As we step into 2024, Tokyo’s real estate market is at a pivotal juncture, reflecting global economic shifts and local trends. This in-depth analysis offers investors and homeowners insights into the current market dynamics and future prospects.
The Rise of a New Real Estate Era
Real estate prices have been soaring since 2012-2013. In 2024, we may witness a situation akin to a ‘real estate bubble.’ The ongoing surge in real estate prices dates back to 2012-2013, coinciding with the political transition to the Liberal Democratic Party. This marked the start of bold monetary easing policies that significantly boosted property values.
The backdrop of over a decade of soaring real estate prices is ‘low-interest rates.’ Although the current era is sometimes labeled a ‘bubble,’ mortgage rates during the 1990 bubble were over 7%. Now, they are around 0.3-0.4% for variable rates. Borrowing 100 million yen today would mean monthly repayments of around 250,000 yen, a far cry from the 600,000 yen-plus payments during the bubble era. While the prices of central Tokyo condominiums have ‘exceeded the bubble period,’ the repayment amounts are significantly lower than in the past.
What Happened During the COVID-19 Pandemic?
When COVID-19 hit, there were many predictions of an imminent real estate price crash. However, the opposite happened: property prices climbed even higher. This was due to a surge in relocation demand, especially among first-time buyers. Changes in living and working styles led to increased demand for suburban homes and detached houses. However, this trend began to stabilize around 2022, with a gradual increase in inventory.
Despite the fall in the number of transactions and the increase in inventory, prices have not fallen, indicating a shift in the characteristics of properties that do sell. In essence, a more selective process is happening, with properties in prime locations like city centers and near stations, particularly in the higher price ranges, becoming increasingly dominant. Waterfront areas are also performing well. Even as inventory continues to rise in 2024, there is still room for prices to climb for well-located properties.
What Will Happen to Mortgage Interest Rates?
Increasing mortgage interest rates could dampen the desire to purchase property and exert downward pressure on prices. In April 2023, Kazuo Ueda became the governor of the Bank of Japan. By late October, the monetary policy meeting had agreed to tolerate long-term interest rates slightly exceeding 1%, and fixed rates have been rising gradually since.
However, variable rates have remained stable and fallen due to intense competition among financial institutions. Over 70% of homebuyers choose variable-rate mortgages primarily because of their lower interest rates. Even if fixed rates rise slightly, it is unlikely to impact the real estate market significantly.
No Drastic Interest Rate Hikes Expected in Japan
If variable rates were to increase not just by 0.25% or 0.5% but by 2% or 3%, it would be a different story. Nonetheless, such a drastic increase in interest rates is not expected in 2024. The Bank of Japan currently owns over half of all government bonds issued. Raising interest rates too much could lead to the Bank of Japan incurring excessive debt. Although there is talk of tolerating interest rates slightly over 1%, it seems unlikely that this will extend to 2% or 3%.
The ‘Tripolarization’ of the Real Estate Market
Japan’s real estate landscape has been experiencing an intriguing phenomenon known as ‘tripolarization.’ While there’s been considerable buzz about the marked increase in standard and public land prices in 2023, the broader picture reveals a more nuanced trend. Post the 1990s bubble collapse, the overall average land value in Japan has seen a steady decline. From the peak of approximately 2,000 trillion yen during the bubble era, the total land value has now dwindled to about half of that.
This divergence highlights a growing gap within the real estate market. On one side, there are areas where property values are not just holding steady but actively surging. On the other, a majority of regions are witnessing a gradual decline in property values, and some are even seeing properties edge towards becoming virtually worthless. This ‘tripolarization’ effectively segments the real estate market into three distinct categories:
- The top 15-20%: Characterized by high demand and rising prices, often located in prime areas.
- The middle 70%: Representing the majority of the market, showing a gradual decline in property values.
- The bottom 15-20%: Facing challenges such as decreasing demand and value, often in less desirable locations.
This trend is increasingly becoming a defining characteristic of Japan’s real estate landscape.
The Future Outlook
As we progress through 2024, the Japanese real estate market is expected to exhibit varied price movements. Specifically, properties in prime locations such as central Tokyo, Yokohama, and other areas near major transit hubs, and sought-after waterfront districts are poised for further price increases.
Whether you’re looking to invest in a high-value property in a booming area or seeking a personal home in a more affordable region, a nuanced approach tailored to individual needs and market conditions will be the key to success in Japan’s real estate market in 2024 and beyond.
