Some critics in the industry are predicting the price of condominiums in Tokyo shall drop soon simply because they are too expensive for people to buy.
According to Nikkei in December 2017, the average price of a newly built condo in the capital region — Tokyo and the surrounding prefectures of Kanagawa, Saitama
and Chiba — rose 7.6% in 2017 to 59.08 million yen ($533,000).That was higher than the average in 1989 and 1991 and the second-highest level ever,
trailing only the 1990 record by 2.15 million yen.
Are condominiums really too expensive ? Are those critics are right ?
We need a crystal ball to predict the future
but today I am going to discuss the reason why the price of condominiums may go down.
Personally though, I am still mildly bullish about the market right now due the global aspect (see below UBS report)
and the healthy growth of the secondhand condominium market.
It is always to good to listen to the people with different opinions.
Let’s listen to what critics have to say.
We saw the condominiums developers go bankrupt one after another in the recession after the global financial crisis in 2008.
Nonetheless, the current price of newly built condominiums in greater Tokyo area has risen up sharply over several years and they are becoming more and more unaffordable for average salaried workers.
In the latest Tokyo kantei report in 2017, the average price of new condominiums are about 8-10 times higher than average annual income of the skilled workers in greater Tokyo area.(vs. 14 times in London)
London house price
The reason for raising is not because real demand is strong because everyone wants to buy them.
On the other hand, from the viewpoint of property investment (i.e. property for not own use), the market is also becoming tougher.
In the city center of Tokyo, current gross yield is around 5%-6%.
The loan interest rate for financing is generally about 2%-3%
which makes investors very difficult to expect the healthy cash flow.
If you are only looking at the information widely available on the web sites,
on surface it is fair argument.
But if you spend more time and talk to savvy investors, there are
plenty good properties that can produce 7-8% yield even in Tokyo area even now.
When it comes to the real estate investment in Japan, the developing a good network of industry moguls is
essential condition for obtaining success.
Another argument in the industry is about the outcome of the ‘Act Concerning Agricultural Land, etc. Reserved in the Urbanization Promotion Area the farmland in the urbanization area’
(herein after referred as ‘green land act’ or ‘the law’) after its expiry in 2022.
Starting in 1992, Japan designated roughly 13,000 hectares of urban land nationwide.
as “productive green space,” offering 30 years of tax incentives to those who would use the land for agricultural purposes. In 2022, those incentives will expire for roughly 80% of the land in the program.
There are areas specified by the municipality in accordance with the designated land designation system that fulfills certain requirements among the land within the urbanization area (such as Tokyo) based on the law.
The law mainly applied to the lands in 3 big economic zones in Japan, Tokyo, Osaka and Nagoya.
In Tokyo, the space of such farming green land currently designated under the law is 3296 hectares
It is huge.
3296 hectares land is equivalent of 3% of total Tokyo.
It is said you can build about 250,000 houses in 3296 hectares.
Under the law, the owners of the lands can enjoy the special tax incentives.
In spirit, the law allowed the owners of the land in urban ares to continue the farming with reduced tax rate as exceptional farm land for 30 years on condition that the owner keeps farming.
However, this 30-year tax incentives will expire in 2022.
Although actual farming was obligation, there have been cases reported where only tax benefits are enjoyed and owners just pretend to continue the farming.
30 years ago when the law was introduced, majority of land owners
did want to continue the farming. However now they greyed, it is becoming more difficult for them to continue farming.
Since there are not many people who can continue farming, they may just want to sell the lands rather than holding it as “farm land in the urban area”.
Based on the above scenario, some critics in the industry are insisting
that the land in the green land will be sold in a short time and comes to market on a large scale.
However It is hard to think that those lands will be sold only in 2022.
And it is said that to avoid the market crash, the government is considering some extra measures after the expiry of the law. But no official announcement is made so far.
After 2022 it could be fair to say those lands gradually become converted to
real estate to urbanized the area which should theoretically give the downward pressure to the market.
To sum up, the outcome of the green land act could be a trigger of the dynamic market movement after 2022 expiry, especially in Tokyo but it is
too early to say the expiry will cause the market crash.
And all of us must watch if the government will or will not introduce the extra measures about the green land in urban areas
to eschew the negative impact.
USB GLOBAL REAL ESTATE BUBBLE INDEX 2017
Toshihiko Yamamoto
Real estate investing consultant and author.
Toshihiko is currently writing a book about the real estate investing in Japan
for foreign investors.
Founder of Yamamoto Property Advisory in Tokyo.
International property Investment consultant and licensed
real estate broker (Japan).
He serves the foreign companies and individuals to buy and sell
the real estates in Japan as well as own homes.
He holds a Bachelor’s degree in Economics from
Osaka Prefecture University in Japan
and a MBA from Bond University in Australia