatment counselling centres in major cities.
  • The government has also been discussing accepting more immigrants – a possible solution to maintain its population and counter its dwindling workforce.

Moderate rental yields, rising rents

Japan tokyo price

In Tokyo’s central districts, gross rental yields - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - range from 3.4% to 5.4%, according to Global Property Guide research conducted in April 2016.

Yields are a little higher on smaller apartments. Yields on the very smallest apartments are 5.42%, a reasonable yield. But then smaller apartments tend to need more maintenance, so a higher yield is justified. 

Rents are rising modestly. In 2015, the nationwide apartment rent index rose by 2.7% from a year ago, based on figures from the Japan Real Estate Institute.

In the country’s metro areas:

  • In Tokyo Metropolitan Area, apartment rents increased 5.2% y-o-y in 2015.
  • In Osaka Metropolitan Area, apartment rents rose by 1.4% y-o-y in 2015.
  • In Nagoya Metropolitan Area, apartment rents rose by 1.2% over the same period.

New housing loans falling, despite record low interest rates

Japan interest rate

In July 2016, the BOJ kept its key interest rate steady at -0.1%. The key rate became negative in January 2016. This means that lenders will be charged to keep their money with the central bank.

The BOJ’s key rate has been below 1% since mid-1990s. As a result, the prime lending rates in principal banks in Japan have hardly moved since 2000, remaining below 3%.

Following the BOJ’s rate cut, five of the country’s major banks reduced their fixed mortgage rates in early-2016. The Bank of Tokyo-Mitsubishi UFJ (MUFJ), Sumitomo Mitsui Banking Corporation (SMBC), Resona Bank, and Mizuho Bank reduced interest rates for 10-year fixed mortgage loans to 1.05%. Sumitomo Mitsui Trust Bank reduced its 10-year rate to 0.7%. A decade ago, fixed mortgages in Japan were around 3%.

Despite these low interest rates, new housing loans from domestically-licensed banks keep falling - the amount of loans fell 3.6% in Q1 2016 from the previous year, according to the Bank of Japan (BOJ).

The amount of housing loans in Japan is much lower than in other developed countries. The ratio of outstanding mortgage loans to GDP in Japan stood at around 36% in 2015, almost unchanged from a decade ago.

The "lost decade" and after

Japan residential urban land price

The Japanese economy continues to disappoint. In 2015, the economy expanded by a minuscule 0.5%, after a contraction of 0.03% in 2014, and modest growth of 1.4% in 2013, according to the IMF.

Japan has never fully recovered from the great asset bubble of the late 1980s, and this slow growth is the reason that Abenomics was adopted. “Abenomics” includes the following:

  • Inflation targeting at 2%
  • Correction of the excessive appreciation of the yen
  • Negative interest rates
  • Radical quantitative easing
  • Expansion of public investment
  • Buying of construction bonds by the Bank of Japan
  • Revision of the Bank of Japan Act

However none of this has been very successful.

The property market has benefited the most. We appear to be seeing some recovery in Japan´s property market - good marks for Abenomics, maybe.

Japan gdp inflation

The wider economy is not doing so well, however.

After the ‘lost decade’ after the 1990’s, from 2000 to 2007 the Japanese economy grew by an average of 1.5% annually. However due to the global financial meltdown, the economy contracted by 1% in 2008 and by another 5.5% in 2009.

The economy bounced back in 2010 with 4.7% growth.  Then in 2011 GDP shrank by 0.5% due to the Great Tohoku Earthquake (magnitude 9.0), and China´s economic slowdown. Anti-Japanese feeling sparked by the Diaoyu/Senkaku Islands dispute didn’t help. Japan’s economy grew by a modest 1.8% in 2012, and performance since then has been poor.

This is a major blow for Prime Minister Shinzo Abe growth plan.  The economy is expected to grow by a meager 0.5% this year and to contract by 0.06% next year, according to the International Monetary Fund (IMF).

Japan faces a long-term growth slowdown. It is not obvious that Abenomics is the cure.

Improving trade balance, record public debt

Japan’s trade balance improved sharply last year, thanks to the weaker yen and a decline in energy import costs. In H1 2016, Japan posted a trade surplus of JPY1.8 trillion (US$17 billion), in contrast with a JPY1.69 trillion deficit in the same period last year, according to the Finance Ministry. It was its first half-year trade surplus since the 2011 Fukushima nuclear disaster, which sent energy import bills soaring.

Japan government gross debt

The Japanese yen has moved significantly in the desired direction since 2012, depreciating from US$1 = ¥78 in 2012 to US$ = ¥123 in 2015. However, this year the yen gained almost 16% against the dollar in just a span of six months, and has moved up strongly against all major currencies since the Brexit vote.

A strong yen is bad news for the economy and many Japanese companies as it makes Japanese products more expensive internationally and makes it much harder for the government to tackle deflation due to cheaper imports.

Despite Abenomics, inflation is falling

Japan exchange rate

Abenomics was intended to stimulate the economy, partly by generating inflation. Yet Japan’s core inflation, excluding volatile food prices, was a negative 0.5% in May 2016, after falling by 0.3% in the past two months.

The BOJ sets an inflation target of 2% this year. Aside from maintaining its -0.1% key interest rate, the central bank stepped up its pace of monetary easing in July 2016, adding JPY2.7 trillion (US$26 billion) of equity funds to its annual asset-buying program. The latest move is expected to almost double the BOJ’s purchases of equity exchange-traded funds from the current JPY3.3 trillion a year.

Abe was re-elected unopposed as head of the ruling Liberal Democratic Party (LDP) in September 20, 2015. His new term will run until September 30, 2018.

Abe is not giving up.  The government unveiled a new JPY28 trillion (US$274.3 billion) stimulus package in July 2016 – the third in a row after a JPY10.3 trillion (US$100.9 billion) round in 2013 and a JPY3.5 trillion (US$34.3 billion) package in 2014.

Japan has the world´s biggest debt burden. In 2015, the country’s gross debt amounted to JPY1,238 trillion (US$12.13 trillion), equivalent to about 248% of GDP. Opinions differ about how much of a problem this is.


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