In 2023, the global economy faces challenges due to the COVID-19 pandemic, the war in Ukraine, and worldwide inflationary trends.
For Japan’s real estate market, the three major factors affecting its trajectory are “increasing office vacancy rates,” “declining household numbers,” and “rising mortgage rates” due to policy shifts.
1. Decline in Household Numbers, Peaking in 2023
In 2023, Japan will face a serious phase of declining household numbers.
According to forecast data from the National Institute of Population and Social Security Research, the number of households is expected to decrease after peaking in 2023.
The estimate predicts a drop from 54.13 million households in 2023 to 50.76 million by 2040, 17 years later.
In addition to declining household numbers, changes in “household size” and “household composition” pose significant challenges. Focusing on the average number of people per household, it’s expected to decrease from 2.33 in 2015 to 2.08 by 2040, with households consisting of two or fewer people, such as single-person households, couples-only households, and single parents with children, becoming the norm.
At the same time, the aging of each household will progress, which is likely to increase real estate sales and relocation in the future.
2. Possibility of Rising Mortgage Rates
One of the biggest economic topics at the end of 2022 was the reduction in the Bank of Japan’s (BoJ) monetary easing policy.
On December 20, 2022, the BoJ held a monetary policy meeting to raise the cap on long-term interest rates, which had been limited to “around 0.25%” to “around 0.5%.”
This move has been seen as an interest rate hike and is likely to significantly change the environment surrounding mortgages.
Since the decision only involves a slight increase in interest rates, it is not expected to impact the real estate market significantly.
However, the mindset of financial institutions that have maintained low-interest rates at break-even levels may change. There is no change in the “variable interest rates,” but the “fixed interest rates” have already started to be affected due to the rise in the yield on 10-year government bonds.
It is essential to monitor the risk of future interest rate increases.
3. Office Vacancy Rates Expand Due to Oversupply
In 2023, Tokyo’s office vacancy rates are expected to increase. One reason for this is the collapse of the supply-demand balance in the office building market. Numerous redevelopment projects are scheduled for completion in 2023, resulting in a large supply of office spaces.
The supply centers around projects like Toranomon Hills Station Tower, Tokyo Mita Redevelopment Project Office Tower, and the urban redevelopment project at Shibuya Station Sakuragaoka exit, totaling approximately 1.28 million square meters.
Compared to the supply in 2022, which was around 480,000 square meters, this is a whopping 2.7 times more.
On the other hand, the demand for office buildings is declining. According to a report by Mikou Estate in August 2022, the vacancy rate for offices in the five major districts of Tokyo increased from 1.13% in January 2020 to 5.04% in August 2022.
With more companies continuing to work remotely due to the pandemic, the mismatch between supply and demand is expected to widen in 2023.
What is the Real Estate Price Index? Introducing the Trends by Property Type
One indicator to grasp the trends in real estate prices is the “Real Estate Price Index.”
The Real Estate Price Index is a numerical index based on the annual transaction prices of over 300,000 properties published by the Ministry of Land, Infrastructure, Transport, and Tourism. The index is calculated monthly, using the average value of 2010 as 100, allowing for long-term comparison of real estate price trends.
Originally released to predict financial crises, it is now widely referenced as an easy-to-understand material for judging the movement of real estate prices.
Let’s take a look at the trends of the Real Estate Price Index for each property type.
Trends of the Real Estate Price Index for Residential Properties Overall
According to the “Real Estate Price Index” announced by the Ministry of Land, Infrastructure, Transport, and Tourism on November 30, 2022, the Real Estate Price Index (Residential Overall) as of August 2022 increased by 9.5% compared to the previous year, showing a nationwide upward trend.
Although there was a decline in prices at the beginning of the spread of COVID-19, it can be said that overall housing prices have been on the rise since the 2020s.
The Real Estate Price Index for residential properties is categorized into “Residential Land (Vacant),” “Detached Houses,” and “Condominiums.” Furthermore, the target areas are divided into “Nationwide,” “Block-by-Block (Kanto region, Tohoku region, etc.),” “Metropolitan Area (Tokyo, Osaka, Aichi),” and “Prefecture-by-Prefecture,” making it possible to compare real estate price trends in each region.
We will further break down the Real Estate Price Index for “Residential Land (Vacant),” “Houses,” and “Condominiums.”
Trends of Residential Land (Vacant) Price Index
The price index for residential land has been almost flat since 2010, but it has been showing a slight increase since 2020. The overall Real Estate Price Index as of August 2022 was 111.1, a slight increase of 1.6 points from the previous year’s 109.5.
Looking at the metropolitan areas, the Real Estate Price Index in the Tokyo area (Southern Kanto) was 120.6, a 3.9% increase compared to the previous month, maintaining a strong performance.
On the other hand, the Keihanshin area saw a 2.8% decrease to 110.5, and the Nagoya area saw a 5.8% decrease to 110.5, showing stagnation in real estate prices. Especially in the second half of 2022, land prices outside the Tokyo region seemed to have settled down.
Trends of House Price Index
Much like that for residential land, the real estate price index for houses has remained relatively flat since 2010 and has seen a slight increase since 2020. The index for August 2022 is 117.2, up 9.2 points from 108.0 the previous year.
Looking at the data by region, the Tokyo area (southern Kanto) increased by 1.6% month-over-month to 121.3, the Keihanshin area decreased by 1.2% to 119.7, and the Nagoya area remained unchanged at 119.7. Demand for houses is growing, especially in the capital region.
Trends of Condominium Price Index
The condominium price index has been on a steady upward trend since 2013. The rate of increase far outpaces that of residential land and detached houses, with the price index more than doubling between 2010 and 2022. Since 2020, the growth rate has accelerated even further. As of August 2022 (the latest data), the condominium price index stands at 183.1, a 14.2-point increase compared to the previous year’s 168.9.
When broken down by region, the Tokyo area (southern Kanto) decreased by 0.2% month-over-month to 177.9, the Keihanshin area decreased by 1.3% to 185.7, and the Nagoya area increased by 3.0% to 182.9.
In the short term, the figures are either nearly flat or slightly positive, indicating stability in the demand for condominiums in major urban areas.
A peak in household numbers shapes 2023 trends in Japan’s real estate market, potential housing loan interest rate increases, and varying property price indices for residential land, detached houses, and condominiums.
The declining household numbers and the Bank of Japan’s tightened monetary easing policies impact the market, while demand for detached houses grows in the capital region and condominium demand remains stable in major urban areas.
These diverse trends and challenges characterize the Japanese real estate market in 2023.