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Japan’s Housing Prices Are Rising Instead of Falling: A New Bubble or A New Opportunity?

Housing prices have become a prevailing concern amongst the Japanese populace. Data from the OECD demonstrates that in the first quarter of this year, housing prices in 31 of the world’s 46 major economies declined to varying degrees. Even the formerly soaring markets of Vietnam and South Korea saw a fall. Yet curiously, Japan’s housing prices have defied the trend, rising rather than falling.

The Nihon Keizai Shimbun reported that over the past year, prices per unit in Tokyo’s 23 wards hit record highs. In fiscal year 2022, the average price of new apartments in the Tokyo metro area rose 8.6% from the previous year.

Japan’s housing market has always been an anomaly. Since the bursting of the economic bubble in the 1990s, prices plunged and never recovered their peak for 30 years. Few other countries have seen such enduring declines.

Today, Japan’s housing prices have shattered long-dormant records, nearing the heights of the bubble era and beyond.

In the post-pandemic period, the gradual revitalization of the Japanese economy and prolonged quantitative easing have reinvigorated the domestic market’s fervor for real estate. The continued depreciation of the yen has also brought a flood of overseas capital into metropolises like Tokyo. These factors have jointly contributed to Japan’s recent housing price surge.

With all manners of funds eager to enter the Japanese property market and “sweep up goods”, the Japanese media have grown concerned. Nikkei wrote that “prices have risen beyond what average families can afford, and housing’s ‘liveability’ function is fading.”

A Post-Pandemic Storm

In 2017, Tokyo’s GDP surpassed New York’s, becoming the world’s largest city. Attention began focusing on this future Olympic host. This sparked a new wave of rising housing prices in Japan, though dwarfed by the last two years.

In 2021, prices for new Tokyo apartments exceeded 80 million yen, hitting a post-bubble economy high. In April this year, the Japan Real Estate Economic Research Institute announced trends for fiscal year 2022: average prices in Tokyo and surrounding prefectures reached 69.07 million yen, with prices per square meter hitting 103.9 yen – record highs representing 8.6% and 9% year-on-year increases.

The 23 Tokyo wards saw the fastest growth – average prices of 98.99 million yen and 150,000 yen per square meter rose 17.2% and 14.8%.

Perhaps the most direct driver is workers returning to cities as remote work wanes post-COVID. For commuting and business, the Tokyo metro area is ideal, making its property market red-hot.

Resale value is a key indicator. Tokyo KANTEI data shows 2018 metro area resale value was 91.4% of purchase price. By last year it was 132.5%. Near the popular Roppongi-Itchome station, resale value skyrocketed to 251.6% – 2.5 times the purchase price.

Japan’s cities increasingly struggle to find land suitable for development.

Along with shifting supply-demand dynamics, the shrinking inventory and size of new homes further stimulate anxious buyers.

Last year, 28,632 Tokyo metro apartments sold – a 12% drop and first sub-30,000 figure in two years. Nationwide listings fell 5.9% to 72,900 units – roughly 60% below record highs. Developers told the Asahi Shimbun that since the 2010s, finding large development sites in major cities has become increasingly difficult.

This directly lowers single home sizes. The Ministry of Internal Affairs and Communications “Residential and Land Survey” shows 2018 sizes shrank versus five years prior. An Flat35 survey shows 2021 average new home size was 64.7 square meters, down 10% in a decade. Second-hand homes averaged 68.2 square meters, down 5%. Some single-family units are now smaller.

Rising labor and material costs, like steel and resin, also boost housing prices. Industry sources told the Mainichi Shimbun this is not a 1990s “bubble” but real cost increases, making homebuying harder for working-class people.

With Foreign Capital, Stocks and Real Estate Rise Together

Alongside real estate, the Japanese stock market has also seen a wave of quotations this year.

So far in 2022, Japanese stocks have steadily risen. By early May, the market capitalization had surged approximately $518 billion (3.69 trillion RMB). The Nikkei 225 finally broke 32,000 in the first half, its highest level since August 1990.

Foreign capital has been a key driver. “Stock God” Buffett has increased his Japan positions over the past six months, prompting Wall Street and European capital to follow. A Huatai Securities report cites the combination of global capital reallocation, Japan’s monetary easing, and fundamental recovery as drivers.

Real estate and equities are both “assets”. Investment in these two major asset classes is advancing simultaneously, traceable to a revolution 11 years ago.

In late 2012, Shinzo Abe was re-elected Prime Minister. At the time, successive financial crises had battered Japan’s economy. Abe immediately embarked on reforms collectively termed “Abenomics.”

The core logic was to boost exports via yen depreciation through exaggerated monetary easing, revitalizing the economy and reversing long-term deflation.

Under this thinking, Japan’s benchmark interest rate is astonishingly low. During the bubble era, mortgages were 8.5%, but now just 0.4%. More shocking is that while enjoying 0.4%, meeting conditions allows deducting up to 1% of the balance from taxes – potentially reaching an inverse discount where the tax deduction exceeds interest repayment. This strongly incentivizes homebuyers.

On the other hand, continuous quantitative easing has spurred yen depreciation. At end-2012, $1 was around 85 yen, but the first two Abe months saw an 8% drop, breaking 125 in 2015. This continued after his resignation. Last year coincided with Abenomics’ 10th anniversary, with the dollar approaching 150 yen.

As the yen grows “worthless” and interest rate differences widen, overseas buyers are enthusiastic. For them, Japan’s market seems depressed, perfect for investment.

Back in 2018, CBRE found Japan was Asia-Pacific’s second largest real estate investment destination after Australia, with capital giants like Norway’s sovereign wealth fund, Blackstone, and Singapore’s GIC investing.

JLL data shows April-September 2021 foreign investment exceeded 500 billion yen, up 80% year-on-year. Some Japanese intermediaries stated Asian individual investor inquiries surged last year.

A recent JLL global real estate investment report showed Tokyo Q1 investment rose 26% to $4.8 billion, second globally behind only Los Angeles – a major jump from 14th place last year.

Excessive Price Rises May Further Accelerate Tokyo’s Siphon Effect

Japan Real Estate Economic Research Institute data shows the 2021 national average new home price was 51.21 million yen, a six-year high but only 0.1% annual increase. Tokyo’s 23 wards jumped 30 million yen over 10 years, a 90% decade rise.

While Tokyo metro prices have rapidly risen, national housing prices face a dilemma – the tiny 0.1% increase is virtually entirely driven by Tokyo. Excitement is confined around Tokyo, unrelated to other cities.

The extremes between Tokyo and other areas risk trapping youth in endless cycles – lower-paying jobs in small cities where homes are worthless, yet crowded Tokyo has unaffordable housing. For young families, astronomical prices – about 10 times the average full-time salary – may empty wallets.

Bank of Japan data shows Q3 2021 household debt reached 346 trillion yen (17.8 trillion RMB), up 4% since pre-pandemic 2019. Housing loans comprise about 62%.

A Japanese student in Chiba told Watching the World that since last year, new bank branches have appeared around transport hubs, with more mortgage services.

Since late last year, Japanese media have called for revising the years-long quantitative easing policies amidst the housing price rises.

When discussing the post-bubble stagnation, Japanese often reference the “lost 30 years,” with achievements dubbed “recovering the lost 30 years.” But with minimal wage and benefit growth, and only housing prices reaching bubble-era levels, ordinary Japanese feel perplexed and concerned.

After all, bubble-era real estate speculation proved more lucrative than most careers, leading many Japanese to see it as their best shot at changing their lives. Yet when the bubble burst, personal tragedies like weeping and suicide were not uncommon.

With housing prices soaring again, could history repeat itself and bring a fresh tragedy? For now, no one can say.

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