4 reasons why sales of pre-owned homes in Tokyo are surging

The pre-owned home market in Japan, including both apartments and single-family homes, has traditionally played second fiddle to the market for newly built condominiums and freestanding houses in that the majority of residential home sales in Japan still consists of transactions for newly built properties. This is one important aspect in which the residential property market in Japan is different than that in many western countries.

But things have been changing in the past year.

The Real Estate Information Network (REINS) recently reported that in April, there were 3,428 sales contracts signed for pre-owned apartments in greater Tokyo, an astounding year-on-year increase of 110.4%. This was only slightly less (about 0.3% less) than the number of contracted sales recorded in April 2019, a year prior to the start of the COVID-19 pandemic.

The average sales price per square meter of a pre-owned apartment in greater Tokyo also shot up 16.1% year-on-year to ¥590,000 ($5,371 USD) per sqm, as did the averages sales price (up 19.5% year-on-year to ¥38,260,000, about $348,000 USD). This was the eleventh consecutive month in which the average sales price has increased year-on-year.

The picture in the pre-owned single-family home market is similar.

Sales contracts for pre-owned freestanding homes in greater Tokyo jumped 98.1% in April to 1,347 recorded sales, the tenth consecutive month of year-on-year increases. The average sales price for a pre-owned home sold in greater Tokyo reached ¥34,060,000, an increase of 24.8%, the sixth consecutive month of year-on-year increases.

Nor is this a single month phenomenon.

As we covered in last month’s post, sales of pre-owned apartments and houses in greater Tokyo hit a record high in 2021), with the highest number of sold units ever recorded for the January to March period, since the Real Estate Information Network for East Japan (REINS East Japan) started tracking the market in May 1990.

What are the factors driving sales in the pre-owned home market in the past year? And are these trends likely to continue?

Ultra-low interest rate environment

The Bank of Japan’s ultra-low interest rate policy is, of course, a key driver of residential home sales.

As explained in this article (What are the main factors affecting home prices in 2019), low interest rates caused by the Kuroda effect have made properties that would previously have been out of reach for certain households affordable.

For example, 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%, however, 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 also not qualify them for a loan at 3%.

So what are mortgage rates currently like in Japan? This month (May 2021), the official Flat 35 mortgage rate is between 1.360% and 2.160% (compared to 1.370% and 2.170% in April) for a 35-year fixed rate for 90% LTV (loan-to-value). For LTVs over 90%, the Flat 35 rate is between 1.620% and 2.420%.

These ultra-low rates have made it much more viable for people considering the leap to home ownership.

The BOJ has also indicated that it plans to continue its negative interest rate policy after 2023.

High prices in the new condominium market

Prices for newly built condominiums in greater Tokyo surged last year amidst very tight supply, as developers held back in the wake of the pandemic.

As explained in this article (Tokyo apartment market forecast: Trends to watch for in 2021), housing starts dropped by 8.0% in the period from January to October 2020, coming in at 47,503 units.

But the demand side was strong. From January to November 2020, the average sales price for a newly constructed apartment in greater Tokyo was ¥62,540,000 ($606,000). This was the second time since 1990 that the average sales price was above the ¥60,000,000 mark.

This trend has continued into 2021. As we detailed here, the average sales price of a newly constructed apartment sold in greater Tokyo in April jumped 24.9% year-on-year to hit ¥77,640,000 ($712,500 USD). This was despite a hefty number of apartments being brought online by developers last month, with 2,089 new units being offered for sale, a jump of 204.5% year-on-year.

This dynamics of the new condominium market (tight supply coupled with strong demand) have caused many buyers to be priced out of buying a newly constructed apartment. These buyers have been forced to consider (and buy) previously-owned homes, a segment of the market which has traditionally been overlooked.

Pent-up demand

Continuing caution on the part of current home owners has caused the supply of previously-owned homes to remain tight, while pent-up buyer demand has not yet been met.

In April 13,539 previously owned apartments were registered for sale (placed on the market) in greater Tokyo, this was a year-on-year decrease of 6.3% and the 20th consecutive month (since September 2019) in which the number of newly registered properties fell year-on-year. The April number was also a drop of 0.8% compared to March.

Total inventory of previously owned apartments in April was 34,184 units, a big drop of 26.1% year-on-year, and the 17th consecutive month in which inventory saw a year-on-year decline.

The supply situation is the same in the previously-owned single-family home segment.

In April, 4,644 previously-owned freestanding homes were registered for sale (placed on the market), a year-on-year decrease of 7.4%, representing 14 consecutive months of year-on-year drops.

Total inventory of previously-owned single-family homes stood at 15,199 units in greater Tokyo, a drop of 32.2% year-on-year and the 11th consecutive month of year-on-year declines.

There has not been enough supply to keep up with demand, which has continued to grow due to higher prices in the new condominium market and the changes in working style brought on by the pandemic.

How we work now and for the foreseeable future

More and more companies in Japan are allowing and even encouraging people to work from home and many renters are using this opportunity to trade up to owning their home and buying an apartment where one or both parents have a dedicated home office space.

City-center apartments near major stations are still very popular with home buyers and are likely to remain so because of the convenience and potential in resale value. These types of properties tend to be more attractive for singles and couples without children.

Other buyers are looking to move to the suburbs where the overall living space is bigger.

Developers of new condominium buildings are well aware of these trends, but their properties are simply not affordable for many homebuyers. From what the data seems to indicate, for these buyers, previously-owned homes are beginning to look more and more attractive.

If these trends continue, what we may see is a gradual shift in Japan’s residential housing market and an increasing number of transactions in a segment which has historically seen low turnover.


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Sources:

  • Flat 35 official site (in Japanese)
  • REINS Greater Tokyo Market Watch Report, April 2021 (in Japanese)

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