Supply shortage in central Tokyo sees apartment prices up 40% from market bottom

The price of secondhand apartments in Tokyo is rising, with prices in some areas exceeding those seen in the mini-bubble in 2007. In Tokyo’s 23 wards, the average asking price of a 70 sqm in October 2014 was 42,560,000 Yen, up 8.5% from the low of 39,220,000 Yen seen in July 2012.

One of the main drivers behind the rising prices is the shortage in the supply of brand new apartments. Following the Lehman Shock (or global financial crisis), a number of small-to-medium sized developers filed for bankruptcy. This has left the market controlled by a small number of Japan’s top developers. Prior to the Lehman Shock, the annual supply of brand new apartments reach 80,000 units. In 2014, it has almost halved to around 40,000 units. Buyers, who have not been able to find new apartments in their desired area, have turned to the secondhand market which has reduced supply even further. In the central Tokyo area, there are only half as many apartments on the re-sale market than there were in 2011. 

— Secondhand apartment prices influenced by new apartment prices

The price of secondhand apartments is linked with the price of new ones. New apartment prices have been driven up by a steep rise in labour and material costs.

Furthermore, In the past two years the Yen has weakened against the USD by over 30%, which has made Japanese real estate seem relatively inexpensive to foreign buyers. As a result, foreign investors from China, Singapore and other parts of Asia have been actively acquiring real estate in Japan and are helping to push prices higher.

Secondhand apartments are usually around 20 ~ 30% cheaper than brand new apartments. In recent years, there has been a growing trend of renovating older apartments to make them almost the same inside as new ones. Many of Japan’s major banks have started offering renovation loans along with home loans.

The consumption tax rate increase in April 2014 has also been advantageous to the resale market. Consumption tax is charged on the building portion of new apartment sales (where the seller is a corporate entity), but is not charged on the sale of real estate between two private parties. The tax increase has made the acquisition of secondhand properties comparatively cheaper.

— Short supply

The supply of secondhand apartments, however, is also shrinking and the market has turned into a sellers market. Although demand is high, major brokerages are having difficulty sourcing apartments for sale. Sumitomo Real Estate Sales’ operating profit for the first half of 2014 was down 20.5% from last year.

In October, the number of new listings of secondhand apartments in Chiyoda, Chuo and Minato-ku was down almost 30% from two years ago. Transactions, however, were up 40.5% from 2012. In the Tokyo metropolitan area, the supply of new listings in October was down 12.5% from 2012, while transactions were up 1.5%.

In the Tokyo metropolitan area, inventory levels are at a 4-year low, with current stock down 32% from the peak in February 2012.

In Chiyoda, Chuo and Minato, inventory has reached a 7-year low, with stock down 50% from the peak in September 2011.

Central Tokyo apartment inventory

— Price boom is limited to prime areas

In Chiyoda-ku, the average apartment price was 83,040,000 Yen, 3.2% higher than the previous peak of 80,440,000 Yen seen during the mini-bubble in July 2007. Compared to the bottom of 58,500,000 Yen seen in April 2009, prices are now up 41.9%.

In the bayside area of Koto-ku, which has received a lot of attention over the past year due to the Olympic announcement, the average apartment price in September was 38,470,000 Yen, nearing the peak of 39,180,000 Yen seen in December 2007.

A researcher from Tokyo Kantei said that the current conditions may not currently exhibit signs of a bubble, but are reaching a level where caution is needed. The researcher does not believe prices can continue to rise at this pace.

Tokyo Osaka Nagoya Apartment Prices

Price rises are limited to certain locations. In Saitama City and Chiba City, for example, prices are relatively flat. Even in Nagoya City where the Linear Chuo Shinkansen will shorten the trip to Tokyo to 40 minutes, price rises have only been seen in the central 3 wards (Naka, Higashi and Chikusa). The rest of Nagoya City has seen little to no movement in prices.

Those who benefited from the high stock prices brought about by ‘Abenomics’ represent a small portion of the market. The majority of consumers are seeing their disposable incomes decline as prices of goods rise. Without any change in income levels, the recent property boom is likely to be limited to prime locations.

Sources:
Toyo Keizai, December 6, 2014.
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