By Jeff Wynkoop
This is part one of a two-part series on the main factors affecting home prices in Tokyo this year.
- The Kuroda Effect
- Location and the 3-Part Marketplace
- Importance of Proximity to the Station
- Olympic Effect
- Consumption Tax Effect
1. The Kuroda Effect
The residential market in Tokyo has been going through a major transformation ever since the Kuroda bazooka effect began to distort prices for housing here. The effect that interest rate levels have on how much people can afford can be summarized very simply: with a 1% fixed interest rate on a thirty million yen mortgage loan over a 35-year period, monthly payments equate to approximately ¥85,000. If the fixed interest rate is 3% instead of 1%, with all other factors remaining the same, the payment goes up to roughly ¥115,000 per month.
Many people who can afford ¥85,000 per month can’t afford a ¥30,000 jump in monthly expenses, equivalent to an increase of ¥13 million over the life of the loan. Banks may not qualify them for a loan at 3% either. In other words, the extra low interest rates caused by the Kuroda effect have made properties that would previously have been out of reach for certain households affordable. How long interest rates will remain this low is anybody’s guess, which is the main reason why the market for mortgage loans flipped a few years ago, with the number of new fixed interest loans now exceeding the number of new variable interest loans. Since the mid-1970’s variable interest mortgage loans were all the rage in Japan, but not anymore.
2. Location and the 3-Part Marketplace
Perhaps the most important thing to realize about the Japanese housing market (including new condos, pre-owned condos, and free-standing houses) is the fact that the market is increasingly splitting into three separate markets based on location, regardless of whether you are looking in Kanto, Kansai, or other regions around Japan.
Properties representing roughly 10%-15% of the total marketplace are located in neighborhoods or areas where it is most likely for housing to retain value or even appreciate in value for the foreseeable future. This is irrespective of the coming wave of major demographic changes in Japan, although the changes are expected to most likely exacerbate the 3-part sectioning trend.
The middle class of properties (roughly 70% of the market) are properties where the most likely scenario is for a gradual decline in value to continue for the foreseeable future due to their location, etc. The last category (15%-20% of the market) are properties where values are already dropping, sometimes precipitously, with no end in sight. Fortunately, these properties are in areas where almost no one is currently looking to buy in. Of course, there is a big difference between whether a property can expect a 1% or 4% drop annually, but the above three categories provide a good rule of thumb to keep in mind when looking to buy a new place here.
3. Importance of Proximity to the Station
Perhaps due to the fact that interest expense for new mortgages has come down so much, opening up certain residences to a higher number of would-be buyers, the distance of a property from the nearest station, and especially from which station and train line, is becoming more critical every year. Five years ago, for pre-owned condos, each one minute increase in walking distance from the station meant a drop in price of approximately ¥8,000 per square meter in the seven main wards of Tokyo. These days, each one minute increase in walking distance generally means a ¥16,000 per square meter drop in price in the same market.
4. The Olympic Effect
The word on the street is that housing prices are likely to rise in Tokyo up until the 2020 Olympics, and then start to fall after the games are over. However, in highly developed countries like Japan, the effect is not expected to be very impactful on overall market prices, although neighborhoods near Olympic venues will be more affected than others. Take, for example, the 2012 London Olympics. The UK government’s view is that the Olympics had no discernable effect on housing price levels in greater London. Rather than short-term fluctuations in demand, prospective buyers should keep in mind that the primary drivers of housing prices are national and local economic fundamentals and price trends, as well as long-term expected demographic changes.
5. The Consumption Tax Effect
Consumption taxes in Japan are set to increase in October of this year, from 8% to 10%. The jump in consumption tax will likely affect demand and therefore short-term price movements. However, the impact is expected to be less than the 2014 step up from 5% to 8% consumption tax. Further, buyers should keep in mind that the effect of this tax increase will probably be more pronounced the closer we get to its effective date.
In Part Two, we will cover newly-built versus pre-owned properties, free-standing houses, and popular neighborhoods for buying a home in Tokyo.
Lead photo: Royalty-free stock photo via Pixabay