Japan: existing condo prices up, new condo prices down
Lalaine C. Delmendo | March 25, 2020
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.
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.
Japan’s struggling economyThe 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.
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.
After 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.