Analysis | Real estate markets work best when the line doesn't always go up

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These days, when the Japanese real estate market makes headlines, it’s usually for the wrong reasons: the millions of empty homes across the country, perhaps, or the notoriously poor investment that buying a a house can prove. A home can often be worthless by the time the buyer has paid off the mortgage.

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

Even in these post-Covid times, the country does not face any accessibility crisis. Rents are stable – one of the main reasons inflation is so relatively low – and accommodation can be found for almost any budget. Few need to queue to view an apartment, and even now banks are competing to offer ever-lower variable-rate mortgages to buyers. In a typical year, Tokyo adds three times as many homes as the whole of the UK, which has five times the population.

Like many investments, what you have to let go of is the idea that the line is always going up.

The message has been broadcast. As some other places in Asia look less appealing, including Covid Zero-era Hong Kong and mainland China, wealthy buyers are starting to view properties in Japan as potential low-return investments – or fallback plans . What might be lacking in returns can be made up for in ease of access. Japan has so few restrictions on foreign land ownership that it may seem comical, with the government only recently beginning to legislate foreign purchases of land near sensitive locations, such as military bases.

While all of this is helping new apartment prices in Tokyo finally rise above the bubble-era highs of more than 30 years ago, they have yet to materialize in the rental market:

Admittedly, wages in Japan have continued to stagnate over the past decade, but residential real estate still seems more affordable to buy than in countries where property values have risen more than wages:

Seen from Tokyo, the sight of hundreds of people queuing to see a small number of properties available in London, where the mayor wants to freeze rents amid a ‘cost of renting’ crisis, or the disaster of the Housing affordability in the United States and its blow-out effects on inflation, may seem strange indeed.

Basically, it’s a simple compromise between supply and price: for 50 years, Japan has had more homes available than people to occupy them. Homes purchased in Japan are unlikely to increase much in value except for the savviest and luckiest buyers in certain areas. Owners also tend to prefer newer properties, which makes sense given the poor quality of older stock built during the great post-war rush. Changes to the building code in a land very vulnerable to earthquakes and other disasters also encourage buyers to favor new construction. This works well for supply, but prices cannot be expected to improve continuously.

Legislation(1) encourages construction that meets this demand. Despite what politicians elsewhere might say, even in generally slow Japanese housing, housing has been shown to be a problem that can be solved through legislation. The central government has facilitated construction for decades, with the power and size of the developer and the construction industry undoubtedly playing a role. The 1997 deregulation is credited with a boom in tall condominium buildings of 20 stories or more known as “tower mansions”, a move that put new luxury apartment buildings in urban neighborhoods in boom within the reach of the ordinary worker.

In recent years, further impetus has come from the rise of the “power couple” – supposedly elite two-earner households with around 14 million yen ($100,000) combined salary. With Japan explicitly encouraging low interest rates and offering easy access to flat-rate mortgages, a double loan for an apartment costing almost $1 million isn’t out of reach – even if between low-wage earners in the Japan and the weak yen, power couples could make no more than the current equivalent of just $50,000 each, well below the average individual salary in the United States.(2)

In 2002, the administration of Prime Minister Junichiro Koizumi adopted its “Urban Renaissance” policy, which placed much more power over zoning in the hands of the central government while encouraging private companies to redevelop areas that had better days. This deliberately disenfranchised local governments, leading to complaints about slow approvals; officials elsewhere facing such issues might take note. Another thing: prepare to part ways with iconic architecture, as fans of the Nakagin Capsule Tower learned earlier this year.

Of course, not everything is rosy in the Japanese garden. Oversupply may well be better than the alternative, but nationwide empty homes are still a problem that could be solved with incentives to demolish or resell as second homes. There will be a growing need for new communities to support the aging population in its declining years. Declining rural communities have a unique opportunity, inspired by the pandemic, to attract new talent moving into 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 working class; the increasing number of workers who do not work full time may find it unnecessarily difficult to get a loan approved.

Nevertheless, governments around the world faced with protests over the cost of living should ask themselves: what good is a country’s housing stock for? A store of value for those who first ascended the ownership ladder – or something closer to a social good, the value of which should no more be expected to rise permanently than cars, roads or rolling stock?

Analysis | Real estate markets work best when the line doesn’t always go up

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