Property Markets Work Better When the Line Doesn’t Always Go Up

These days, when Japan’s property market makes the headlines at all, it’s usually for the wrong reasons: The millions of homes sitting empty across the country, perhaps, or the notoriously poor investment that buying a house can prove. A home can often be worthless by the time a buyer has repaid the mortgage. 

But look at it from the perspective of housing as a roof over people’s heads rather than a store of a value, and Japan starts to look like a success. 

Even in these post-Covid times, the country faces no affordability crisis. Rents are stable — one key reason that inflation is so comparatively low — and housing can be found for almost any budget. Few ever need to queue to view an apartment, and even now banks are competing with one another to offer ever lower variable-rate mortgages for buyers. Tokyo in a typical year adds three times more dwellings than the entire UK, which has five times the populace. 

Like many investments, what you need to abandon is the idea that the line always goes up

The message has been trickling out. As some other locations in Asia appear less attractive, most obviously Hong Kong and Covid Zero-era mainland China, wealthy buyers are starting to look at properties in Japan as prospective, low-yielding investments — or fallback plans. What might be lacking in returns can be made up in ease of access. Japan hasso few restrictions on foreign land ownership that it can seem comical, with the government only recently starting to legislate foreign purchases of land next to sensitive locations, such as military bases. 

While all that is helping prices for new apartments in Tokyo to finally top bubble-era highs from more than 30 years ago, they have yet to materialize in the rental market: 

Screen Shot 2022 11 24 at 1.09.24 AM

Admittedly, Japan’s wages have continued to stagnate during the past decade, but residential real estate still looks more affordable to buy than in countries where property values have surged more than pay packets: 

Screen Shot 2022 11 24 at 1.10.15 AM

Seen from Tokyo, the sight of hundreds of people lining up to view a small number of available properties in London, where the mayor wants to freeze rents amid a “cost of renting” crisis, or the housing affordability disaster in the US and its knock-on effects on inflation, can look odd indeed.

At the core, it’s a simple tradeoff between supply and prices: For 50 years, Japan has had more dwellings available than people to fill them. Housing bought in Japan likely won’t increase in value much, save for the canniest and luckiest buyers in select locales. Owners also tend to prefer newer properties, which makes sense given the low quality of older stock built in the great postwar rush. Changes to the construction code in a land highly vulnerable to earthquakes and other disasters also encourages buyers to favor the new. That works well for supply, but means prices can’t be expected to continuously improve. 

Screen Shot 2022 11 24 at 1.11.06 AM

Legislation 1 encourages building that meets this demand. Despite what politicians elsewhere might say, even in typically slow-moving Japan housing has been demonstrated to be a problem fixable through lawmaking. The central government has been making construction easier for decades, with the power and size of the developer and construction industry undoubtedly playing a role. Deregulation in 1997 is credited with a boom in large condominium blocks of 20 stories or more known as “tower mansions,” a move that put fancy new apartment buildings in up-and-coming urban neighborhoods within the reach of the ordinary worker. 

Screen Shot 2022 11 24 at 1.12.50 AM

In recent years, a further boost has come from the rise of the “power couple” — supposedly elite dual-income households with around 14 million yen ($100,000) in combined salary. With Japan explicitly encouraging low interest rates and supplying easy access to flat-rate mortgages, a dual loan for an apartment costing close to $1 million isn’t out of reach — even though between Japan’s low wages and the weak yen, power couples might make no more than the current equivalent of just $50,000 each, well under the individual average salary in the US. 2

In 2002, the administration of Prime Minister Junichiro Koizumi passed its “Urban Renaissance” policy, which put significantly more power over zoning in the hands of central government while incentivizing private businesses to redevelop areas that had seen better days. This purposely disenfranchised local governments, the source of complaints about slow-moving approvals; officials elsewhere facing such issues might take note. One other thing: Be prepared to part with some iconic architecture, as fans of the Nakagin Capsule Tower learned earlier this year.

Screen Shot 2022 11 24 at 1.13.47 AM

Of course, not everything is roses in Japan’s garden. Oversupply might well be preferable to the alternative, but the empty houses nationwide are still a problem that could be tackled with incentives to demolish or sell on as second homes. There will be a growing need for new communities to support the aging population in their sunset years. Declining rural communities have a once-in-a-generation pandemic-inspired opportunity to attract new talent moving to the country, something the government could do more to encourage. And for all the relative affordability of mortgages, it’s still largely a privilege of the full-time salaried class; the growing numbers of non-full-time workers can find it needlessly hard to get a loan approved. 

Nonetheless, governments around the world facing cost-of-living protests should ask: What is a country’s housing stock for? A store of value for those who got on the property ladder first — or something closer to a social good, that should no more be expected to increase in value permanently than cars, roads or rolling stock? 

[Source: Bloomberg/Graphs & Data: Bloomberg/Images: Flikr]

Related Articles

Foreign investment in Japan’s apartments more than doubled to US$5.9 billion in 2020 during the Covid-19 pandemic, from US$2.7 billion a year earlier, according to Real Capital Analytics, which tracks deals worth at least US$10 million. So far this year, the segment has attracted US$704 million in foreign capital with another US$161 million still pending.
General, Investors/Business
Information, News
The rate of offices standing empty in central Tokyo in November dropped for the first time since the pandemic began, an early signal that the worst could be over for the capital’s property market. Vacancies fell by 0.12 percentage points to 6.35% in Tokyo’s five main business districts, real estate brokerage Miki Shoji Co. said on Thursday. Since hitting 1.49% in February 2020, the lowest since the country’s economic bubble burst in the early 1990s, vacancies have surged.
General, Investors/Business
Japan saw its natural population decline accelerate by over 100,000 and logged its first population outflow in nine years amid entry restrictions on foreign residents due to COVID-19. Tokyo’s population shrank for the first time in 26 years, falling by 38,000 to 14.01 million, while all 47 prefectures except Okinawa posted a fall. Prefectures that had seen population growth in recent years saw their populations fall, including Chiba, Fukuoka, Kanagawa and Saitama.
With Tokyo & Osaka approaching their pre-1990's property bubble peak, and yields in other investment hot-spots such as Fukuoka, Kyoto and Nagoya also gaining in price and becoming more compressed, opportunity-seeking investors are on the lookout for smaller cities that may still provide higher, yet stable and reliable rental returns. However, in a country as insular as Japan, where cities other than those already frequented by international visitors remain veiled in language and cultural isolation, the quest for attractive investment destinations can be difficult.