Japan’s housing market losing steam

Japan’s residential property growth is slowing, amidst falling demand and weakening construction activity. During the third quarter of 2023, the nationwide residential property price index rose by a modest 2.4% from a year earlier, a slowdown from y-o-y increases of 4.8% in Q2 and 4.1% in Q1, according to the Land Institute of Japan. However, when adjusted for inflation, prices declined slightly by 0.6% y-o-y in Q3 2023.

Japan’s house price annual change

Quarterly, nationwide residential property prices fell by 0.4% (-1.4% inflation-adjusted) in Q3 2023.

The recent slowdown is in contrast to the strong annual growth of 7.2% in 2022 and 6.3% in 2021.

However, there are wide price variations in terms of location and property type.

In the Tokyo Metropolitan Area:

  • Existing condominium average prices rose by 9% in November 2023 to JPY 699,000 (US$4,730) per square meter (sq. m), following a y-o-y rise of 11.5% in November 2022.
  • New condominium average prices surged by 42.5% in November 2023 from a year earlier, to JPY 1,280,000 (US$8,661) per sq. m, a sharp acceleration from a modest increase of 3.1% in the same period in the prior year.
  • Existing detached house prices were up by 9.5% y-o-y to JPY 42.19 million (US$285,477), following annual growth of 3.9% in November 2022.

In Osaka Metropolitan Area:

  • Existing condominium average prices rose by 5.1% to JPY396,882 (US$2,685) per sq. m in November 2023 from a year earlier, after increasing by 9.3% in the same period in the previous year.
  • New condominium average prices were up by 5.1% y-o-y to JPY808,000 (US$5,467) per sq. m in November 2023, in contrast to the 15.4% decline seen in the same period the prior year.
  • Existing detached house prices rose by 6.5% y-o-y to JPY22.79 million (US$154,207) in November 2023, an improvement from the prior year’s meager growth of 1.3%.

Japan Residential Property Price Index graph

Demand is now falling. In Tokyo, sales of both existing condo units and detached houses fell by 9.8% and 12.2%, respectively, in the first eleven months of 2023 from a year earlier. In Osaka, sales of existing condominiums and detached houses both declined by 3.3%.

Land sales in Tokyo and Osaka also plunged by 20.2% and 13.8% y-o-y, respectively, over the same period.

Residential construction activity is also weakening. The total number of authorized housing starts in Japan fell by 4.7% to 755,037 units in the first eleven months of 2023 from a year earlier, after increasing by 0.4% in the full year of 2022 and 5% in 2021, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT).

Japan Tokyo Condominium Prices graph

Japan continues to post lackluster economic performance. In the FY 2023 ending March 2024, the Japanese economy is projected to grow by 1.6%, buoyed by the recovery in inbound tourism and automobile output, according to figures from the Cabinet Office, Japan. The International Monetary Fund (IMF) expects the country’s economic growth to remain sluggish at 1% during 2024.

Demand is slowing again

After increasing in the past two years, residential property sales are now falling again in both Tokyo and Osaka.

  • In Tokyo, the number of existing condominiums sold fell by 9.8% to 32,927 units in the first eleven months of 2023, a turnaround from an annual increase of 6.6% during the whole year of 2022, according to LIJ. Likewise, existing detached house sales dropped 12.2% y-o-y to 16,752 units, following a 1.8% growth in 2022.
  • In Osaka, existing condominiums sold fell by 3.3% y-o-y to 15,468 units in Jan-Nov 2023, in contrast to an annual increase of 5.8% in the full year of 2022. Likewise, existing detached house sales in Osaka also declined by 3.3% to 9,573 units, following a slight increase of 1.4% in 2022.

This is despite robust foreign demand, buoyed by the weak Japanese yen and the country’s ultra-loose monetary policy. Moreover, there are no legal restrictions on foreigners buying and owning real estate property in Japan.

Japan Existing Condominium Sales graph

Land sales plunging, urban land prices more or less steady

Land sales are also falling sharply. In Tokyo, land sales plummeted by 20.2% y-o-y to 9,027 units in the first eleven months of 2023, following a modest annual increase of 2.4% in 2022, according to LIJ. Likewise, in Osaka, land sales dropped by 13.8% to 5,746 units over the same period, after falling by 4.1% during the full year of 2022.

Despite this, residential land prices were more or less steady. During 2023, the nationwide residential urban land price index rose slightly by 0.7%, following a minuscule increase of 0.6% in 2022 and a slight decline of 0.2% in 2021, according to the Japan Real Estate Institute.

  • In six major cities (Tokyo, Osaka, Yokohama, Nagoya, Kyoto, and Kobe), residential land prices rose by 1% in 2023 from a year earlier, after increasing by 0.7% in 2022 and declining by 0.6% in 2021.
  • For urban land, except for the 6 major cities, residential land prices were up 0.7% last year, following an increase of 0.6% in 2022 and a slight fall of 0.3% in 2021.

Japan Urban Land Prices graph

Residential construction activity weakening; the available supply of new condo units falling sharply

The total number of authorized housing starts in Japan fell by 4.7% to 755,037 units in the first eleven months of 2023 from a year earlier, after increasing by 0.4% in the full year of 2022 and 5% in 2021, according to the MLIT.

In major areas:

  • In Tokyo Metropolitan Area, which accounts for about 36% share of total residential construction, the number of housing starts declined by 3% y-o-y to 269,505 units in Jan-Nov 2023, in contrast to annual growth of 2.8% in 2022 and 3.4% in 2021.
  • In Osaka Metropolitan Area, housing starts fell slightly by 1.3% y-o-y in the first eleven months of 2023, to 105,592 units, following annual increases of 0.5% in 2022 and 3.7% in 2021.
  • In Nagoya Metropolitan Area, housing starts fell by 7.6% y-o-y to 58,963 units over the same period, following zero growth in 2022 and an increase of 7.2% in 2021.
  • In other areas, housing starts dropped 6.6% y-o-y to 320,977 units in Jan-Nov 2023, following an annual decline of 1.5% in 2022 and an increase of 6.4% two years ago.

Japan Housing Starts graph

Unsurprisingly, the supply of new condominium units available for sale is declining dramatically. In Tokyo, the number of newly-built condo units put on the market fell by 12.2% y-o-y to 20,911 units in Jan-Nov 2023. Likewise, in Osaka, new condominiums on the market also dropped sharply by 22.9% y-o-y to 11,497 units over the same period.

Japan New Dwelling Units Put on the Market graph

Japan’s shrinking population is producing a surplus of housing

One of Japan’s biggest problems is its declining population. It is estimated that Japan will lose a third of its population over the next 50 years, and the population will more than halve from 126.8 million in 2017 to just 50.56 million in 2115, according to the National Institute of Population and Social Security Research. In addition, about 40% of the population will be over 65 by 2060.

During 2023, the country’s total population fell to 124.62 million, down by 550,000 people from the previous year. It was its thirteenth consecutive year of decline. Japan’s population is expected to fall by another 581,000 people this year.

The shrinking population is already producing a surplus of housing units. There are many sightings of abandoned homes in Tokyo. There are already an estimated 8.49 million unoccupied homes in the country, representing almost 14% of all residences, and up more than 24% from a decade ago, according to MLIT.

The number of abandoned homes is expected to rise to more than 20 million by 2033.

“The combination of a shrinking population, falling land values, patchy registration records, and a tax system ill-suited to the current situation has left ownership unclear on an estimated 4.1 million hectares, an area larger than Taiwan,” said an article published by The South China Morning Post.

Japan Total Population graph

However, declining household sizes may mitigate the situation. The average household size is expected to fall to 2.37 by 2025, from 2.67 in 2000, and 5.0 in 1950. More Japanese are living alone, and fewer are in multiple-generation households.

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. In 2017, the government also introduced a scheme aimed at making vacant homes available to rent to low-income and single seniors. However, the initiative has failed to attract homeowners to register on its database, despite subsidies being offered.

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

  • Childcare provision was boosted by the Child and Childcare Support Act of August 2012.
  • Early school education, childcare, and child-rearing support services in local communities have been promoted by the Comprehensive Support System for Children and Child-rearing, introduced in April 2015.
  • Local governments are being encouraged to offer speed dating and other forms of matchmaking.
  • The government is expanding free nursery care.
  • Fertility treatment counseling centers in major cities are promoted.

The Japanese government also amended its immigration policy, which took effect last April 1, 2019, to attract overseas workers. The reforms created two new visa categories for migrants – Technical Intern Class 1 and 2. The first category targets marginally skilled workers willing to work in Japan for a period not exceeding 5 years without the benefit of family reunification. The second is directed to semi-skilled workers in certain fields, who are permitted to bring their families as well as make them permanent residents at the end of their 10-year initial working period.

The immigration reform law aims to attract 345,000 foreign workers into the country over the next five years. However, due to the Covid-19 pandemic and the subsequent lockdown and travel restrictions measures imposed worldwide in the past three years, the target seems unattainable right now.

Then in June 2023, the Cabinet approved a plan to expand the scope of industries covered by the blue-collar skilled worker visa from the current 2 to 11 industries, creating a path to permanent residency for foreign nationals working in Japan, many from Vietnam and China, and allowing them to bring their children and spouses into the country.

“It is important to promote smooth acceptance of human resources. To address the severe labor shortage, Japan will expand the (visa’s) scope,” said Prime Minister Fumio Kishida.

Currently, Japan houses more than 1.82 million foreign workers – which is a record-high – out of a total population of 124.49 million, and foreign nationals make up about 25% of its working population.

Moderate rental yields

Japan’s gross rental yields – the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs – average 4.36% in Q1 2024, slightly up from 4.3% in Q2 2023, according to research conducted by the Global Property Guide in January 2024.

In Tokyo’s central districts, gross rental yields range from 3.31% to 5.38%, with an average of 4.02% in Q1 2024. Mostly they are a little higher in smaller apartments. Not great, though not untypical for a city like Tokyo.

Besides Tokyo, the rental yields remain more or less similar in other cities and areas.

  • Osaka’s rental yield, on average, is 4.5% in Q1 2024
  • Nagoya’s rental yields average about 4.2%
  • In Yokohama, the average rental yield is 3.97%
  • In Fukuoka, the average gross rental yield is 4.34%
  • Sapporo’s average rental yield is 5.56%
  • In Kobe, you can expect a rental yield of about 4.78%
  • Kawasaki offers an average rental yield of 3.55%

Modest rent increases, improved occupancy

Residential rents are rising modestly. In Tokyo’s 23 wards (23W), the average mid-market asking rent was JPY4,071 (US$27.55) per sq. m in Q4 2023, up slightly by 0.8% from the previous quarter and by a modest 3.5% from a year earlier, according to Savills’ Tokyo Residential Leasing Q4 2023 report.

“Average rents in the Tokyo 23W experienced moderate growth overall in Q4/2023, amounting to a steady rebound from a modest trough in Q4/2022, with a majority of wards seeing rental increments, particularly on an annual basis,” said Savills. “The overall market sentiment continues to improve as a growing number of people are returning to Tokyo, fuelled partly by a greater rate of in-person office attendance generally mandated by companies in the post-pandemic era.”

Similarly, mid-market rents in the central five wards (C5W) in Tokyo rose modestly by 4% y-o-y in Q4 2023 to an average of JPY4,920 (US$33.30) per sq. m. Quarterly, rents were up by 0.7% in Q4 2023.

Over the same period:

  • In the South, rents reached an average of JPY4,208 (US$28.48) per sq. m. in Q4 2023, up by 1.3% from the previous quarter and by 2.9% from a year ago.
  • In the Inner North, rents were up slightly by 0.1% q-o-q to JPY 4,166 (US$28.20) per sq. m. in Q4 2023 and also saw an increase of 1.2% on an annual basis.
  • In the Inner East, the average rent increased by 1% q-o-q and by 4.2% y-o-y to JPY3,942 (US$26.68) per sq. m.
  • In the West, rents increased 0.8% q-o-q and 2% y-o-y to an average of JPY3,784 (US$25.61) per sq. m.
  • In the Outer North, the average rent rose by 0.2% q-o-q and by 2.9% y-o-y to JPY3,534 (US$23.92) per sq. m.
  • In the Outer East, average rent stood at JPY 3,336 (US$22.58) per sq. m., up slightly by 0.6% from the previous quarter and higher by 3.8% from a year earlier.

The average occupancy rate in Tokyo’s 23W increased slightly by 0.2 percentage points q-o-q and by 0.7 percentage points y-o-y to 97.1% in Q4 2023, according to Savills. In C5W, occupancy also improved to 97%, up by 0.5 percentage points from the previous quarter and by 0.9% percentage points from a year ago.

“Overall, occupancy rates appear to have generally recovered close to pre-pandemic levels, which is an encouraging sign for the market, especially for the C5W, where occupancy rates in Q4/2023 are comfortably above pre-pandemic levels,” said Savills.

Savills expects Japan’s rental market to continue improving in the medium term. “Going forward, the population of the 23W should continue growing and support firm residential demand in the post-pandemic environment. While central wards are expected to remain popular, residences in more affordable peripheral wards will also likely retain some popularity among renters, particularly those who are affected by inflation and lackluster wage growth.”

Home loan rates rising gradually, despite steady key interest rates

The BOJ’s key rate has been below 1% since the mid-1990s. In its January 2024 meeting, the central bank kept its policy rate at -0.10%, unchanged since January 2016. The 10-year yield for government bonds jumped to around 0.75%, one of the highest levels recorded in more than a decade.

Japan Policy Rate Percentage graph

As such, major banks in Japan have been gradually increasing their interest rates on housing loans in recent months. Sumitomo Mitsui Banking Corp. raised the interest rate for its 10-year fixed-rate home loans for most preferred customers to 1.14% in October 2023 while the home loan rate for Mizuho Bank was up to 1.45%. Mitsubishi UFJ Bank also raised its rate by 0.06 percentage points to 0.94%. Resona Bank’s 10-year fixed-rate home loan rate was also raised to 1.65%.

Housing loans continue to increase

As of Q3 2023, the total amount of housing loans outstanding to households was JPY 143.93 trillion (US$975.16 billion), up by 2.9% from a year earlier, according to BOJ figures. This is slightly higher as compared to the annual average growth of 2.7% recorded from 2012 to 2022.

As a percentage of GDP, the size of the housing market stood at about 24.5% in 2023, almost unchanged in the past four years.

Japan Housing Loans Outstanding graph

Sluggish economic growth, easing inflationary pressures

The Japanese economy is projected to grow by 1.6% in the FY 2023 ending March 2024, buoyed by the recovery in inbound tourism and automobile output, according to figures from the Cabinet Office, Japan. The International Monetary Fund (IMF) expects the country’s economic growth to remain sluggish at 1% during 2024.

The Japanese economy expanded by 2.2% in 2021 and by another 1% in 2022, as vaccinations progressed and economic restrictions were lifted. During the onset of the Covid-19 pandemic, the economy contracted by 4.2% in 2020 – its worst performance in 11 years.

But even before the pandemic, the Japanese economy had been adversely affected by the US-China trade tension and the introduction of a consumption tax hike from 8% to 10% in 2019, not to mention the added risks posed by semiconductor chip shortages and rising prices of energy and resources.

Some say that Japan has never fully recovered from the great bubble of the late 1980s. However Japan’s economic performance is sometimes over-criticized, the truth being that over the past decade, Japanese growth has been at par with, or better than, Europe’s older economies, especially in GDP per capita terms.

The world’s third-largest economy expanded by an average of 1.1% annually from 2012 to 2019, an improvement from an annual average growth of just 0.6% from 2001 to 2011.

Japan GDP Growth and Inflation graph

Recently, the government approved a JPY 112.07 trillion (US$758.3 billion) budget for FY 2024 that starts in April – down by 2% from the previous fiscal year but remains the second highest ever recorded. It is the first drop in 12 years as pandemic-related emergency funding was trimmed, but outlays for defense, social security, and debt servicing all surged to a record high.

The country’s budget deficit is projected to narrow to about 3.6% of GDP in 2024, down from shortfalls of 5.5% in 2023, 6.5% in 2022, 5.6% in 2021, and 8.4% in 2020, based on IMF estimates.

Japan’s debt burden is considered the world’s biggest. After soaring to a record 260.1% of GDP in 2022, gross public debt eased slightly to 255.2% of GDP in 2023. The country’s public debt is projected to narrow further to 251.9% of GDP this year.

Japan Government Gross Debt graph

The labor market remains tight. In November 2023, the overall jobless rate was 2.5%, unchanged from the previous month, according to the Ministry of Internal Affairs and Communications. Unemployment averaged 3.4% from 2010 to 2022.

Nationwide inflation stood at 2.6% in December 2023, down from 2.8% in November and 3.3% in October, based on figures from the Ministry of Internal Affairs and Communications. Though, it remains above the BOJ’s target of 2%.

Before surging to 2.5% in 2022 and further to 3.2% in 2023, persistently low inflation had been a long-standing problem in Japan, with inflation standing at an average of just 0.1% from 2000 to 2021.

Weak yen benefits exporters but hits consumers hard

The Japanese yen continues to depreciate against major currencies. The domestic currency lost nearly 28% of its value against the US dollar in just three years, reaching an average exchange rate of US$1 = JPY 144.1 in December 2023. Over the same period, the yen also depreciated against the Canadian dollar, the pound, and the euro by 24.5%, 23.5%, and 19.6%, respectively.

But even before the pandemic, the yen had been generally declining. One aspect of former PM Shinzo Abe’s famous Abenomics was an attempt to boost the economy by reducing Yen’s exchange rate. The Japanese yen was made to depreciate by almost 37% from US$1 = JPY 78 in 2012 to US$ = JPY 123 in 2015. After regaining 4.7% of its value in 2016-17, the yen stabilized in the next three years. Then in 2020-21, the yen depreciated by 4% against the US dollar.

Unsurprisingly, Japan’s exports rose by a modest 2.8% y-o-y to JPY 100.89 trillion (US$683 billion) in 2023, surpassing the 100 trillion mark for the first time and the highest level recorded since comparable data became available in 1979. In contrast, imports fell by 7% y-o-y to JPY 110.18 trillion (US$745.9 billion). This resulted in a trade deficit of about JPY9.29 trillion (US$62.9 billion) – more than halved the previous year’s shortfall.

While a weak yen normally benefits exporters, it may be hurting Japanese households now more than in the past, as the country’s increasing reliance on more expensive raw material imports pushes up the cost of living in the country, said former BOJ Governor Haruhiko Kuroda.

Japan Monthly Average Exchange Rates graph

Brief history: the housing market, Abenomics, and politics

Japan’s housing market grew from 2004 to the first half of 2008, on the back of improved economic conditions. In Tokyo, existing condo prices increased 30.2% (27.3% inflation-adjusted) while new condo prices rose by a more modest 17.5% (14.8% inflation-adjusted).

However, the housing market was adversely impacted by the global financial crisis. From H2 2008 to 2012, prices of new and existing condominiums dropped 12.1% and 3.7%, respectively, amidst weak demand and prolonged economic recession.

Then former Prime Minister Shinzo Abe came to power in December 2012 and implemented his economic policy dubbed “Abenomics”. While the impact of Abenomics on the wider economy is debatable, the policy has undoubtedly helped prop up Japan’s property market in the past years.

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. Transactions started to pick up in 2012 and rose rapidly in 2013, as monetary policy kicked in.

From 2012 to 2019, existing condo prices in Tokyo rose by 43.2% (34.1% inflation-adjusted) while new condo prices increased by 33% (24.5% inflation-adjusted).

In October 2017, Abe was re-elected again for a third consecutive time as head of the ruling Liberal Democratic Party (LDP) which made him Japan’s longest-serving Prime Minister.

In September 2017, the government unveiled a new JPY2 trillion (US$13.55 billion) stimulus package - the fourth in a row.

Then in December 2019, Abe approved another stimulus package worth US$120 billion to buoy the ailing economy and cushion the impact of the sales tax rise.

Before resigning in September 2020 due to health reasons, Abe introduced two rounds of stimulus packages, which added about US$2.2 trillion in extra spending (equivalent to about 40% of GDP) to help households and businesses adversely affected by the pandemic.

Abe was succeeded by his deputy, Yoshihide Suga, whose focus remains on stimulating the ailing economy and asserting Japan as a regional power, after the post-war decades of avoiding strategic commitments.

In December 2020, Suga unveiled another economic stimulus package worth JPY 73.6 trillion (US$498.52 billion), amidst the spike in infections in the country. The aid, the first since Suga took office, included incentives for digitalization and carbon reduction, extensions of subsidy programs aimed at promoting domestic travel, buoying consumption, as well as helping businesses.

However, after just a year in office, Suga resigned over his handling of the pandemic, allowing former foreign minister Fumio Kishida to take over. Officially assumed office in October 2021, Kishida is seen as more liberal than his predecessors. However, his government has been hit by a political scandal related to the link of his conservative Liberal Democratic Party to the Unification Church that came to light after the assassination of Abe in 2022.

The political tension was aggravated recently by the escalating scandal involving allegations of unreported kickbacks from the ruling party’s fundraising proceeds. In December 2023, several ministers resigned over the said corruption scandal and Kishida announced that he will be revamping his government to restore the public’s trust.

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