House prices in Japan have continued to fall, as the country’s recovery fades due to weakening exports, the appreciating yen, and deflation.

In Tokyo Metropolitan Area:

• The average price of new condominium units dropped 5.1% y-o-y to JPY691,000 (US$8,894) per square metre (sq. m.) in August 2012, based on figures released by the Land Institute of Japan (LIJ).
• The average price of existing condominium units dropped 3.3% to JPY380,000 (US$4,891) per sq. m. during the year to August 2012, its 14 consecutive month of annual price falls.
• The average price of detached houses was down by 1.7% to JPY31,770,000 (US$408,901) over the same period.

In Osaka Metropolitan Area:

• The average price of new condominium units fell by 3.2% to JPY457,000 (US$5,882) per sq. m. during the year to August 2012.
• The average price of existing condominium units fell 1.6% to JPY239,000 (US$3,076) per sq. m. over the same period.

Land prices have been more resilient. During the year to August 2012, the average price of land in Tokyo was unchanged at JPY187,000 (US$2,407) per sq. m., while in Osaka Metropolitan Area the average land price increased by 1.7% to JPY117,000 (US$1,506) per sq. m.

During the first seven months of 2012, the total number of new dwellings started in Japan increased y-o-y by 2.5% to 490,781, mainly due to reconstruction after the Great Tohoku Earthquake, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT).

In Tokyo the number condos sold increased by 10.6% to 21,039, while detached houses sold increased by 9.5% during the first eight months of 2012, compared to the same period last year, according to LIJ.

Total outstanding real estate loans increased 1.5% y-o-y to JPY429 trillion (US$5.52 trillion) in Q2 2012, according to the Bank of Japan (BOJ).

Japan’s housing market is expected to remain weak and house prices to continue to fall in the coming months, as the economy remains fragile.

In the second quarter of 2012, the Japanese economy expanded real GDP grew 0.7%, only half of the government’s preliminary estimate of 1.4% and far lower than the 5.3% annual GDP growth recorded in Q1 2012. S&P expects the Japanese economy to grow by 2% in 2012.

The lost decade

In fact, Japan is still recovering from the great asset bubble of the late 1980s. From 1970 to 1980, land prices in Japan rose 200% (23.5% in real terms), and 238.5% in the six major cities (39.3% in real terms). Then during the 1980s, there was a 103% increase nationally (61.6% in real terms) and a 272.2% rise in the six major cities (196.4% in real terms).

The 1991 crash left banks with bad loans of almost USD 1 trillion, contributing to Japan’s ‘lost decade’.

Japan’s super-strong financial system

Japan’s financial system is now in excellent shape. During Junichiro Koizumi’s prime ministership (2001 to 2006) tighter asset assessments of major banks caused a large decline in NPLs, from 8.7% of total loans in March 2002, to 1.4% in March 2008, according to the Financial Services Agency (FSA). Lending competition has also intensified, especially in metropolitan areas. Net result: housing loan costs have fallen.

Interest rates are “virtually zero”

The BOJ’s key interest rate has been “virtually zero” (0% - 0.1%) since October 2010, and below 1% since mid-1990s. Bank variable interest rates in Japan have hardly moved since 2000, remaining at 2.475% in December 2011.

Yet demand for loans remains weak, given the recent financial crisis, and the earthquake‘s impact. The ratio of outstanding home loans to GDP remains very much lower in Japan than in other developed countries, at around 24.5%.

Could a reason for lacklustre demand for housing loans be low rental returns? Global Property Guide research suggests that rental yields in Tokyo fell from an average of 5.5% in 2009, to 4.8% in 2011, findings consistent with trends shown in IPD-Recruit residential data (see chart below). However if Tokyo prices have been rising ahead of rents, weak loan demand is less likely to reflect a specific reluctance to buy versus rent, and more a general reluctance to spend on any kind of housing.

Hints of recovery

Japan was seriously affected by the global financial crisis in 2008 and 2009, and following that house prices fell by up to 4% nationally, and by almost 8% in the six major cities. However, Japan’s economy bounced back in 2010, and there were strong new condominium sales in Tokyo, with the number of dwelling units sold up 22.5%, according to the Real Estate Economic Institute. The increase was helped by the enhanced mortgage tax break carried over from 2009.

Although land sales declined 2.16% in 2010, the sales slowdown is tailing off. Sales in Osaka were up by 0.24% during the year to September 2011. However, land sales registrations in Tokyo and in other cities declined 0.99% and 2.7%, respectively.

Other signs of recovery are housing starts, which rose to 890,000 units (seasonally adjusted) in Q3 2011. Housing investment is increasing due to earthquake rebuilding, according to the Bank of Japan (BOJ). Bankruptcies in the real estate sector declined 6%, to 312 firms during the year to November 2011.

So the picture is mixed but there are some positive signs, especially the strong financial sector.

Bigger trade deficit, because of rising yen

Japan’s trade deficit continues to grow. From January to November 2011, Japan’s trade deficit was above JPY 2 trillion (US$ 26 billion), while over the same period exports fell by 2.3%.

The problem is not going to go away. The yen appreciated to US$1=76 yen in October 2011, well above its mid-1990s levels. However, unemployment remains low, at 4.5% in November 2011.

In sum, the signals in Japan remain mixed. The Japanese economy is expected to rebound as the plans for reconstruction progress. The IMF predicts that Japan’s economy will grow in 2012 by 2.3% - which will be positive for the housing market. But nothing very exciting here!

Weak economy, deflation concerns

The Japanese economy contracted by 0.75% in 2011 due to the impact of the Great Tohoku Earthquake (magnitude 9.0) last March 11, 2011, and the tsunami which devastated much of northern Japan and triggered the explosion of the Fukushima Daiichi power plant.

Despite post-quake reconstruction, Japan’s recovery continues to stall.  The China slowdown is a real problem, as China is Japan’s largest export market. Then there’s the anti-Japanese feeling in China sparked by the dispute over Diaoyu/Senkaku Islands.  

In the second quarter of 2012, the Japanese economy expanded by just 0.2% q-o-q, after growth of 1.3% the previous quarter. On an annualized basis, real GDP grew by 0.7%.

Meanwhile, deflation in Japan has continued to worsen. Core consumer prices, which exclude volatile fresh food prices, fell by 0.3% in August 2012 from a year earlier to mark the fourth consecutive month of price declines. This is in sharp contrast with the BOJ’s 1% inflation target.

Japan is now struggling to end the continuous decline in prices, as the country is currently in a ‘deflation trap’. "Japan´s economy faces a critical challenge of overcoming deflation and returning to a sustainable growth path with price stability", the BOJ said.