Japan: Asia’s best property investment option
Japan recovery is for real
After 15 years of property price falls, land prices for 6 major cities registered a 4.1% increase in 2006. In the first half of 2007, the momentum was sustained with a remarkable 7.75% increase over a year earlier.
Japan’s expanding economy grew 2.8% in 2006, boosting demand for condominiums and offices in major cities. Since its recovery in 2005, the land price index for the 6 biggest cities has increased by 9.3%.
However, the nationwide index for urban land prices still registered a price fall of 1.5%. From the peak of the housing boom in 1991 up to the first half of 2007, the nationwide residential price index has dropped by 42%.
Post-war recovery
From the sixties to the eighties, Japan achieved one of the highest economic growth rates in the world, with an annual growth of 8%.
As part of PM Tanaka Kakuei’s macroeconomic policy, money supply was increased rapidly; leading to rampant speculation in the commodities and real estate markets. By 1980 land prices had risen by 235.85% in the six biggest cities, and by 181.9% nationally since 1970.
Property speculation continued into the 1980s resulting in a massive housing bubble. Between 1980 and 1990, urban residential land prices in the six biggest cities rose by another 272% (and 103% nationally). The Stock Market index also rose by 542% over the same period.
When the government put on the brakes to control inflation, it led to the biggest financial crash in modern Japanese history.
Market crash
When the Japanese stock market crashed in 1989, it wreaked havoc on the financial system. Banks found themselves under heavy pressure to find capital to meet international standards, but easy capital to borrow didn’t come around easy.
To exacerbate the problem, the local real estate bubble burst in 1991. Many loans to small businesses were backed by property, and three quarters of the local banks' lending were to these small businesses. The result was more than a decade of economic stagnation.
Housing Investment
Despite the economic contraction, the housing market is still quite a good investment option because house prices have been falling faster than rents, leading to higher yields.
Global Property Guide research shows that the gross rental yield for properties in Tokyo ranges from 4.7% to 7.2%. This yield is high for a country where interest rates are almost zero and deflation is the norm.
From 1995 to 2005, rents fell by 11.4% nationwide and by 10.7% in Tokyo. Over the same period, residential land prices in Japan fell by 32% and 40% in Tokyo.
