Quake-traumatized Japanese shun condos

January 25, 2012

The Tohoku Earthquake of March 2011 had a not entirely surprising effect – the Japanese are now more nervous of condos, and their prices have fallen sharply.

  • The average price of new Tokyo condominiums fell 7.2% during the year to November 2011, to JPY 45.19 million (US$ 587,570), according to the Land Institute of Japan (LIJ).  Existing condo prices were also down 7.2% to JPY 24.70 million (US$ 321,155).
  • Detached house average prices, on the other hand, rose by 2.4% during the year to November 2011, to JPY 12.65 million (US$ 164,478).

In addition, demand has shifted from waterfront locations to inland areas.

The aftermath of the quake

Japan house prices graph

On March 11, 2011, the coast of Tohoku region was struck by a 9.0 magnitude earthquake, the world’s 4th most powerful earthquake ever recorded. It was followed by a tsunami which devastated cities and farmlands, and triggered a radiation leak in the Fukushima Daiichi power plant.

The luxury sector of the rental market in Tokyo was particularly affected by the nuclear power plant incident, which caused mass departures of expatriates.

Yet although the quake caused 1,000+ dead and property damage worth ¥25 trillion (US$300 billion), it isn’t Japan’s only problem. The economy contracted by 0.4% during 2011, hampered by the yen’s dramatic appreciation, Europe’s deepening crisis, and the fact that amazingly, Japan now has a large trade deficit – which is likely to grow.  All this impacted prices:

  • There was a 0.65% drop in prices in the six major cities (Tokyo, Yokohama, Nagoya, Kyoto, Osaka and Kobe) during the year to H2 2011 (-1.13% in real terms), according to the Japan Real Estate Institute (JREI).  
  • National land prices land prices dropped 3.17% during the year to H2 2011 (-3.63% in real terms). National land prices have been falling continuously since H2 1991.

The lost decade

Japan urban land price index graph

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 urban land price change graph

Japan’s super-strong financial system

Japan non performing loans

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”

Japan interest and mortgage rate graph

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%.

Japan banks lending

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.

Japan residential prices and rent

Hints of recovery

Japan-land sale registration

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.

Japan housing starts

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%.

japan gdp growth graph

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!


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