Japan: despite a weak economy and a shrinking population, Abenomics is pushing house prices up
Last Updated: October 16, 2015
It's working - and it is not working.
For house-owners the news is good: housing demand is robust. House prices are rising rapidly. Residential construction activity is recovering.
The news for the economy is less good.
The Japanese economy contracted by an annualized 1.6% in Q2 2015, in contrast with an expansion of 4.5% the previous quarter. The economy shrank by 0.06% last year but is expected to return to growth this year with real GDP growth of 1.04%.
The Japanese yen has fallen an amazing 38% from January 2013 to August 2015, to JPY123 = US$1 today, mainly due to Abe’s policies. Still, the economy is not moving. Hardly a big success.
But the effects of Abenomics on house prices have been significant.
In Tokyo Metropolitan Area:
- Existing condominium units' average prices rose by 6.6% to JPY453,000 (US$3,762) per sq. m. during the year to June 2015, according to the Land Institute of Japan (LIJ).
- New condominium units' average prices skyrocketed by 21.4% y-o-y to JPY829,000 (US$6,885) per square metre (sq. m.) y-o-y to June 2015.
- Existing detached houses prices rose 1.3% to JPY32,470,000 (US$269,655) over the same period.
In Osaka Metropolitan Area:
- Existing condominium units' average prices increased by 9.3% to JPY282,000 (US$2,342) per sq. m. during the year to June 2015.
- New condominium units dropped slightly by 0.4% to JPY551,000 (US$4,576) per sq. m. over the same period.
- Existing detached house prices were up by 4.7% to JPY20,720,000 (US$172,074) over the same period.
Surprisingly, land prices are still falling. During the year to June 2015, average land prices in Tokyo Metropolitan Area fell by 1.5% to JPY193,000 (US$1,603) per sq. m., while in Osaka Metropolitan Area land prices dropped by 3.8% to JPY125,000 (US$1,038) per sq. m., according to the LIJ.
House prices are expected to continue rising for the remaining months of 2015, given an additional Abenomics stimulus in the second half. Moreover, Tokyo’s successful bid to host the 2020 Summer Olympics should boost property demand and construction over the next 7 years.
The economy shrank by 0.06% in 2014, but is expected to return to growth with GDP growth of 1.04% in 2015, according to the International Monetary Fund (IMF).
Low to moderate yields on Japanese residential property
Rental yields in Tokyo central districts range from 3.7% to 4.1%. They’re a little higher on smaller apartments, but not much. Not great, though not untypical for a city like Tokyo.
Prices per square metre range from around $10,560 to $14,400, not really so expensive when compared to other global cities. In Yen terms residential prices continue to strengthen. That’s likely to continue so long as Abenomics is in place. More money in the system means lower interest rates means increasing asset prices, especially prices of assets that produce nice incomes, like Tokyo property.
This is going to be interesting. Assuming that Abenomics, now entering its second phase, really leads to a revival of the Japanese economy, rising incomes will continue to support rising rents.
Round trip transaction costs are moderate in Japan. See our Property transaction costs analysis for Japan and Property transaction costs in Japan, compared to the rest of Asia.
Effective rental income tax is low in Japan
Rental Income: Rental income of nonresident individuals is subject to 10% tax.
However, effective rental income tax is low, ranging from 3.4% to 5.9%. Nonresident taxpayers are taxed on their net income; depreciation and income-generating expenses such as maintenance and repairs are deductible from the gross rent.
Capital Gains: Net gains realized from selling short-term real properties, i.e. property held for less than 5 years, are taxed at 30%. Net gains on property held beyond five years are taxed at 15%.
Inheritance: Inheritance is based on residency status but foreign individuals inheriting property located in Japan are still subject to inheritance tax, which is levied at progressive rates.
Residents: A permanent resident taxed on his worldwide income at progressive rates, from 5% to 45%.
Moderate roundtrip buying costs in Japan
The total roundtrip transaction cost is around 13.26% to 13.45%, inclusive of the 3.15% agent’s fee plus an additional payment of JPY63,000 (US$534).
Japanese landlords get key money
Tenancy laws passed in 2000 shifted the balance of power from tenants to landlords, making Japan strongly pro-landlord.
Rents: Rents are freely negotiable. Aside from two to three month’s security deposit, landlords receive key money worth one to two month’s rent.
Tenant Eviction: Automatic renewals of leases were abolished in 2000, making eviction easier. If the tenant prematurely ends the contract the landlord can charge one month’s rent.
Japan: Anaemic economic growth; ballooning trade deficitJapan is the world’s third largest economy, a major aid donor and one of the primary sources of global capital and credit, with a population of 127 million in 2014 and GDP per capita of US$36,331. The country is the world’s fourth largest exporter and fourth largest importer, and has the world’s largest electronics industry.
From 2000 to 2007, the Japanese economy grew by an average of 1.5% annually. However due to the global financial meltdown, the economy contracted by 1% in 2008 and by another 5.5% in 2009. The economy returned to growth in 2010 with GDP growth of 4.7%. Then Japanese growth contracted again, shrinking by 0.5% in 2011 due to the impact of the Great Tohoku Earthquake (magnitude 9.0) last March 11, 2011. In addition the economic slowdown in China, Japan’s largest export market, exacerbated the situation. Then there was the anti-Japanese feeling in China sparked by the dispute over Diaoyu/Senkaku Islands.
The economy grew by a modest 1.8% in 2012 and by another 1.6% in 2013. In 2014, the economy contracted again by 0.06%.
The Japanese economy actually contracted by an annualized 1.6% in Q2 2015, in contrast with an expansion of 4.5% in the previous quarter, mainly due to weak exports and household spending. The economy shrank by 0.06% last year but is expected to return to growth this year with real GDP growth of 1.04%, according to the International Monetary Fund (IMF).
The poor economic performance of Japan is a major blow for the massive growth plan introduced by Prime Minister Shinzo Abe about two years ago, in an effort to kickstart anaemic growth and conquer years of deflation.
PM Abe, who came to power in December 2012, introduced a program of reflationary policies, widely referred to as “Abenomics”, including the following:
- Inflation targeting at 2%
- Correction of the excessive appreciation of the yen
- Negative interest rates
- Radical quantitative easing
- Expansion of public investment
- Buying of construction bonds by the Bank of Japan
- Revision of the Bank of Japan Act
Effective April 1, 2014, the sales tax was increased from 5% to 8%. The sales tax is expected to rise again to 10% in October 2015.
In 2014, Japan’s trade deficit swelled to a record JPY12.78 trillion (US$109 billion), weighed down by post-Fukushima energy bills, according to the Finance Ministry. The said trade deficit was up 11.4% from the previous year and the worst since records began in 1979.
Japan’s trade deficit narrowed 40.2% to JPY569.7 billion (US$4.7 billion) in August 2015 from the same period last year, thanks to lower oil imports and stronger exports to the U.S., according to the Finance Ministry. Despite this, the deficit was the largest in seven months. The improvements were partly negated by a decline in exports to China.
In August 2015, the value of exports increased 3.1% from a year earlier, to JPY5.9 trillion (US$48.7 billion) while imports fell 3.1% to JPY6.5 trillion (US$53.4 billion).
However, the country’s trade deficit is expected to widen again in the second half of 2015 due to signs of weakening corporate demand for Japanese products in the U.S. “The deficit is likely to widen in the latter half of this fiscal year,” said Shunsuke Kobayashi of Daiwa Institute of Research.
In addition, the country’s fiscal health is the worst among major industrialized countries, with a public debt equivalent to about 230% of GDP in 2014. In 2014, the country’s central government debt topped JPY1,200 trillion (US$10 trillion) for the first time in its history.
In August 2015, the headline inflation rate increased 0.2% from the same period last year, but remained unchanged from the previous month. On the other hand, Japan’s core inflation fell 0.1% in August 2015 from a year ago, the first decline since April 2013. Because of the weak acceleration in prices, the Bank of Japan is expected to step up its pace of monetary easing this October to meet its inflation target of 2%.
Consumer prices rose by 2.7% last year, after rising by 0.4% in 2013 and falling for four straight years (-1.3% in 2009, -0.7% in 2010, -0.3% in 2011 and -0.04% in 2012), according to the IMF.
In August 2015, the Japanese yen weakened sharply by about 38% to an average monthly exchange rate of JPY122.967 = US$1 from January 2013, mainly due to Abe’s policies.
PM Abe was re-elected unopposed as head of the ruling Liberal Democratic Party (LDP)in September 20, 2015. Abe's current, three-year term as LDP president will end this September 30, 2015. His new term will run until September 30, 2018. PM Abe recently declares a new stage for his economic growth plan with focus on fuelling the economy and population growth, and improving social security in the country.