In this article, we take a look at average rent levels in Japan’s major markets to see how growth (or decline) in rental housing costs compare with the overall lacklustre growth in consumer prices. By all accounts, we’re living in a low-price environment here in Japan and have been for some time.
However, let’s see if this is actually holding true for the cost of renting an apartment in the big cities of Japan, because for many people rent takes up the biggest part of their pay check.
Overall prices may not be rising very much, but this may not be so for average rent levels.
Low Inflation
Japan has been mired in a deflationary price cycle for several decades. Here is the inflation rate data for just 2006 to 2016.
Source: tradingeconomics.com
In June 2016, consumer prices dropped by 0.4% year-on-year, for the fourth straight month of decline, according to Tradingeconomics.com. This was steepest drop since March 2013.
Components of the Consumer Price Index (CPI)
The main components of the consumer price index in Japan are
- Food (25% of total weight)
- Housing (21%)
- Transportation and communications (14%)
- Culture and recreation (11.5%)
- Fuel, light and water (7%)
- Medical care (4.3%)
- Clothes and footwear (4%)
- Furniture and household utensils/Education and Miscellaneous goods and services (remainder)
According to the official method used to calculate the CPI, the average Japanese household spends about a fifth of its income on housing costs.
As we discuss in this article (Tips for Renting an Apartment in Japan), however, landlords and property managers typically expect your rent will come to about 30% to 40% of your income.
Average Rent Trends in Japan’s Big Cities
Let’s take a look at what average rent growth or decline has been like in Japan’s major rental markets for the last five years against the negative trend in consumer prices over the same period.
The following data is from Tokyo Kantei’s latest data release (in Japanese) for average rent per sqm for an apartment in Japan’s major cities.
The key takeaways are:
- For July 2016, average rent increased year-on-year in Tokyo’s 23 wards, Chiba, Osaka, Kobe, and Nagoya.
- For the same period, average rent decreased in Yokohama and Saitama.
- The same holds if we do a five-year comparison, but is even more pronounced.
- In Tokyo’s 23 wards, average rent increased by 5.6% in July 2016 v. July 2010 and increased 3.6% for 2016 (year-to-date) v. 2010.
- Osaka has had double digit growth in average rent levels year-on-year and versus five years ago.
- In Yokohama and Saitama, however, average rent levels have decreased versus five years ago.
Since housing costs only account for a fifth of of the CPI, the average rent increases in some Japan’s largest cities are not clearly reflected in the inflation data.
Tenants Staying Put
The average person wanting to rent an apartment in Tokyo’s 23 wards, Chiba, Osaka, Kobe or Nagoya will be looking at market rents that are higher than they were a year ago or five years ago. On the other hand, renters in Yokohama and Saitama are in more of a renters’ market.
One factor exacerbating rental price increases in Tokyo is that more and more young people are moving into Tokyo to work and live (please see this article for more on what Tokyo’s population trends mean for renters and investors), while Japan overall is facing a demographic decline. At the same time, developers are facing both a lack of suitable land in Tokyo’s central areas and rising construction costs.
In addition, broadly speaking there is a trend in Japanese society from big extended families to smaller nuclear households, so that demand for urban housing is increasing even if the population is staying the same.
There are high barriers to moving into an apartment in Japan compared to many countries, but tenants enjoy strong tenants rights, so many people stay put once they have found a place.
Many landlords require a guarantor (whether the tenant is a foreigner or Japanese) and the upfront cost of moving into an apartment can equal six months rent (please see upfront costs of moving in an apartment in Japan). This can make it difficult for a young person to move into their first apartment, or a family saving up to move into a bigger place.
However, tenants in Japan enjoy relatively strong rights compared to many countries, and in a deflationary price environment, it can be next to impossible for Japanese landlords to raise rents once a tenant has moved in. A tenant also has the right to renew an ordinary lease agreement almost indefinitely. Further, in practice it can take at least six months before a landlord can have a delinquent tenant evicted from their apartment. For more on this, please see: Buy and Managing an Rental Income Investment Property in Japan.
Average Wage Growth (Or Not)
Let’s look at wage growth in Japan to see what renters have to work with when they are allocating their hard-earned pay checks.
In this analysis by Japan Macro Advisors, we see that average wages have barely risen over the last few years.
In June 2016, total wages increased by 1.3% year-on-year, fueled by a 3.3% increase in summer bonuses, but regular wages increased only about 0.1% year-on-year.
The 0.7% year-on-year increase in average rents in Tokyo may not seem like much, but against a background of almost stagnant wages, even small increases in one of the most expensive categories in people’s expenses can affect their spending and moving decisions.
It’s also important to point out that a relatively high percentage of people in Japan (especially in big cities) rent their home. In 2013, the home-ownership rate in Japan was about 62%. This compares with home-ownership rates of over 90% in such countries as Singapore and China.
These are some of the underlying issues that ordinary people are facing in the midst of Japan’s deflationary environment.
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