Historically, the highest average price for new apartments recorded in the greater-Tokyo area was JPY61.23mln in 1990, during Japan’s economic bubble. Over the last nine years, in particular, apartment prices have steadily increased, bringing the average new apartment price to JPY62.6mln in 2021, surpassing the previous record reported by the Real Estate Economic Institute. Additionally, within the 23 wards of Tokyo, the highest average price recorded was JPY86.67mln in 1991; as of 2021, this average price was just under the historical high, coming in at JPY82.93mln.
Drivers for this increase
Many factors are pushing the increase in housing prices; most fundamentally, it comes down to supply and demand. When considering supply, we must analyze what is happening in the raw materials and commodities markets. According to the latest data, as of December 31st, 2021, the Japan Raw Materials Index was recorded at 145.60 points, while just one year earlier, this index was recorded at 86.80 points. What this indicates is a significant rise in the cost of raw materials, thus limiting the practical supply of properties builders can construct, simultaneously increasing costs incurred by consumers. We can reasonably attribute these increases to the COVID-19 pandemic and its crippling impact on global supply chains across all sectors, causing cost-push inflation
When considering demand, two apparent factors are at play: population and interest rates. Despite a declining national population and projected decrease in Tokyo’s population throughout this decade, the greater area of Tokyo’s population in 2021 was recorded at 37.3mln people, reaching its peak in 2018 at 37.5mln. Conversely, in 1990 the population was at 32.5mln people. This gradual population increase over time has introduced new buyers to the market, in turn affecting demand
Regarding interest rates, the Bank of Japan has continued to keep rates very low, with the country’s discount rate currently set at -0.1% and the long-term prime rate at 1%. Depending on the type and term of the mortgage, you can find rates ranging from as low as 0.375% to 1.62%. With such low rates, this is a strong incentive for more people to invest in real estate, again increasing demand
Purchasing power of the Yen
Despite Japan’s continued deflationary economic conditions, this only pertains to the Consumer Price Index (CPI), which does not consider housing (except for leased properties). That is to say, the prices for daily consumer goods and services have remained low and relatively unchanged (although CPI has increased over the last several months), yet real estate prices have increased.
Behind these numbers, it is important to consider the effects of inflation in asset markets on the purchasing power of the Yen, primarily spurred by economic stimulus. Accounting for inflation over the 31-year period from 1990 to 2021, we can determine that JPY61.23mln in 1990 would equal JPY69.32mln in today’s currency, using the compounding interest formula; this results in 13.21% inflation. In other words, an apartment listed at JPY61.23mln in 1990 would now cost you JPY69.32mln.
What this means for investors
Real Estate is generally considered a good hedge against inflation as property values increase over time. For overseas cash investors who may hold stronger currency than the Yen, the decision to invest in the Japanese real estate market today provides immediate value. For domestic buyers utilizing financing, you can minimize inherent costs and maximize long-term value with very low interest rates.
Article written by Wyatt Beck.
Sources:
Real Estate Economic Institute 2021 Market Trends; 2022
YCharts Japan Raw Materials Price Index. Bank of Japan; 2022
World Population Review Tokyo Population 2021; 2021
Trading Economics Japan Interest Rate; 2022
Trading Economics Japan Long Term Prime Rate; 2022
Mizuho Bank Home Loans; 2022
SMBC Housing Loan Interest Rate Plans; 2022
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