Japan: existing condo prices up, new condo prices down
Lalaine C. Delmendo | March 25, 2020
It is a puzzling situation. While the market for old homes in Japan seems healthy, the market for new homes is increasingly depressed.
In Tokyo Metropolitan Area, existing condominiums´ average price rose by 4.73% during 2019 (3.91% inflation-adjusted), up from 0.9% the previous year. During the latest quarter, existing condo prices rose by 2.04% (1.65% inflation-adjusted).
However the average price of new condos in Tokyo fell by 2.67% in 2019 (-3.43% inflation-adjusted), after a 0.23% decline the previous year. The big surprise was that during the latest quarter, new condo prices plunged by 8.11% (-8.46% inflation-adjusted).
Demand is rising, partly driven by foreign investors. In Tokyo, existing condominiumsales rose by 2.4% y-o-y in 2019 while existing detached house sales increased 4.5%.
In Osaka, sales of existing condo and detached houses increased by 1.4% and 1.7%, respectively.
Yet residential construction activity remains weak. In 2019, authorized housing starts fell by 4% y-o-y to 905,123 units, its third consecutive year of y-o-y decline.
“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.
“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.
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.
There are no legal restrictions on foreigners owning real estate property in Japan.
Big economic and social challenges lie ahead for Japan. Aside from its decades-long problems of weak economic growth and declining population, the country is battling the impact of the COVID-19 pandemic.
Prime Minister Shinzo Abe continues tointroduce the stimulus measures which have been the hallmark of ‘Abenomics’ since 2012. These measures should be positive for the Japanese property market (which earns investors moderately good rental returns), but present some dangers for the wider economy as Japan’s national debt mounts.
The Japanese economy shrank by an annualized rate of 7.1% in the last quarter of 2019, worse than the initial estimate of 6.3% and the biggest decline in more than five years, as the introduction of new sales tax hike from 8% to 10% weighed on consumer spending. The COVID-19 outbreak could push the world’s third largest economy into technical recession in Q1 2020. A decline in tourism is a major problem for Japan, which welcomed 8.1 million Chinese visitors last year.
In March 2020, the Japanese government adopted a fresh JPY 1 trillion (US$ 9.6 billion) emergency package to help businesses battered by the new coronavirus outbreak. It includes JPY 500 billion (US$ 4.72 billion) in zero-interest loans for small and medium size companies, and subsidies of JPY 4,100 (US$ 38.7) a day to freelance workers forced to give up work to take care of their children amid school closures. A month earlier, the government also introduced a JPY 500 billion (US$ 4.72 billion) package of low-interest loans to small and medium-sized companies in the tourism and other virus-hit sectors.
On top of these new measures, the government also approved a US$120 billion stimulus program last December 2019 to buoy the struggling economy and cushion the impact of the sales tax rise introduced in October 2019.
Demand is robust
Residential property sales are now rising in both Tokyo and Osaka.
- In Tokyo, the number of existing condominiums sold rose by 2.4% to 38,313 units in 2019 from a year earlier, in contrast to a 0.3% decline in 2018, according to LIJ. Likewise, existing detached house sales increased 4.5% y-o-y to 19,035 units over the same period.
- In Osaka, existing condominiums sold rose by 1.4% y-o-y to 17,892 units in 2019, while existing detached houses sales were up by 1.7% to 13,881 units.
Land sales are mixed. In Tokyo, 3.3% fewer lots were sold in 2019(11,581 units) in 2019 while in Osaka, land sales rose strongly by 11.8% to 2,983 units. Nationwide residential urban land prices rose slightly by 0.6% in 2019, following 0.2% growth in 2018, according to Japan Real Estate Institute.
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 years old 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.
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.
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.
Residential construction is falling
Despite Tokyo’s successful bid to host the 2020 Summer Olympics - now postponed - construction activity has been weak in recent years. Authorized housing starts fell by 4% to 905,123 units in 2019 from the previous year, its third consecutive year of y-o-y decline, according to the MLIT.
In major areas:
- In Tokyo Metropolitan Area, the number of housing starts fell by 4.3% to 308,830 units in 2019 from a year earlier. On average, existing condominium units’ prices rose by 5% y-o-y per sq. m. in December 2019, new condominium prices fell slightly by 0.3%, while detached house prices rose by 2.6%.
- In Osaka Metropolitan Area, housing starts fell by 3.2% y-o-y in 2019, to 117,712 units. On average, existing condominium prices rose by 1.7% y-o-y per sq. m. in December 2019, new condominium units’ prices rose by 2.1%, while detached house prices fell by 2.2%.
- In Nagoya Metropolitan Area, housing starts dropped 1.3% y-o-y in 2019 to 76,565 units.
- In other areas, housing starts fell by 4.4% y-o-y to 402,016 units in 2019.
Moderate rental yields, rising 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 increasing. In Tokyo’s 23 wards (23W), the average mid-market asking rent rose by 5.8% y-o-y to JPY 4,044 (US$ 37.5) per sq. m, according to Savills. Likewise, in Tokyo’s central five wards (C5W), average asking rents increased 6.2% y-o-y to JPY 4,842 (US$ 44.9) per sq. m.
“Rents continue to rise steady, as annual growth quickened in Q4 2019 compared to the same period last year,” said Savills. “That said, rents in some wards, especially in the C5W, could soon start to test the financial capabilities of tenants.”
Interest rates remain very low; housing loans rising
The BOJ’s key rate has been below 1% since mid-1990s. In February 2020, the central bank’s policy rate stood at -0.10%, unchanged since January 2016.
As a result, mortgages rates are very low. The interest rate for a 10-year fixed-rate home loan ranges from just 0.6% to 1.2% in March 2020. Resona Bank has the lowest home loan rate of 0.6% in March 2020, followed by Sumitomo Mitsui Trust Bank with rates ranging from 0.7% to 1%, and Bank of Tokyo-Mitsubishi UFJ (MUFJ) and Mizuho Bank, both with a rate of 0.9%. Mitsui Sumitomo Banking Corporation has a mortgage rate of 1.2%.
During 2019, the total amount of housing loans outstanding to households was JPY 131.1 trillion (US$1.23 trillion), up by 2.8% from a year earlier. This accounted for about 23.5% of the country’s GDP last year.
Abenomics is good for 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 and boosted residential construction.
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).
In October 2017, Abe was re-elected again for a third consecutive time as head of the ruling Liberal Democratic Party (LDP) which will make him Japan’s longest serving Prime Minister if he is able to continue his current term that will run until September 30, 2021.
In September 2017, the government unveiled a new JPY2 trillion (US$17.8 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.
The government has vowed that it will abandon its massive stimulus only after inflation reaches 2%.
Japan’s struggling economy
The Japanese economy shrank by an annualized rate of 7.1% in the last quarter of 2019, worse than the initial estimate of 6.3% and the biggest decline in more than five years, as the introduction of new sales tax hike from 8% to 10% weighed on consumer spending.
Now the COVID-19 outbreak is expected to exacerbate the situation and could push the world’s third largest economy into technical recession in Q1 2020. A decline in tourism is a major problem for Japan, which welcomed 8.1 million Chinese visitors last year.
“Huge uncertainty remains on how the spread of the new virus may affect the Japanese economy,” said BOJ Governor Haruhiko Kuroda. “We’re watching the impact with grave concern and keeping a close eye on downside risks.”
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 1.2% annually from 2012 to 2018, an improvement from an annual average growth of just 0.6% from 2001 to 2011.
Exports falling, amidst strengthening yen
One aspect of Abenomics was an attempt to boost the economy by reducing the Yen’s exchange rate. A strong yen is bad news for the economy and many Japanese companies as it makes Japanese products more expensive. The Japanese yen had previously moved significantly in the desired direction since 2012, depreciating 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, and stood at ¥110.044 = US$1 in February 2020.
However the Japanese yen has gained about 11% against the euro in the past two years, to ¥120.043 = EUR1 in February 2020. Over the same period, the yen also appreciated against the pound and the Canadian dollar, by 5.8% and 3.6%, respectively.
Unsurprisingly exports fell by 2.6% in January 2020 from a year earlier, following a y-o-y drop of 6.3% in December 2019, amidst weakening global demand and the ongoing US-China trade dispute, according to the Finance Ministry. In fact, it was the fourteenth consecutive month of y-o-y declines.
Exports to China, Japan’s largest trading partner, fell by 6.4% y-o-y in January 2020 on lower demand for car parts and electronic components. Shipments to the U.S. also declined 7.7% over the same period.
Japan posted a trade deficit of JPY 1.31 trillion (US$ 11.9 billion), following a deficit of JPY 1.2 trillion in 2018 and a surplus of almost JPY 3 trillion in 2017, amidst plunging exports to the country’s major markets.
The COVID-19 outbreak is expected to further weigh on demand in the months ahead.
Inflation remains far below target despite massive monetary easing
Afters years of massive monetary easing, Japan’s core inflation, excluding volatile food prices, stood at 0.8% in January 2020 - still far below the BOJ’s official target of 2%.
The government’s ultra-accommodative monetary policy’s failure to boost inflation has led dissenting voices calling for change, with others urging for additional stimulus in order to achieve its inflation target.
BOJ Governor Haruhiko Kuroda has recently said he would consider additional easing if the COVID-19 outbreak significantly threatens the country’s economy and inflation.
In September 2017, the government unveiled a new JPY2 trillion (US$17.8 billion) stimulus package - the fourth in a row after a JPY28 trillion (US$262.6 billion) round in 2016, JPY10.3 trillion (US$96.6 billion) in 2013 and a JPY3.5 trillion (US$32.8 billion) package in 2014.The government has vowed that it would abandon its massive stimulus only after inflation reaches 2%.
Then in December 2019, Abe approved another stimulus package worth US$120 billion in an effort to buoy the struggling economy and cushion the impact of the sales tax rise.
In March 2020, the Japanese government adopted a fresh JPY 1 trillion (US$ 9.6 billion) emergency package intended to help businesses battered by the new coronavirus outbreak. It includes JPY 500 billion (US$ 4.72 billion) in zero-interest loans for small and medium size companies and giving subsidies of JPY 4,100 (US$ 38.7) a day to freelance workers who are forced to give up work to take care of their children amid school closures.
The new measures came about a month after the government introduced the first package worth JPY 500 billion (US$ 4.72 billion) that intends to offer low-interest loans to small and medium-sized companies in the tourism and other sectors hit by the coronavirus outbreak.
Japan has the world’s biggest debt burden. In 2019, the country’s gross debt amounted to about JPY1,325.6 trillion (US$12.49 trillion), equivalent to about 237.7% of GDP, according to the IMF. However opinions differ about how much of a problem this is.
- World Economic Outlook Database (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx
- Monthly Data of Real Estate Economy (The Land Institute of Japan): http://www.lij.jp/english/
- Moderate rental yields on Japanese residential property (Global Property Guide): https://www.globalpropertyguide.com/Asia/Japan/Rental-Yields
- Japan’s New Housing Policy to Reduce Abandoned Homes Falls Below National Target (The Diplomat): https://thediplomat.com/2019/09/japans-new-housing-policy-to-reduce-abandoned-homes-falls-below-national-target/
- Is Japan Ready to Welcome Immigrants? (The Diplomat): https://thediplomat.com/2020/01/is-japan-ready-to-welcome-immigrants/
- Japan’s Immigration Policies Put to the Test (Nippon.com): https://www.nippon.com/en/in-depth/d00515/japan%E2%80%99s-immigration-policies-put-to-the-test.html
- Is Japan Ready to Welcome Immigrants? (The Diplomat): https://thediplomat.com/2020/01/is-japan-ready-to-welcome-immigrants/
- Tokyo Residential Leasing Briefing - Q4 2019 (Savills): http://pdf.savills.asia/asia-pacific-research/japan-research/japan-residential/jres01-2020.pdf
- House Hunting in Japan: A Modern Ski Cabin in the Woods (The New York Times): https://www.nytimes.com/2020/02/26/realestate/house-hunting-in-japan-a-modern-ski-cabin-in-the-woods.html
- Japan profile – Timeline (BBC News): https://www.bbc.com/news/world-asia-pacific-15219730
- Japan´s GDP contraction revised to 7.1%, fueling recession fears amid coronavirus crisis (The Japan Times): https://www.japantimes.co.jp/news/2020/03/09/business/economy-business/japan-gdp-recession/#.Xm7vNhMzaCQ
- Japan´s exports fall for 14th straight month (Market Watch): https://www.marketwatch.com/story/japans-exports-fall-for-14th-straight-month-2020-02-18
- Rise in Japan’s soft inflation keeps BoJ under pressure (Gulf Today): https://www.gulftoday.ae/business/2020/02/21/rise-in-japans-soft-inflation--keeps-boj-under-pressure
- Japan adopts 1 tril. yen level fresh package to fight coronavirus (Kyodo News): https://english.kyodonews.net/news/2020/03/a313cff1eb57-cabinet-oks-bill-to-enable-abe-to-declare-emergency-amid-virus-spread.html
- Japan’s housing market remains buoyant - May 17, 2017
- Japan’s housing market prices continue to rise, despite sluggish economic growth - July 30, 2016