Japan’s housing market has hardly moved

Lalaine C. Delmendo | February 22, 2021

Japan’s housing market remains steady, amidst the economic repercussions brought by the COVID-19 pandemic. The nationwide residential property price index rose by about 0.8% (0.7% inflation-adjusted) during the year to Q3 2020, following y-o-y rises of 0.6% in 2019, 2.1% in 2018, and 2.4% in 2017, according to the Land Institute of Japan.

Quarter-on-quarter, house prices increased 2.4% (2.1% inflation-adjusted).

Japan house prices graph

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).

Abenomics buoyed the housing market

While the impact of “Abenomics” - i.e., the reflationary policies of Shinzo Abe, who came to power in December 2012 - on the wider economy is debatable, the policy has undoubtedly helped prop up Japan’s property market in recent 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 33% (24.5% inflation-adjusted).

Japan tokyo condo prices

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$19.1 billion) stimulus package - the fourth in a row.

Then in December 2019, Prime Minister Shinzo Abe approved another stimulus package worth US$120 billion in an effort 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 last year, which added about US$2.2 trillion 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, who was expected to continue his policies. Like Abe, Suga’s 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$708 billion), amidst the spike in infections in the country. The aid, the first since Suga took office, includes incentives for digitalization and carbon reduction, extensions of subsidy programs aimed at promoting domestic travel, buoying consumption, as well as helping businesses.

“We have compiled the new measures to maintain employment, sustain business and restore the economy and open a way to achieve new growth in green and digital areas, so as to protect people’s lives and livelihoods,” said PM Suga.

Demand weakens

Despite the spending, residential property sales continue to weaken in both Tokyo and Osaka.

  • In Tokyo, the number of existing condominiums sold fell by 5.6% to 33,502 units in the first eleven months of 2020 from a year earlier, following an annual growth of 2.4% in 2019, according to LIJ. In contrast, existing detached house sales increased 3.6% y-o-y to 18,278 units, a slight slowdown from 4.5% growth in 2019.
  • In Osaka, existing condominiums sold fell by 6.8% y-o-y to 15,345 units in Jan-Nov 2020, following annual rise of 1.4% in 2019. Likewise, existing detached houses sales in Osaka dropped 2.2% to 12,475 units.

Japan existing condo sales

Land sales are mixed. In Tokyo, land sales fell slightly by 0.9% y-o-y to 10,607 units in the first eleven months of 2020 while in Osaka, about 39% more lots were sold at 3,774 units. Nationwide residential urban land prices rose slightly by 0.4% in 2020, following 0.6% growth in 2019, according to Japan Real Estate Institute.

Residential construction is plunging

Despite Tokyo’s successful bid to host the 2020 Summer Olympics - now postponed and scheduled to be held on July 23, 2021 instead - construction activity has been weak. Authorized housing starts fell by 10.1% to 749,122 units in the first eleven months of 2020 from the previous year, following three consecutive years of y-o-y declines, according to the MLIT.

Japan housing starts

In major areas:

  • In Tokyo Metropolitan Area, the number of housing starts fell by 8.3% to 261,440 units in Jan-Nov 2020 from a year earlier, following a 4.3% decline in 2019.
  • In Osaka Metropolitan Area, housing starts fell by 4.7% y-o-y in the first eleven months of 2020, to 102,644 units, following a 3.2% fall in 2019.
  • In Nagoya Metropolitan Area, housing starts dropped 16% y-o-y to 59,443 units, following a fall of 1.3% in 2019.
  • In other areas, housing starts fell by 11.9% y-o-y to 325,595 units in the first eleven months of 2020, following a 4.4% decline in 2019.

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.

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 8.47 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 a recent article published by The South China Morning Post.

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, fewer in multiple-generation households.

Japan total population

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. 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 – only about 11,000 homes were registered as of last year compared to the target of 175,000 affordable rental units.

The government is also trying to stop the Japanese population 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 counselling centres in major cities are promoted.

The Japanese government recently 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, the target seems unattainable right now.

Moderate rental yields, falling rents

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.

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 falling. In Tokyo’s 23 wards (23W), the average mid-market asking rent was JPY 3,999 (US$ 38.2) per sq. m in Q4 2020, down by 1.9% from the previous quarter and by 1.1% from a year earlier, according to Savills. Likewise, in Tokyo’s central five wards (C5W), average mid-market rents dropped 1.2% y-o-y to JPY 4,780 (US$ 45.7) per sq. m. Within the C5W, Shibuya saw the biggest q-o-q fall of 2.8%.

Japan new dwelling units

“Average rents in the 23W and C5W have decreased for the third consecutive quarter, the first occurrence since 2011, said Savills. “However, another interesting trend that has manifested is that the average space of available apartment units has been constantly decreasing in 2020, to a record low of below 30 sq m. This could possibly indicate that some residents are moving out of smaller apartments and into more spacious ones. Moreover, this status quo looks set to continue following the recent spike in daily COVID-19 case numbers.”

“Indeed, with Japan bracing itself for the third wave of COVID-19, remote work and social distancing measures will likely remain in place. Demand for smaller residences in central locations could therefore lose further momentum,” Savills added.

The average occupancy rate in Tokyo’s 23W fell to 96% in Q4 2020 from 97.3% in the previous year, according to Savills. In C5W, occupancy dropped to 94.4% in Q4 2020 – the lowest level since 2012.

Interest rates remain very low; housing loans rising modestly

The BOJ’s key rate has been below 1% since mid-1990s. In January 2021, the central bank’s policy rate stood at -0.10%, unchanged since January 2016.

As a result, mortgage rates are very low. The interest rate for a 10-year fixed-rate home loan ranges from just 0.6% to 1.2% last year. Resona Bank and Sumitomo Mitsui Trust Bank had the lowest home loan rate of about 0.6% to 0.7% in 2020, followed by Mitsubishi UFJ (MUFJ) at 0.79%, and Mizuho Bank at 0.85%. Mitsui Sumitomo Banking Corporation has a mortgage rate of about 1.1% to 1.2%.

Japan interest rate

During 2020, the total amount of housing loans outstanding to households was JPY 133.6 trillion (US$1.28 trillion), up by 2% from a year earlier. This accounted for about 25% of the country’s GDP last year.

Covid19 has hit Japan’s already sluggish economy

The 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.

Japan gdp inflation

“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 government gross debt

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.

Japan exchange rate

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).


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