Japan’s housing market remains buoyant
May 17, 2017
Japan’s overall residential property price index rose by 4.7% (4.2% inflation-adjusted) in January 2017 from the same period last year, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Nationwide, condominium prices were up by 5.2%, detached house prices increased 2.7% and residential land prices rose by 4.8% over the same period.
In Tokyo Metropolitan Area:
- Existing condominium units’ average prices rose by 3.1% to JPY492,800 (US$4,378) per sq. m. during the year to end-Q1 2017, according to the Land Institute of Japan (LIJ).
- New condominium units’ average prices dropped slightly by 1.5% y-o-y to JPY790,000 (US$7,018) per square metre (sq. m.) in Q1 2017.
- Existing average detached house prices increased 1.4% to JPY33,700,000 (US$299,391) over the same period.
In Osaka Metropolitan Area:
- Existing condominium units’ average prices increased 2.7% to JPY305,000 (US$2,710) per sq. m. during the year to Q1 2017.
- New condominium units’ prices fell by 2.2% to JPY622,000 (US$5,526) per sq. m. over the same period.
- Existing detached house prices were down by 2.1% to JPY20,660,000 (US$183,543) over the same period.
While the impact of "Abenomics” - i.e., the reflationary policies of Prime Minister Shinzo Abe, who came to power in December 2012 – on the wider economy is debatable, the policy has undoubtedly helped prop up Japan’s property market and boosted residential construction activity.
Abenomics stimulates the economy by increasing public infrastructure spending, devaluing the yen and aggressive quantitative easing by the Bank of Japan (BOJ). Since the introduction of Abenomics, real estate prices have accelerated strongly. Transactions started to pick up in 2012 and rose rapidly in 2013, as monetary policy kicked in.
House prices are expected to continue rising in the coming months, as a fresh round of economic stimulus was initiated in the second half of 2016. Moreover, Tokyo’s successful bid to host the 2020 Summer Olympics should boost property demand and construction over the next 7 years.
From a US$-based investor's perspective, the Japanese residential market's gains was bolstered by the 12.3% appreciation of the Japanese Yen from ¥123.725 = US$1 in June 2015, to ¥110.177 = US$1 in April 2017. However, this was not enough to offset the 37% drop in the value of yen against the dollar from 2012 to 2015.
The Japanese economy grew by 1% in 2016, after y-o-y growth of 1.2% in 2015, 0.3% in 2014, 2% in 2013, and 1.5% in 2012. The economy is expected to grow by 1.2% this year and by another 0.6% in 2018, according to the International Monetary Fund (IMF).
Moderate rental yields on Japanese residential property
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%. They’re a little higher on smaller apartments. Not great, though not untypical for a city like Tokyo. Yields on the very smallest apartments are 5.4%, a reasonable yield. But then smaller apartments tend to need more maintenance, so a higher yield is justified.
Prices per square metre range from around $8,700 to $13,800, not really so expensive when compared to other global cities. In Yen terms residential prices continue to strengthen. That’s likely to continue so long as Abenomics is in place. More money in the system means lower interest rates means increasing asset prices, especially prices of assets that produce nice incomes, like Tokyo property.
This is going to be interesting. If Abenomics really leads to a revival of the Japanese economy, rising incomes will continue to support rising rents. However as time goes on, the success of Abenomics seems more and more in doubt.
Round trip transaction costs are moderate in Japan. See our Property transaction costs analysis for Japan and Property transaction costs in Japan, compared to the rest of Asia.
Effective rental income tax is low in Japan
Rental Income: Rental income of nonresident individuals is subject to 10% tax.
However, effective rental income tax is low, ranging from 3.4% to 5.9%. Nonresident taxpayers are taxed on their net income; depreciation and income-generating expenses such as maintenance and repairs are deductible from the gross rent.
Capital Gains: Net gains realized from selling short-term real properties, i.e. property held for less than 5 years, are taxed at 30%. Net gains on property held beyond five years are taxed at 15%.
Inheritance: Inheritance is based on residency status but foreign individuals inheriting property located in Japan are still subject to inheritance tax, which is levied at progressive rates.
Residents: A permanent resident taxed on his worldwide income at progressive rates, from 5% to 45%.
Moderate roundtrip buying costs in Japan
The total roundtrip transaction cost is around 13.26% to 13.45%, inclusive of the 3.15% agent’s fee plus an additional payment of JPY63,000 (US$534).
Japanese landlords get key money
Tenancy laws passed in 2000 shifted the balance of power from tenants to landlords, making Japan strongly pro-landlord.
Rents: Rents are freely negotiable. Aside from two to three month’s security deposit, landlords receive key money worth one to two month’s rent.
Tenant Eviction: Automatic renewals of leases were abolished in 2000, making eviction easier. If the tenant prematurely ends the contract the landlord can charge one month’s rent.
Japan: trade balance improves, but inflation remains far below targetJapan is the world’s third largest economy, a major aid donor and one of the primary sources of global capital and credit, with a population of 127 million in 2016 and GDP per capita of US$38,917. The country is the world’s fourth largest exporter and fourth largest importer, and has the world’s largest electronics industry.
From 2000 to 2007, the Japanese economy grew by an average of 1.5% annually. However due to the global financial meltdown, the economy contracted by 1% in 2008 and by another 5.5% in 2009. The economy returned to growth in 2010 with GDP growth of 4.7%. Then Japanese growth contracted again, shrinking by 0.5% in 2011 due to the impact of the Great Tohoku Earthquake (magnitude 9.0) last March 11, 2011. In addition the economic slowdown in China, Japan’s largest export market, exacerbated the situation. Then there was the anti-Japanese feeling in China sparked by the dispute over Diaoyu/Senkaku Islands.
In 2016, the economy expanded by a minuscule 1%, after growth of 1.2% in 2015, 0.3% in 2014, 2% in 2013 and 1.5% in 2012, according to the IMF.
The poor economic performance of Japan is a major blow for the massive growth plan introduced by Prime Minister Shinzo Abe about four years ago, in an effort to kickstartanaemic growth and conquer years of deflation.
PM Abe, who came to power in December 2012, introduced a program of reflationary policies, widely referred to as “Abenomics”, including the following:
- Inflation targeting at 2%
- Correction of the excessive appreciation of the yen
- Negative interest rates
- Radical quantitative easing
- Expansion of public investment
- Buying of construction bonds by the Bank of Japan
- Revision of the Bank of Japan Act
The BOJ introduced negative interest rates at the start of 2016 and adopted an even more accommodative monetary policy in September 2016 under the name “Quantitative and Qualitative Monetary Easing with Yield Curve Control.” This means that the central bank controls short-term and long-term interest rates through market operations and will expand the monetary base to reach the desired level of inflation. In terms of fiscal policy, PM Shinzo Abe encouraged more public spending and postponed a rise in the consumption tax rate (from 8% to 10%) for the second time in two years to October 2019.
In the past ten months, the yen gained almost 12.3% against the dollar,from ¥123.725 = US$1 in June 2015, to ¥110.177 = US$1 in April 2017, and has moved up strongly against all major currencies since the Brexit vote.A strong yen is bad news for the economy and many Japanese companies as it makes Japanese products more expensive internationally and makes it much harder for the government to tackle deflation due to cheaper imports. The Japanese yen had previously moved significantly in the desired direction since 2012, depreciating by about almost 37% from US$1 = ¥78 in 2012 to US$ = ¥123 in 2015 - so this reversal is a disappointment.
Nevertheless despite the currency's appreciation exports grew 12% y-o-y to JPY7.2 trillion (USD64 billion) in March 2017, the strongest expansion since January 2015 and the fourth consecutive month of y-o-y gains, thanks to strong demand for auto parts and optical instruments, according to Finance Ministry. Likewise, imports rose by 15.8% y-o-y to JPY6.6 trillion (USD58.6 billion) in March 2017 due to rising oil and coal purchases.
The primary reason for the currency's rise is that Japan’s trade balance improved sharply last year, thanks to a decline in energy import costs. In 2016, Japan posted a trade surplus of JPY4.01 trillion (US$35.6 billion), according to the Finance Ministry, its first year of trade surplus since the 2011 Fukushima nuclear disaster, which sent energy import bills soaring.
Abenomics was intended to stimulate the economy, partly by generating inflation. Yet Japan’s core inflation, excluding volatile food prices, increased by just 0.2% in March 2017, still far below the BOJ’s official target of 2%.
Aside from maintaining its -0.1% key interest rate, the central bank’s policy also consisted of government bond purchases to the tune of JPY 80 trillion (US$711 billion) annually. Moreover in July 2016, the BOJ stepped up its pace of monetary easing, adding JPY2.7 trillion (US$24 billion) of equity funds to its annual asset-buying program. The latest move is expected to almost double the BOJ’s purchases of equity exchange-traded funds from the current JPY3.3 trillion (US$29.3 billion) a year.
Abe was re-elected unopposed as head of the ruling Liberal Democratic Party (LDP) in September 20, 2015. His new term will run until September 30, 2018.
Abe is not giving up. The government unveiled a new JPY28 trillion (US$249 billion) stimulus package in July 2016 – the third in a row after a JPY10.3 trillion (US$91.5 billion) round in 2013 and a JPY3.5 trillion (US$31 billion) package in 2014.
The government vowed that it would abandon its massive stimulus only after inflation reaches 2%.
“Talking about a specific exit strategy now would cause undue confusion in markets,” said BOJ Governor Haruhiko Kuroda. “The prerequisite for such debate to happen is for inflation to achieve 2 percent.”
Japan has the world’s biggest debt burden. In 2016, the country’s gross debt amounted to JPY1,285 trillion (US$11.42 trillion), equivalent to about 239% of GDP, according to the IMF. Opinions differ about how much of a problem this is.