Japan's housing market has hardly moved
Lalaine C. Delmendo | April 04, 2021
Quarter-on-quarter, house prices increased 2.4% (2.1% inflation-adjusted).
There are wide price variations in terms of location and property type.
In Tokyo Metropolitan Area:
- Existing condominium average prices rose by 3.38% during the year to November 2020 to JPY 568,700 (US$ 5,432) per square meter (sq. m), following a y-o-y rise of 4.73% in 2019.
- New condominium average prices surged by 11.76% y-o-y to JPY 903,000 (US$ 8,625) per sq. m in November 2020, in sharp contrast to a y-o-y decline of 2.67% in 2019.
- Existing detached house prices rose by 2.94% y-o-y to JPY 34.87 million (US$ 332,887).
In Osaka Metropolitan Area:
- Existing condominium average prices fell by 0.4% to JPY 337,200 (US$ 3,219) per sq. m during the year to November 2020, from a 2.8% rise in the prior year.
- New condominium average prices rose strongly by 10.83% y-o-y to JPY 696,000 (US$ 6,643) per sq. m in November 2020, following an increase of 8.1% in 2019.
- Existing detached house prices fell by 3.5% y-o-y to JPY 20.38 million (US$ 194,530) over the same period.
Residential construction activity continues to fall, unsurprisingly given the country's massive supply glut. In the first eleven months of 2020, authorized housing starts fell by 10.1% y-o-y to 749,122 units, following three consecutive years of y-o-y declines, according to the MLIT.
Demand has weakened due to the pandemic. In Tokyo, existing condominium sales fell by 5.6% in Jan-Nov 2020 from a year earlier, while existing detached house sales increased 3.6% y-o-y to 18,278 units. In Osaka, sales of existing condo and detached houses fell by 6.8% and 2.2%, respectively.
Yet demand is expected to return as soon as the pandemic is over, as the country remains an attractive investment destination for ultra-rich Asians.
“Japan is a safe haven for wealthy individuals in Asia,” said Mori Nishimura of Housing Japan. “Nowhere else in Asia can you buy freehold land as a foreigner.” Most foreign buyers in the country come from Singapore, Malaysia, Thailand, Hong Kong, and Mainland China. There is also a growing interest from the US, Australia, Western Europe, Taiwan and Indonesia.
This is supported by a 2020 report released by Savills: “Tokyo's ultra-luxury residential market has been growing, with demand bolstered by a sound domestic base and increasing interest from UHNWIs abroad,” said Savills. “While the COVID-19 pandemic has slowed transaction activity, this sector is likely to expand further and benefit from the recovery of inbound visitors.”
Japan's reasonable rental return is another attraction. Gross rental yields - the rental return earned on the purchase price of a residential property - range from 3.4% to 5.4% in Tokyo's central districts, according to Global Property Guide research.
Yields on the very smallest apartments are 5.42%, a reasonable yield.
“Some international investors are looking for rental yields and to diversify their holdings outside their home countries, while others just want to have a holiday home in Japan,” said Robert Crane of Solid Real Estate.
There are no legal restrictions on foreigners owning real estate property in Japan.
The Japanese economy contracted by 5.3% in 2020, the biggest contraction since 2009, as the COVID-19 pandemic adversely affected domestic consumption, as well as exports. The economy is expected to recover this year, with a projected real GDP growth of 2.3%, according to the International Monetary Fund (IMF).
Moderate rental yields on Japanese residential property
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%. They’re a little higher on smaller apartments. Not great, though not untypical for a city like Tokyo. Yields on the very smallest apartments are 5.4%, a reasonable yield. But then smaller apartments tend to need more maintenance, so a higher yield is justified.
Prices per square metre range from around $8,700 to $13,800, not really so expensive when compared to other global cities. In Yen terms residential prices continue to strengthen. That’s likely to continue so long as Abenomics is in place. More money in the system means lower interest rates means increasing asset prices, especially prices of assets that produce nice incomes, like Tokyo property.
This is going to be interesting. If Abenomics really leads to a revival of the Japanese economy, rising incomes will continue to support rising rents. However as time goes on, the success of Abenomics seems more and more in doubt.
Round trip transaction costs are moderate in Japan. See our Property transaction costs analysis for Japan and Property transaction costs in Japan, compared to the rest of Asia.
Effective rental income tax is low in Japan
Rental Income: Rental income of nonresident individuals is subject to 10% tax.
However, effective rental income tax is low, ranging from 3.4% to 5.9%. Nonresident taxpayers are taxed on their net income; depreciation and income-generating expenses such as maintenance and repairs are deductible from the gross rent.
Capital Gains: Net gains realized from selling short-term real properties, i.e. property held for less than 5 years, are taxed at 30%. Net gains on property held beyond five years are taxed at 15%.
Inheritance: Inheritance is based on residency status but foreign individuals inheriting property located in Japan are still subject to inheritance tax, which is levied at progressive rates.
Residents: A permanent resident taxed on his worldwide income at progressive rates, from 5% to 45%.
Moderate roundtrip buying costs in Japan
The total roundtrip transaction cost is 13.16% to 13.45%, inclusive of the 3.15% agent's fee plus an additional payment of JPY63,000 (US$578).
Japanese landlords get key money
Tenancy laws passed in 2000 shifted the balance of power from tenants to landlords, making Japan strongly pro-landlord.
Rents: Rents are freely negotiable. Aside from two to three month’s security deposit, landlords receive key money worth one to two month’s rent.
Tenant Eviction: Automatic renewals of leases were abolished in 2000, making eviction easier. If the tenant prematurely ends the contract the landlord can charge one month’s rent.
Covid19 has hit Japan’s already sluggish economyThe Japanese economy contracted by 5.3% in 2020, as the COVID-19 pandemic adversely affected consumption, as well as exports.
The economy is expected to recover this year, with a projected real GDP growth of 2.3%, according to the International Monetary Fund (IMF). In fact, the government is even more optimistic, expecting the economy to post 4% expansion during FY2021.
However with the recent surge in coronavirus cases, which compelled the government to declare a one-month state of emergency in 11 of Japan’s 47 prefectures including Tokyo MA, Osaka, Aichi, and Fukuoka (from Jan 8 to Feb 7), there is now a heightened risk of a double-dip recession. The 11 prefectures account for over half of Japan’s economic output.
“There’s no doubt it will affect January-March growth,” said Finance Minister Taro.
“Domestic economic conditions remain severe due to the impact of coronavirus infections at home and abroad but we have seen a pickup,” said BOJ Governor Haruhiko Kuroda. “The pace (of recovery) will likely be rather moderate while there remains a sense of alert against infections.”
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.
In fact 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.
With massive stimulus spending to fight the spread of the virus, Japan’s budget deficit is estimated at 14.2% of GDP in 2020, sharply up from a shortfall of 3.3% in 2019.
Japan’s debt burden, which is already considered world’s biggest, surged further last year. Public debt reached 266% of GDP in 2020, sharply up from 238% of GDP in 2019, according to the IMF. However opinions differ about how much of a problem this is.
Unemployment is also rising. In 2020, the overall jobless rate was 2.8%, up from 2.4% a year earlier and marked the first increase since 2009, according to the Ministry of Internal Affairs and Communications. The number of unemployed people also increased by 290,000 to 1.91 million last year – the highest in 11 years.
Persistently low inflation is another long-standing problem. After years of massive monetary easing, Japan’s inflation stood at an average of just 0.5% from 2015 to 2019 – far below the BOJ’s official target of 2%.
The pandemic has put the BOJ’s inflation target further out of reach with consumer prices falling by 1.2% y-o-y in December 2020, the sharpest decline since April 2010.
Exports falling, amidst strengthening yen
One aspect of Abenomics was an attempt to boost the economy by reducing the Yen’s exchange rate. The Japanese yen was made to depreciated by about almost 37% from US$1 = ¥78 in 2012 to US$ = ¥123 in 2015. After regaining 4.7% of its value in 2016-17, the yen has stabilized in the past three years.
However in the past year, the yen appreciated against the US dollar by about 5.3% to ¥103.778 = US$1 in January 2021. Over the same period, the yen also appreciated against the Canadian dollar and the pound, by 2.4% and 1%, respectively.
It was only against the euro that the Japanese yen has depreciated by about 3.9% in the past year, to JPY126.29 = EUR1 in January 2021.
Unsurprisingly, Japan’s exports plummeted by 11.1% in 2020 from a year earlier to JPY 68.41 trillion (US$ 653 billion) – the biggest decline in 11 years as the pandemic hurt demand for Japanese products, according to the Finance Ministry.
Japan’s key exports of automobiles and related parts plunged 20% and 19.1%, respectively.
Despite an increase in exports to China, Japan’s largest trading partner, by 2.7% during 2020, total exports to the U.S. actually slumped by 17.3% and to the European Union by 14.6%.
Likewise, overall imports also dropped 13.8% to JPY 67.73 trillion (US$ 646.5 billion), resulting to a trade surplus for 2020 of about JPY 674.73 billion (US$ 6.44 billion).