Japan’s nationwide residential property price index rose by 6.9% (6.7% inflation-adjusted) during the year to Q3 2021 – high for Japan. This follows y-o-y rises of 3% in 2020, 0.5% in 2019, 2.1% in 2018, and 2.4% in 2017, according to the Land Institute of Japan.

Quarter-on-quarter, house prices increased 1.6% (0.9% inflation-adjusted).

Source: The Land Institute of Japan

But there are wide price variations in terms of location and property type.

In Tokyo Metropolitan Area:

• Existing condominium average prices rose strongly by 7.1% during the year to November 2021 to JPY 609,200 (US$ 5,334) per square meter (sq. m), following a y-o-y rise of 4.8% in 2020.
• New condominium average prices fell by 3.54% y-o-y to JPY 871,000 (US$ 7,626) per sq. m in November 2021, following a slight decline of 0.2% during 2020.
• Existing detached house prices rose by a huge 10.1% y-o-y to JPY 38.39 million (US$ 336,121).

In Osaka Metropolitan Area:

• Existing condominium average prices rose strongly by 12% to JPY 377,500 (US$ 3,305) per sq. m during the year to November 2021, from a 3.2% rise during 2020.
• New condominium average prices soared by 30.6% y-o-y to JPY 909,000 (US$ 7,959) per sq. m in November 2021, in sharp contrast to a 6.1% fall in 2020.
• Existing detached house prices rose by 9.5% y-o-y to JPY 22.33 million (US$ 195,508) in November 2021, in contrast to a decline of 2.1% during 2020.

Residential construction is recovering. In the first eleven months of 2021, authorized housing starts rose by 5.1% y-o-y to 788,091 units, following four consecutive years of y-o-y declines, according to the MLIT.

Demand is expected to continue increasing this year, as the country remains an attractive investment destination for ultra-rich Asians.

“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.

This is supported by a 2021 report released by Savills: “Whilst the global pandemic and the subsequent recession have thrown the real estate market into turmoil, the Japanese residential market on the other hand, known for its defensive nature, has been gaining strong interest from global investors, especially in Tokyo.”

“The attractiveness of the market is based on favourable funding conditions, as well as its stable political and economic fundamentals. These factors have stood out especially in recent years as social disruptions, including COVID-19, were experienced around the globe. As the world economy remains clouded by uncertainty, and abundant liquidity seeks investment opportunities, the Japanese residential market will likely continue to gain traction.”

Japan’s reasonable rental return is another attraction. 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.

“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.

There are no legal restrictions on foreigners owning real estate property in Japan.

After shrinking by a record 4.5% in FY 2020 due to the COVID-19 pandemic, the Japanese economy began to pick up last year as vaccinations progressed and economic restrictions were lifted. The world’s third biggest economy grew by about 2.6% last year.

The economy is expected to continue growing this year, with the government projecting a real GDP growth of 3.2%. Yet uncertainty remains, as the highly contagious Omicron variant of coronavirus, coupled with semiconductor chip shortages and rising energy prices, could dampen economic activity.

Demand rising

After falling in 2020 due to the pandemic, residential property sales are now rising again in both Tokyo and Osaka.

• In Tokyo, the number of existing condominiums sold rose by 10.8% to 37,113 units in the first eleven months of 2021 from a year earlier, in a turnaround from an annual decline of 5.9% in 2020, according to LIJ. Likewise, existing detached house sales increased 5.5% y-o-y to 19,290 units, following a 3.7% growth in 2020.
• In Osaka, existing condominiums sold rose by 6% y-o-y to 15,822 units in Jan-Nov 2021, in contrast to an annual decline of 8.6% in 2020. Likewise, existing detached houses sales in Osaka increased by a modest 3.4% to 9,753 units.

Land sales are mixed. In Tokyo, land sales rose by 7.7% y-o-y to 11,425 units in the first eleven months of 2021 while in Osaka, land sales fell slightly by 1.4% to 6,568 units. Nationwide residential urban land prices fell slightly by 0.2% in 2021, following miniscule growth of 0.4% in 2020 and 0.6% in 2019, according to Japan Real Estate Institute.

Residential construction up, but not much

Authorized housing starts rose by 5.1% to 788,091 units in the first eleven months of 2021 from the previous year, following four consecutive years of y-o-y declines, according to the MLIT.

In major areas:

• In Tokyo Metropolitan Area, the number of housing starts increased 2.7% to 269,124 units in Jan-Nov 2021 from a year earlier, following annual declines of 8.2% in 2020 and 4.3% in 2019.
• In Osaka Metropolitan Area, housing starts rose by 4.4% y-o-y in the first eleven months of 2021, to 107,137 units, following annual declines of 5.3% in 2020 and 3.2% in 2019.
• In Nagoya Metropolitan Area, housing starts increased 7.2% y-o-y to 63,711 units, following contractions of 15.7% in 2020 and 1.3% in 2019.
• In other areas, housing starts rose by 6.9% y-o-y to 348,119 units in the first eleven months of 2021, following declines of 11.5% in 2020 and 4.4% in 2019.

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 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 8.49 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.

“The combination of a shrinking population, falling land values, patchy registration records and a tax system ill-suited to the current situation has left ownership unclear on an estimated 4.1 million hectares, an area larger than Taiwan,” said a recent article published by The South China Morning Post.

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.

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 also 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. However due to the COVID-19 pandemic and the subsequent lockdown and travel restrictions measures imposed worldwide, the target seems unattainable right now.

Then recently, the government is looking to allow foreign nationals in certain blue-collar jobs to stay indefinitely in Japan starting the fiscal year 2022. If the revision takes effect, said workers, many from Vietnam and China, would be permitted to renew their visas indefinitely and bring their families in the country, a benefit currently available only to a small cadre of foreigners in sought-after professions.

“As the shrinking population becomes a more serious problem and if Japan wants to be seen as a good option for overseas workers, it needs to communicate that it has the proper structure in place to welcome them,” said Toshihiro Menju of think tank Japan Center for International Exchange.

Currently, Japan houses 1.72 million foreign workers, out of a total population of 125.4 million and foreign nationals make up just 25% of its working population.

Moderate rental yields, steady 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 more or less steady. In Tokyo’s 23 wards (23W), the average mid-market asking rent was JPY 3,963 (US$ 34.70) per sq. m in Q4 2021, up by 0.9% from the previous quarter but down by 0.9% from a year earlier, according to Savills’ Tokyo Residential Leasing Q4 2021 report.

Likewise, mid-market rents in the central five wards (C5W) in Tokyo increased 1.1% q-o-q in Q4 2021 to an average of JPY 4,713 (US$41.30) per sq. m., but saw a decline of 1.4% y-o-y. Over the same period:

• In the South, rents rose by 0.5% q-o-q to an average of JPY 4,104 (US$35.90) per sq. m., but fell by 0.8% a year earlier.
• In the Inner North, rents increased 0.8% q-o-q to JPY 4,095 (US$35.85) per sq. m., but also saw a correction of 1% on an annual basis.
• In the Inner East, the average rent fell by 0.5% q-o-q and by 1.2% y-o-y to JPY 3,868 (US$33.90) per sq. m.
• In the West, rents increased 0.8% q-o-q and 0.3% y-o-y to an average of JPY 3,737 (US$32.70) per sq. m.
• In the Outer North, the average rent rose slightly by 0.4% q-o-q to JPY 3,440 (US$30.10) per sq. m., but dropped 1.1% y-o-y.
• In the Outer East, average rent stood at JPY 3,256 (US$28.50) per sq. m., down 0.9% q-o-q but up 2.3% y-o-y.

“Tokyo’s rents and occupancy rates have increased over the past quarter, which may imply an inflection point. However, when compared to major regional cities, Tokyo has seen lower rents and occupancy than pre-pandemic times, and a more noticeable population decline. The implications of new variants may further affect future housing demand in Tokyo.”

The average occupancy rate in Tokyo’s 23W inched up slightly to 96.1% in Q4 2021, from 95.8% in the previous quarter and 96% a year earlier, according to Savills. In C5W, occupancy increased 0.7 percentage points q-o-q to 95.6%.

Interest rates remain very low; housing loans rising modestly

The BOJ’s key rate has been below 1% since mid-1990s. In December 2021, the central bank’s policy rate stood at -0.10%, unchanged since January 2016.

As a result, mortgage rates are very low. The interest rate for a 10-year fixed-rate home loan ranges from just 0.6% to 1.2% last year. Resona Bank and Sumitomo Mitsui Trust Bank had the lowest home loan rate of about 0.6% to 0.7% in 2020, followed by Mitsubishi UFJ (MUFJ) at 0.79%, and Mizuho Bank at 0.85%. Mitsui Sumitomo Banking Corporation has a mortgage rate of about 1.1% to 1.2%.

During 2021, the total amount of housing loans outstanding to households was JPY 135.4 trillion (US$1.19 trillion), up by 2.6% from a year earlier. This accounted for about 25% of the country’s GDP last year.

Japan’s economic growth to continue, despite Omicron variant

After shrinking by a record 4.5% in FY 2020 due to the COVID-19 pandemic, the Japanese economy began to pick up last year as vaccinations progressed and economic restrictions were lifted. The world’s third biggest economy grew by about 2.6% last year.

The economy is expected to continue growing this year, with the government projecting a real GDP growth of 3.2%. Yet uncertainty remains, as the recently spreading Omicron variant could dampen private spending, which accounts for more than half of Japan’s GDP.

Recently, the government introduced its so-called “vaccine and test package”, which aims to strike a balance between anti-coronavirus measures and economic activity. Under the said program, vaccinated people or those with negative tests would not be discouraged from traveling across prefectural borders and would be allowed to buy alcohol from restaurants even during states of emergency. The expansion of vaccination to children, and the introduction of oral COVID-19 drugs developed by Pfizer Inc. and Merck & Co. are also expected to boost economic activity in the country.

“For 2022, the main goal for the Japanese economy would be achieving a ‘with-corona’ new normal, striking a balance between keeping the economy running and curbing infections,” said senior economist Saisuke Sakai of Mizuho Research and Technologies.

Semiconductor chip shortages, as well as rising prices of energy and resources, also pose additional risks to the country’s full economic recovery.

But even before the pandemic, the Japanese economy had been adversely affected by the US-China trade tension and the introduction of a consumption tax hike from 8% to 10% in 2019.

In fact 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 1.1% annually from 2012 to 2019, an improvement from an annual average growth of just 0.6% from 2001 to 2011.

Recently, the government approved a JPY 107.6 trillion (US$940 billion) draft budget for FY 2022 starting in April – a record high for the tenth consecutive year in a row – to finance measures against the coronavirus, swelling social security costs and record defence spending.

Yet the country’s primary deficit is expected to fall to JPY 13.05 trillion (US$114.26 billion) for FY 2022, improving from JPY 20.36 trillion (US$178.26 billion) in FY 2021.

Japan’s debt burden, which is already considered world’s biggest, surged in the past two years. Public debt increased to 254.1% of GDP in 2020 and further to 256.9% of GDP in 2021, sharply up from 235.4% of GDP in 2019, according to the IMF. However opinions differ about how much of a problem this is.

Government debt is expected to increase further to JPY 1,026.5 trillion (US$8.99 trillion) by end of FY 2022, up from las year’s JPY 990.3 trillion (US$8.67 trillion) and topping the JPY1,000 trillion threshold for the first time.

In November 2021, the overall jobless rate was 2.8%, the first increase in six months, according to the Ministry of Internal Affairs and Communications. Though it is still slightly lower than the average unemployment rate of 2.9% from 2014 to 2020.

Nationwide inflation rose to 0.6% in November 2021, the third consecutive month of increase and the highest in nearly two years, mainly driven by rising energy and water charges. Yet it remains far below the BOJ’s official inflation target of 2%.

Persistently low inflation has been a long-standing problem of Japan, with inflation standing at an average of just 0.4% from 2015 to 2020.

Weak yen benefits exporters but hits consumers hard

One aspect of Abenomics was an attempt to boost the economy by reducing the Yen’s exchange rate. The Japanese yen was made to depreciate by almost 37% from US$1 = JPY 78 in 2012 to US$ = JPY 123 in 2015. After regaining 4.7% of its value in 2016-17, the yen has stabilized in the next three years. In 2020, the yen appreciated again against the US dollar by about 5.1% from a year earlier.

Then in 2021, the yen lost about 8.8% of its value against the US dollar, to reach an exchange rate of US$1 = JPY 113.85 in December 2021. Over the same period, the yen also depreciated against the Canadian dollar, the pound and the euro by 8.9%, 8% and 1.9%, respectively.

While a weak yen normally benefits exporters, it may be hurting Japanese households now more than in the past, as the country’s increasing reliance on more expensive raw material imports pushes up the cost of living in the country, said BOJ Governor Haruhiko Kuroda.

The depreciation of the yen will likely continue over the coming years, as it becomes increasingly less attractive to foreign investors. While the BOJ is expected to continue its large-scale monetary easing, the United States and some European countries have recently announced their policy of scaling back monetary easing and raising interest rates. This will prompt investors to buy these currencies with higher interest rates, instead of the yen whose interest rate remains extremely low.

Unsurprisingly, Japan’s exports rose strongly by 21.9% y-o-y to JPY 75.21 trillion (US$658.49 billion) in the first eleven months of 2021, a sharp turnaround from the 11.1% decline in 2020, according to the Finance Ministry.

Likewise, overall imports also increased 22.7% y-o-y to JPY 76.1 trillion (US$666.29 billion) in Jan-Nov 2021, resulting to a trade deficit of about JPY 889.8 billion (US$7.79 billion).

Abenomics buoyed the housing market

While the impact of “Abenomics” - i.e., the reflationary policies of former 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 in recent years.

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 made him Japan’s longest serving Prime Minister.

In September 2017, the government unveiled a new JPY2 trillion (US$17.5 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.

Before resigning in September 2020 due to health reasons, Abe introduced two rounds of stimulus packages, which added about US$2.2 trillion extra spending (equivalent to about 40% of GDP) to help households and businesses adversely affected by the pandemic.

Abe was succeeded by his deputy, Yoshihide Suga, whose focus remains on stimulating the ailing economy and asserting Japan as a regional power, after the post-war decades of avoiding strategic commitments.

In December 2020, Suga unveiled another economic stimulus package worth JPY 73.6 trillion (US$644 billion), amidst the spike in infections in the country. The aid, the first since Suga took office, includes incentives for digitalization and carbon reduction, extensions of subsidy programs aimed at promoting domestic travel, buoying consumption, as well as helping businesses.

However after just a year in office, Suga resigned over his handling of the pandemic, allowing former foreign minister Fumio Kishida to take over. Officially assumed office in October 2021, Kishida is seen as more liberal than his predecessors, and is expected to steer the government slightly to the left.

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