Japan’s housing market remains buoyant

May 15, 2018

Japan house prices graphJapan´s housing market remains upbeat, despite slow economic growth. House prices continue to rise strongly, especially in Tokyo and Osaka metropolitan areas. This is mainly due to falling residential construction activity, amidst largely stable property demand.

In Tokyo Metropolitan Area:

  • Existing condominium units´ average prices rose by 4.6% to JPY516,000 (US$4,881) per sq. m. in January 2018 from a year earlier, according to the Land Institute of Japan (LIJ).
  • New condominium units´ average prices dropped 19.4% y-o-y to JPY787,000 (US$7,445) per square metre (sq. m.) in January 2018.
  • Existing average detached house prices increased 4.6% to JPY35,410,000 (US$334,979) over the same period.

In Osaka Metropolitan Area:

  • Existing condominium units´ average prices increased 6.1% y-o-y to JPY315,000 (US$2,980) per sq. m. in January 2018.
  • New condominium units´ prices soared by 12.6% to JPY680,000 (US$6,433) per sq. m. over the same period.
  • Existing detached house prices were up by 3% to JPY21,120,000 (US$199,795) over the same period.

Japan´s overall residential property price index rose by about 1.2% (0.7% inflation-adjusted) in November 2017 from the same period the prior year, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Nationwide, condominium prices were up by 3.5%, residential land prices rose by 2.1%, while detached house prices fell by slightly 1.2% and over the same period.

Demand is more or less steady. In Tokyo, existing condominium sales rose slightly by 0.5% during 2017 while sales of existing detached houses fell by 1.4% over the same period. In Osaka, sales of existing condos and existing detached houses increased by 0.6% and 0.8%, respectively.

Authorized housing starts fell slightly by 0.3% to 964,641 units in 2017 from a last year, in contrast with annual rises of 6.4% in 2016 and 1.9% in 2015, according to the MLIT. Then in January 2018, housing starts fell sharply by 13.2% from the same period last year.

Abenomics - great for property owners!

While the impact of "Abenomics" - i.e., the reflationary policies of Prime Minister 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.

Housing demand is expected to rise strongly starting the second half of 2018, ahead of the expected increase in the consumption tax to 10% in October 2019, according to the Real Estate Economic Institute (REEI)

Construction activity expected to rise this year, with about 38,000 new condo units for sale in the greater Tokyo area, a year-on-year increase of 4.4%.). Tokyo´s successful bid to host the 2020 Summer Olympics should boost property demand and construction over the next 7 years.

Residential property prices are expected to remain strong in the central Tokyo wards, while sales prices in the suburbs are projected to approach their peaks in 2018, due to the continued rise in demand, especially for properties near major hub stations, according to the REEI.

From a US$-based investor´s perspective, the Japanese residential market´s gains was bolstered by the 14.6% appreciation of the Japanese Yen from ¥123.725 = US$1 in June 2015, to ¥107.98 = US$1 in February 2018. However, this was not enough to offset the 37% drop in the value of yen against the dollar from 2012 to 2015.

The world´s third largest economy posted its eighth straight quarter of expansion in Q4 2017, with an annualized growth rate of 0.5% - the longest upward trend in 28 years. The economy is expected to grow by 1.7% in fiscal year 2017 (which ends in March), an improvement from y-o-y growth rates of 1% in 2016, 1.2% in 2015, and 0.3% in 2014.

Residential property sales variations

Demand is mixed in Tokyo while a slight increase can be seen in Osaka.

Japan existing condo sale
  • In Tokyo, the number of existing condominiums sold rose slightly by 0.5% to 37,540 units in 2017 from a year earlier, according to LIJ. On the other hand, existing detached house sales fell by 1.4% y-o-y to 18,433 units.
  • In Osaka, existing condominiums sold rose slightly by 0.6% y-o-y to 17,276 units in 2017, while existing detached houses sales were up by 0.8% to 13,589 units.

Land sales is also mixed. In Tokyo, lots sold fell by 1.8% y-o-y to 12,012 units in 2017 while in Osaka, land sales rose by 1.5% to 2,778 units over the same period.

Residential construction activity falling

Authorized housing starts fell slightly by 0.3% to 964,641 units in 2017 from a last year, according to the MLIT. Housing starts rose in 2016, by 6.4% y-o-y to 967,237 units, after rising slightly by 1.9% in 2015.

Japan housing starts

In major areas:

  • In Tokyo Metropolitan Area, the number of housing starts rose slightly by 0.7% to 339,224 units in 2017 from a year earlier.
  • In Osaka Metropolitan Area, housing starts fell by 1.7% y-o-y in 2017, to 118,656 units.
  • In Nagoya Metropolitan Area, housing starts rose by 1.5% y-o-y in 2017, to 73,997 units.
  • In other areas, housing starts fell slightly by 0.9% y-o-y to 432,764 units over the same period.

Japan new dwelling units

The downward pressure continues this year. In January 2018, housing starts fell sharply by 13.2% y-o-y to 66,358 units. Tokyo registered the biggest y-o-y decline of 23.3%, followed by Osaka (-23.1%), and other areas (-1.6%). Nagoya recorded a meager y-o-y growth of 0.2% in January 2018.

In Tokyo, 40% more new condominiums were put on the market in January 2018 compared to a year earlier, according to LIJ. In contrast in Osaka, there was a 22% decline in the number of new condominiums put on the market.

Japan´s shrinking population is producing a surplus of housing

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.

Japan total population

"Based on our projections, the size of the annual decline will keep getting bigger before peaking somewhere between 2060 and 2070," said Futoshi Ishii of the National Institute of Population and Social Security Research.

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 8.2 million unoccupied homes in the country, representing 13.5% of all residences, and up 24.4% from a decade ago, according to MLIT. Japan has a total of 60.63 million residences, 16% more than the total number of households of 52.45 million.

The number of abandoned homes is expected to rise further to more than 20 million by 2033.

However, declining household sizes may mitigate the situation. The average household size is projected to decline to 2.37 by 2025, from 2.67 in 2000, and 5.0 in 1950, according to the Ministry of Internal Affairs and Communication. More Japanese are living alone and fewer are living in multiple-generation households, increasing the demand for quality housing.

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, as part of its new 10-year national housing plan. The plan also proposes to offer some of these houses to low-income earners and families with children, and to replace aging condominiums.

The government is also trying to stop the Japanese population shrinking:

  • Childcare provision was boosted by the Act on Child and Childcare Support of August 2012.
  • The Comprehensive Support System for Children and Child-rearing, introduced in April 2015, will promote early childhood school education, childcare and child-rearing support services in local communities.
  • The government is expected to approve enhanced support for families with three or more children.
  • Local governments are being encouraged to offer speed dating and other forms of matchmaking, and to support marriage, child-bearing and child-rearing.
  • The government is expanding free nursery care.
  • The government also plans to establish fertility treatment counselling centres in major cities.
  • The government is also being pushed by various groups to accept more immigrants - a possible solution to maintain its population and counter its dwindling workforce. However, PM Shinzo Abe remains steadfast in his opposition to any moves to reform Japan´s strict border policy. Only less than 2% of Japan´s population are foreign born.

Moderate rental yields, stable rents

Japan tokyo price

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 conducted in May 2o17.

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 stable. In 2017, the nationwide apartment rent index rose by a meager 0.1% from a year ago, based on figures from the Japan Real Estate Institute.

In the country´s metro areas:

  • In Tokyo Metropolitan Area, apartment rents increased 0.3% y-o-y in 2017.
  • In Osaka Metropolitan Area, apartment rents dropped 0.1% y-o-y in 2017.
  • In Nagoya Metropolitan Area, apartment rents were unchanged in 2017 from a year earlier.

Interest rates remain very low

Japan interest rates

In February 2018, the BOJ kept its key interest rate steady at -0.1%. The key rate became negative in January 2016. This means that lenders will be charged to keep their money with the central bank.

The BOJ´s key rate has been below 1% since mid-1990s. As a result, the prime lending rates in principal banks in Japan have hardly moved since 2000, remaining below 3%. In February 2018, the prime lending rate stood at 1%.

As a result, mortgages rates in the country´s five major banks remain very low. The interest rate for a 10-year fixed-rate home loan ranges from just 0.7% to 1.05%. Sumitomo Mitsui Trust Bank has the lowest home loan rate of 0.7%, followed by Bank of Tokyo-Mitsubishi UFJ (MUFJ) with a rate of 0.75% and Mizuho Bank with 0.8%. The other two major banks - Resona Bank and Mitsui Sumitomo Banking Corporation - have both a mortgage rate of 1.05%.

A decade ago, fixed mortgages in Japan were around 3%.

The amount of housing loans in Japan is much lower than in other developed countries. The ratio of outstanding mortgage loans to GDP in Japan stood at around 22.9% in 2017, a slight increase from 22.6% a year earlier.

The "lost decade" and after

Japan gdp inflation

The world´s third largest economy posted its eight straight quarter of expansion in Q4 2017, with an annualized growth rate of 0.5% - the longest upward trend in 28 years. The economy is expected to grow by 1.7% for fiscal year 2017 (which ends in March), up from y-o-y growth rates of 1% in 2016, 1.2% in 2015, and 0.3% in 2014.

Despite this improvement, Japan has never fully recovered from the great bubble of the late 1980s, and this slow growth is the reason that Abenomics was adopted. "Abenomics" includes the following:

  • Inflation targeting at 2%
  • Correction of the excessive appreciation of the yen
  • Negative interest rates
  • Radical quantitative easing
  • Expansion of public investment
  • Buying of construction bonds by the Bank of Japan
  • Revision of the Bank of Japan Act

The BOJ introduced negative interest rates at the start of 2016 and adopted an even more accommodative monetary policy in September 2016 under the name "Quantitative and Qualitative Monetary Easing with Yield Curve Control." This means that the central bank controls short-term and long-term interest rates through market operations and will expand the monetary base to reach the desired level of inflation. In terms of fiscal policy, PM Shinzo Abe encouraged more public spending and postponed a rise in the consumption tax rate (from 8% to 10%) for the second time in two years to October 2019.

Japan residential urban land price

However none of this has been very successful.

The property market has benefited the most. The wider economy is not doing so well, however.

After the ´lost decade´ after the 1990´s, from 2000 to 2007 the Japanese economy grew by an average of 1.5% annually. However due to the global financial meltdown, the economy contracted by 1.1% in 2008 and by another 5.5% in 2009.

The economy bounced back in 2010 with 4.2% growth. Then in 2011 GDP shrank by 0.11% due to the Great Tohoku Earthquake (magnitude 9.0), and China´s economic slowdown. Anti-Japanese feeling sparked by the Diaoyu/Senkaku Islands dispute didn´t help. Japan´s economy grew by a modest 1.5% in 2012, and performance since then has been poor.

This is a major blow for Prime Minister Shinzo Abe growth plan. Japan faces a long-term growth slowdown, and it is not obvious that Abenomics is the cure. But if not that, then what?

Exports continue to rise, despite strong yen

In the past 20 months, the yen gained about 14.6% against the dollar, from ¥123.725 = US$1 in June 2015, to ¥107.98 = US$1 in February 2018, and has moved up strongly against all major currencies since the Brexit vote.

Japan government gross debt

A strong yen is bad news for the economy and many Japanese companies as it makes Japanese products more expensive internationally and makes it much harder for the government to tackle deflation due to cheaper imports. 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 - so this reversal is a disappointment.

Yet despite the currency´s appreciation exports grew by 12.2% to JPY6.09 trillion (US$57.19 billion) in January 2018 from a year earlier, according to the Finance Ministry, thanks to strong demand for hybrid cars and semiconductor production machinery from China. Exports to China, Japan´s largest trading partner, surged 30.8% y-o-y in January 2018. Shipments to the U.S. increased 1.2% while those to the EU rose by 20.3%.

The primary reason for the currency´s rise is that Japan´s trade balance improved sharply last year. In 2017, Japan posted a trade surplus of JPY2.99 trillion (US$28.08 billion), its second year of trade surplus since the 2011 Fukushima nuclear disaster, which sent energy import bills soaring.

Despite Abenomics, inflation remains far below target

Japan exchange rate

Abenomics was intended to stimulate the economy, partly by generating inflation. Japan´s core inflation, excluding volatile food prices, hit 1% in February 2018, up from 0.9% in the previous month and highest level in three and a half years. Yet it was still far below the BOJ´s official target of 2%. Moreover, a strengthening yen and the threat of a global trade war continue to pose risks of price gains stalling.

Abe was re-elected unopposed as head of the ruling Liberal Democratic Party (LDP) in September 20, 2015. His new term will run until September 30, 2018.

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.

However, in the first two months of 2018, the BOJ has reversed gear several times - reducing its bond purchases in early January, only to offer "unlimited" bond buying by end of the month, in an effort to curb rising yields and weaken the yen. However, by end of February, the central bank trimmed back again its buying of super-long government bonds.

The government vowed that it would abandon its massive stimulus only after inflation reaches 2%.

"The BOJ´s board members expect that prices will reach 2 percent around fiscal 2019. If this happens, there´s no doubt that we will consider and debate an exit," said BOJ Governor Haruhiko Kuroda.

Japan has the world´s biggest debt burden. In 2017, the country´s gross debt amounted to JPY1,307.6 trillion (US$12.27 trillion), equivalent to about 240.3% of GDP, according to the IMF. Opinions differ about how much of a problem this is.


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