Tokyo Kantei recently announced the results of its “average income multiple” survey for 2014, which compares the average annual income versus the average price for new and used condominiums for major markets in Japan.
The key takeaway is that homes are becoming less and less affordable for the average income earner in Japan.
Also of note is that the income multiple (for newly-constructed condominiums) for greater Tokyo was 10.61 in 2014, the highest level reached since the real estate bubble of the 1990’s.
Prices of Newly-Constructed Condominiums Outstripping Average Income
In 2014, the average income multiple nationwide for newly-constructed condominiums was 7.17, the fifth consecutive year in which the multiple increased.
The average income multiple for newly-constructed condominiums is calculated by dividing the average price of a 70-square meter (about 753 square feet) condo by the average income in a particular market.
For example, in 2014, for Japan as a whole, the calculation would be: 30,690,000yen (about $247,600 at today’s exchange rate) divided by 4,280,000yen (about $34,500) = 7.17.
The lower the multiple, the more affordable it is for the average income-earner to buy a home.
In 2013, the income multiple for Japan, as a whole, was 6.59, which means that the multiple increased by .58 (up 8.8%) in 2014.
In 2014, greater Kyoto had the highest income multiple in Japan (in terms of newly-constructed condos) at 10.98. Tochigi prefecture had the lowest income multiple at 4.89.
Greater Tokyo (10.61) and its surrounding prefectures (Saitama (9.24), Chiba (8.44) and Kanagawa(10.11)) notched the highest income multiples in Japan.
In greater Tokyo, the income multiple increased from 9.79 in 2013 to 10.61 in 2014, a jump of 8.3%.
The average income in Tokyo decreased from 6,310,000yen to 6,290,000yen, while the average price of a newly-constructed condo increased from 61,740,000yen to 62,900,000yen.
Basically, average incomes in Tokyo are decreasing at the same time that the average price of new condominiums is increasing.
The news is not much better for the average person looking to buy a new home in most markets across Japan. Only in eight markets tracked by Tokyo Kantei did the income multiple decrease year-on-year: Iwate (7.10 in 2014), Ibaraki (5.89), Tochigi (4.89), Gunma (6.10), Yamanashi (5.38), Nara (6.47), Kochi (5.05) and Kagoshima (7.02)prefectures.
Income Multiple in Second-Hand Condo Market Also Accelerating
In 2014, the income multiple in the second-hand condo market also increased nationwide, a trend that has been evident since 2010, according to Tokyo Kantei.
The income multiple for Japan as a whole increased by .34 (up 7.4%) to 4.92 for second-hand (defined as ten-year old) condominiums. This number was derived by dividing the national average price of a used condo (21,010,000yen) by the average national income (4,270,000yen).
The most unaffordable market in 2014, as measured by the income multiple, was greater Tokyo, where the multiple hit 7.61 (compared to 10.61 for newly-constructed condos).
The most affordable market in 2014 for second-hand condos was Kagawa prefecture, where the income multiple was only 3.27.
Median Multiples in Other Countries
How does this compare to other international markets?
The Median Multiple has been recommended by the World Bank and the United Nations to compare affordability in urban housing markets across countries.
It is calculated by dividing the median house price in a given market by gross annual median household income.
Note that this methodology differs from Tokyo Kantei’s, which uses average prices and incomes, but it is still instructive to compare the two multiples to get a general idea of just how affordable or unaffordable houses are in Japan.
According to the Demographia International Housing Affordability Survey,
— A Median Multiple of 5.1 and over indicates a market that is “severely unaffordable”
— A Median Multiple of 4.1 to 5.0 indicates a market that is “seriously unaffordable”
— A Median Multiple of 3.1 to 4.0 indicates a market that is “moderately unaffordable”
— A Median Multiple of 3.0 and under indicate a market that is “affordable”
In its 2015 survey, the Demographia International Housing Affordability found that
“For the second year in a row, the United States had the most affordable housing among major metropolitan markets, with a moderately affordable Median Multiple of 3.6. Canada (4.3) Ireland (4.3) Japan (4.4), the United Kingdom (4.7), and Singapore (5.0) had seriously unaffordable housing.
Three national markets were severely unaffordable, with Median Multiples of 5.1 or above. These included China (Hong Kong), with a Median Multiple of 17.0, New Zealand, at 8.2 and Australia at 6.4”
Whatever, methodology we look at, Median Multiple or Income Multiple (as defined by Tokyo Kantei), Japan as a whole cannot be said to be an affordable market for the average person.
This is borne out by Japan’s relatively low home-ownership rate, compared to many other developed countries. According to Japan’s Ministry of Internal Affairs and Communications, in 2013 the home-ownership rate for Japan as a whole was 61.9%. The rate for greater Tokyo was only 46.2%.
According to Wikipedia, average home ownership rates of many developed markets tend to be higher than Japan: for example, 90.3% in Singapore (2013), 90.0% in China (2012), 67.0% in Australia (2011), and 64.5% in the United States (2014). However, the rate for Hong Kong is unsurprisingly low, at 51.0% (2014). Germany and Switzerland also have low home-owership rates, at 53.5% and 44.0%, respectively.
Some international property investors have pointed to Japan’s relatively low home-ownership rate as a point for investing in income-generating (rental) properties, especially in expensive urban areas.
Sources: Tokyo Kantei press release (Japanese), Financial Sense, SUUMO (Japanese), Wikipedia
Photo is of the Chungking Mansions in Hong Kong, where as we noted above, the Median Multiple is 17.0.
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