Japanese Govt Warns of Possible Bubble in Residential Rental Market

By Jeff Wynkoop

The Japanese Cabinet Office recently indicated its concern regarding the pace of development of new assets for the residential rental market in Tokyo. New construction in the residential market was severely affected by the increase in Japanese consumption tax in April 2014, but after two years the number of new developments has managed to rebound to pre-2014 levels. The pace of new developments last year reached levels last seen in 2008, with 384,000 new units developed in 2016.

Effect of Inheritance Tax

Private individuals are thought to be the primary driver in this growth because of the recent popularity of building and owning rental housing to mitigate the effects of the January 2015 amendments to the Japanese inheritance tax. (In Japan, oftentimes land is appraised at a lower value for inheritance tax purposes when the land has a residential building on it than when the land is vacant.) According to the National Tax Office, the number of persons having to pay inheritance tax in 2015 grew over 80% when compared to 2014.

Supply Outpacing Demand

In its report, the Cabinet Office calculated latent demand for rental housing in Tokyo, finding that although actual demand (roughly 400,000 rental units per annum) exceeded new supply in both 2014 and 2015, the market will unravel after 2016 as latent demand is set to fall precipitously (to roughly 350,000 units per annum) due to the negative effects of having a steadily-aging population and a diminishing number of Japanese children.

Mismatch in Types of Assets

An interesting point made in the report concerns the types of assets being built. Not only will there be too much new supply in the rental residential market in the next few years, existing stock does not fit future demand. The reason for this is that a majority of the rental units being built have a total of less than 30 square meters of living space (so-called one-room mansions), although future demand is expected to grow only for properties with at least 60 square meters in living space.

The Cabinet Office is worried that the double whammy of excess supply and lessening demand will cause rents to crash and much pain for owners of one-room mansion rental properties.

Toshima Ward Taxes One Room Mansions

Toshima Ward in Tokyo has already taken measures to steer the residential development market, and it is likely that other wards in Tokyo are contemplating similar measures. Toshima Ward introduced a new one-room mansion tax (500,000JPY per unit) on owners and developers beginning in 2004. Although from 2012-2015 the number of new buildings of one-room mansions in Tokyo went up by more than 50% according to the Cabinet Office’s report, in Toshima Ward the number of one-room mansion buildings actually dropped. In addition to such policy changes at the ward level, the national government is also looking into new ways to stimulate the construction of larger dwellings.

Source: Mainichi Shinbun, January 24, 2017

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  • mikanrealist

    Inflation adjusted land prices are now at mid-1970s levels, Japanese cities, including Tokyo are some of the few major cities in the world with substantial positive carry for the landlord, borrowing rates are sub-1%, and the supply of new apartments in Tokyo is at a 24 year low (http://japanpropertycentral.com/2017/01/new-apartment-supply-in-greater-tokyo-reaches-24-year-low/). That is not a bubble.

    The error in this article (or in the Cabinet Office) is the assumption that there is a Japanese real estate market. There is not. Just as real estate in Detroit has little correlation to real estate in Manhattan, so real estate in Kitakyushu does not correlate to Tokyo’s nijusanku. To attempt to conflate them is simply unintelligent.