By Jeff Wynkoop
Five years ago Japan was shocked by the massive Tohoku earthquake and tsunami. The March 11th, 2011 earthquake permeated the economic mood and made average consumers even more reticent to buy a new house. Although previously there were signs the economy was recovering from the Global Financial Crisis of 2007-2008, the Tohoku disaster put a stop to that. Over 2011-2012, the average price for buying a new residence in the Tokyo area was in the 45 million JPY range, with little change during this time period. The average price for a used residence hovered around 30 million JPY. The main thing that kept average sales prices from falling in 2011-2012 was the fact that many housing developers decided to delay much of their new stock from coming on the market, especially in more remote suburban areas. This trend extended well into 2013.
The Liberal Democratic Party of Japan won the election at the end of 2012, and the second Abe administration began to take shape. 2013 was the first year of Abenomics, and the Bank of Japan began its plan to inflate the economy by purchasing government bonds and publicly-traded stocks on a grand scale. This had a profound effect on Japanese housing prices, since investors expecting a rise in interest rates and flush with cash from the stock market bonanza soon poured money into new housing. The steadily weakening yen stimulated interest from overseas and made construction materials cheaper, although any potential for a larger boon was capped by the continuing labor shortage in the Japanese construction industry. Another important impetus during this time period was the September 2013 decision for Tokyo to host the 2020 Olympics. For the housing market, the jump to an 8% consumption tax effective from April 2014 didn’t affect the mood as much as had been feared, likely due to the fact that the range of Japanese tax deductions for mortgage loans was increased around the same time.
The average sales price for a new residence in the Tokyo metropolitan area exceeded 50 million JPY in 2014, and in 2015 it reached 58 million JPY. By the first 5 months of 2016, the average sales price was roughly 62 million JPY. The market for used residences has also benefitted greatly from Abenomics, with year-on-year growth in prices over the first 5 months of 2016 of over 10%.
This growth in housing prices has been heavily influenced by the environment of steadily falling interest rates. The interest rate for the Flat 35 mortgage was 2.39% in July 2011, but by July 2012 it had dropped to 1.94%. Although interest rates on 10-year government bonds (the benchmark for most interest rates in the economy) initially rose when BOJ Governor Kuroda began his new inflationary policies in 2013, the market soon settled down and mortgage interest rates continued to creep downward. The Flat 35 interest rate was 1.73% in July 2014, 1.61% in July 2015, and 0.93% in July 2016.
Over the same time period, average sales prices for new residences in the Tokyo area basically tracked the interest rate trend in the opposite direction. The important point here is that although average sales prices have gone up over the last five years, due to steadily falling interest rates, new purchasers have not had monthly payments increase very much over this time.
July 2011, average sales price of 45.02 million JPY, Flat 35 interest rate of 2.39%
July 2012, average sales price of 45.83 million JPY, Flat 35 interest rate of 1.94%
July 2013, average sales price of 49.07 million JPY, Flat 35 interest rate of 2.05%
July 2014, average sales price of 52.04 million JPY, Flat 35 interest rate of 1.73%
July 2015, average sales price of 58.73 million JPY, Flat 35 interest rate of 1.61%
July 2016, average sales price of 62.77 million JPY, Flat 35 interest rate of 0.93%
And most remarkably, although the average sales price went up nearly 7% from July 2015 to July 2016, since the Flat 35 interest rate went down from 1.61% in July 2015 to 0.93% in July 2016, the average monthly payment on a mortgage actually went down from 164,708 JPY per month in July 2015 to 157,627 JPY per month in July 2016 (in both cases calculated with a 10% down payment on average sales price). Although interest rates may not have much farther to fall going forward, it seems likely this effect will be offset by slower growth in sales prices, creating a more stable housing market in the near and mid-term.
Data compiled from Tokyo Kantei