Chen Li is the Chief Economist of Soochow Securities and a director of the China Chief Economist Forum
Investment Essentials
Real estate prices in Japan have entered an upward trend. It is well known that the "lost two decades" are known for real estate in Japan, but what is not well known is that the average transaction price of new homes in the Tokyo metropolitan area has been rising since 2013 and surpassed the high of the 90s in 2021. Real estate prices in Japan's three major metropolitan areas are already on the rise. However, there is a clear divergence in the recovery of real estate prices in Japan, which is reflected in the differentiation between the three major metropolitan areas and non-metropolitan areas, the differentiation between the three major metropolitan areas, and the differentiation within the Tokyo metropolitan area, which is in line with the process of urbanization and population agglomeration. The average home price in the Tokyo metropolitan area has increased by 75.9% over the past 10 years, with the cumulative increase doubling to an annualized increase of 7.2% in the metropolitan area, and the annualized growth rate of 4.1% and 4.0% in Saitama and Chiba prefectures in the non-core areas, both outperforming Japan's CPI. The rebound in real estate prices in Japan is not only the result of the concentration of population, but also the result of the concentration of capital. First, overseas funds are driving the recovery of transactions at the margin. There are two reasons for the entry of foreign funds: First, Japan has few restrictions on the purchase of real estate by overseas buyers, and only slightly differentiates itself from its own nationals in terms of down payment ratio and loan policy. The second is a very attractive rental yield. Second, continued accommodative macro policies have pushed up asset prices. "Abenomics" drove interest rates down until 2016, when they entered an era of negative interest rates. Low interest rates correspond to lower borrowing costs, and at the same time, the income of fixed income products is reduced, highlighting the better return on investment of real estate. Thirdly, the continued concentration of the population brings stable demand. After 1974, the population of the Tokyo metropolitan area accelerated to 29.5% of the total population, hedging against the effects of the aging population and maintaining a stable transaction volume in Tokyo. Finally, the restoration of the financial attributes of real estate has prompted the participation of domestic residents in the purchase. After 2000, the growth of employee salaries in Japan stagnated, but housing prices began to rise again during the same period, prompting a new generation of Japanese citizens to rethink the position of real estate on their balance sheets. Japanese people have begun to participate in real estate ownership because they have begun to realize that real estate can be used as an investment product and generate stable investment income in addition to being a consumer product. Real estate prices in Japan are about to enter a process of rapid bubble. First, the macro policy pivot will not happen overnight, and the low interest rate environment will continue. Although Japan has canceled the YCC, the adjustment is mainly on the short-end interest rate of the policy rate account and the magnitude is very small, and the Bank of Japan will continue to buy long-term bonds and maintain QE. Second, the young Heisei generation, who did not experience the last round of real estate crisis, are gradually becoming the main home buyers, and the increasing female labor force participation rate will definitely increase investment in real estate with the help of low-cost leveraged funds in the face of rising incomes and faster housing prices in the future. Finally, the Japanese government is maintaining the supply of high-end projects through the renovation and renewal of super complexes in core areas, forming a price anchoring effect, which will also promote the further rise of housing prices to a certain extent. Summary: To sum up, the low interest rate environment that will not change in the short term, the inflationary spiral of rising wages and rising real estate prices is gradually forming, and the younger Heisei generation, who are more open to buying real estate, has become the main home buyer population, coupled with the continuous and considerable amount of overseas investment funds, we can draw a relatively clear conclusion: housing prices in the Tokyo metropolitan area of Japan may have entered a rapid upward channel and are expected to bubble again.
Risk Warning
Monetary policy exceeded expectations, population concentration was less than expected, and overseas capital inflows slowed.
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01
Real estate prices in Japan have entered an upward trend
Since 2021, the real estate industry in mainland China has entered an adjustment cycle, and core indicators such as sales, investment, and new construction have undergone significant adjustments, causing market concerns, and researchers and practitioners have begun to explore solutions that can be used as a reference, and our East Asian neighbor Japan is a very valuable research sample. Based on our research and field visits, we have come to a relatively clear conclusion that Japan's real estate prices are about to enter a process of rapid bubble after years of recovery. As for Japanese real estate, it is well known that the "lost two decades" are known, but what is not well known is that the average transaction price of new homes in the Tokyo metropolitan area has continued to rise since 2013, and exceeded the highs of the 90s in 2021, and then continued to break new highs in 2022 and 2023.
However, it should be noted that there is a clear divergence in the recovery of real estate prices in Japan. The first level of differentiation is the differentiation between the three major metropolitan areas and the non-metropolitan areas. The second level of differentiation is the beginning of a clear differentiation between the three major metropolitan areas, and the Tokyo metropolitan area is the only one, which is consistent with Japan's urbanization process and population migration. The third level of differentiation is that there is also a clear differentiation within the Tokyo metropolitan area, where the increase in housing prices in the metropolitan core area is significantly higher than that in the non-capital core areas such as Toshita Ward, Kanagawa Prefecture, Saitama Prefecture, and Chiba Prefecture.
Looking at the changes in housing prices in the Tokyo metropolitan area, starting with 2013, the average housing price in the Tokyo metropolitan area has increased by 75.9% over the past 10 years, with an annualized increase of 5.8%. Among them, the largest increase was 99.7% and 7.2% annualized, while the cumulative and annualized increases in Kanagawa Prefecture were only 62.4% and 5.0%, respectively. This is a very typical metropolitan area corresponding to the price increase, the core area due to the relative scarcity of supply, the price increase is usually much higher than the peripheral area, but even the more peripheral Saitama and Chiba prefectures have seen an annualized increase of 4.1% and 4.0% in the past 10 years, both outperforming Japan's CPI.
02
The rebound in real estate prices in Japan is not only the result of the concentration of population, but also the result of the concentration of capital
2.1. The recovery of transactions driven by foreign funds at the marginIt is undeniable that the impact of the bursting of the real estate bubble in the 90s on the Japanese people of that generation is unforgettable and persistent, and the balance sheet of the household sector is seriously damaged and even a large number of insolvents, although the Japanese government has since implemented unusually loose monetary and fiscal policies, it is still unable to withstand the continuous shrinkage of the corporate and residential sectors. Therefore, in the so-called "lost 20 years" period, Japanese nationals were not the main players who promoted the recovery of real estate transactions, but a group of overseas funds represented by Singapore, Europe and the United States became the catalysts for the initial recovery of Japanese real estate. According to CBRE's data, the speed of foreign capital inflow into the Japanese real estate market has begun to increase since the beginning of the 21st century, which has led to a recovery in real estate transactions, especially existing homes. In the metropolitan areas, for example, the average annual transaction volume of existing homes in the Tokyo metropolitan area increased by 13% from 38,000 units in 1991-2000 to 43,000 units in 2001-2010, while the average annual transaction volume of existing houses in the area increased by 31% from 15,000 units in 1991-2000 to 20,000 units in 2001-2010.
There are two core reasons for the large amount of foreign capital entering the Japanese real estate market:
First of all, Japan has few restrictions on the purchase of real estate by overseas buyers, and only slightly differentiates itself from its own nationals in terms of down payment ratio and loan policy. Foreigners who do not have a zero down payment to buy a house in Japan need to meet certain conditions when applying for a loan before they can apply for a personal loan with a lower interest rate (generally no more than 1%), otherwise they can only apply for a commercial loan with a slightly higher interest rate (1.8-2.5%) in the name of the company. Considering that a significant proportion of overseas investors do not need loans, the practical impact of these two policies is even more limited.
Second, it is a very attractive rental yield. During the real estate crisis in Japan in the 90s, the average price decline in the country was about 44%, but the decline in rental prices during the same period was significantly lower than the decline in house prices, which led to the fact that the rental yield of real estate in Japan has become quite attractive after the price decline stopped in 2008. In 2002, the rental rate of apartments in Tokyo's 23 wards reached 7.7%, which is still an attractive long-term rate of return even after deducting the holding cost of about 1.2-1.5%, which has attracted a number of private equity funds from Singapore, Europe and the United States.
Although rental yields have fallen as housing prices have gradually risen, the enthusiasm of overseas funds for investing in Japanese real estate has not waned. According to CBRE, the average proportion of foreign investors in Japan's real estate investment market from 2015 to 2019 was 24%, and in 2021 it even reached a record high of 30%. It can be seen that overseas capital is an important factor driving the recovery of Japanese real estate prices in this round. 2.2. The continued easing of macroeconomic policies will eventually promote the rise of asset pricesAfter Shinzo Abe took office, in order to stimulate the economy, he launched "three arrows" and formed "Abenomics". One of the most important "arrows" is the ultra-loose monetary policy, which has led to a decline in interest rates in Japan since the policy was implemented. By 2016, Japan had officially entered an era of negative interest rates. Accommodative monetary policy is conducive to driving up Japan's real estate prices. First, low interest rates mean that the cost of borrowing for home buyers and developers is lower, which reduces the cost of buying a home, which stimulates real estate market transaction activity, which in turn drives up house prices.
Second, in the loose monetary policy environment, the yield of fixed income products has declined, and the yield of real estate is relatively prominent, so it will attract more people to turn to real estate investment. The rate of return on real estate in Japan is relatively stable and attractive.
In addition, the securitization of real estate assets through the establishment of real estate investment trusts (J-REITs) in Japan, which packages real estate assets into funds and trades fund shares on the open market, has also indirectly contributed to the rise in real estate prices in Japan. After 2013, the number and overall size of J-REITs increased significantly.
2.3. Steady demand due to the continuous agglomeration of the populationIn the process of urbanization in Japan, the population continues to concentrate in the metropolitan area along with the industry, especially since the 80s of the 20th century, the agglomeration of the population has begun to shift from the "three poles" of the Tokyo area, the Osaka area, and the Nagoya area to the "one pole" of the Tokyo area From 1974 to 2022, the net population of the Tokyo metropolitan area exceeded 4 million, and from 2010 to 2022, the population of the Tokyo metropolitan area increased from 35.62 million to 36.87 million, and the proportion of the total population increased from 27.8% to 29.5%.
The concentration of the population will inevitably lead to an increase in housing demand, and the inflow of people at this level in the Tokyo metropolitan area will be more than enough to offset the decline in demand for housing due to the aging population. It can be seen that although housing prices fell sharply after the bursting of the real estate bubble in the 90s of the 20th century, the number of existing housing transactions in the Tokyo metropolitan area has not decreased significantly, and has been steadily increasing since 2000. Historically, the change in the number of existing home transactions has been largely matched by the inflow of population. 2.4. The recovery of the financial attributes of real estate has encouraged domestic residents to participate in the purchase process, but the continued influx of people does not necessarily lead to an increase in the demand for housing purchases, because the newly urbanized population often uses renting to meet their housing needs, and Japan has a well-established rental system, and many large Japanese companies will provide rental subsidies for employees. The answer is very simple: to restore the financial properties of real estate, in other words, to make the new generation of Japanese citizens realize that real estate can be used as an investment product and generate stable investment income in addition to being inhabitable as a consumer product. If you've ever been to Japan, you'll probably have the impression that there doesn't seem to be much change in Japan. Japan's urban interface doesn't seem to have changed much from a decade ago, and the commercial complexes that flourished a decade ago are still bustling with people, and even the souvenirs they choose when they return home are still the same as they were a decade ago. In addition, there is also no change in the salary level of Japanese employees. According to the Ministry of Health, Labor and Welfare, the average monthly income of full-time workers in Japan in 2023 will be 318,000 yen, an increase of only 5% compared with 302,000 yen in 2000, and the average monthly income level has always fluctuated in a narrow range of 295,000 yen ~ 318,000 yen in the past 24 years, and the fluctuation range is only about 8%. Stagnant wages, combined with a resurgence in rising housing prices, are beginning to cause a new generation of Japanese citizens to rethink the position of real estate on their balance sheets. Since 2013, when housing prices returned to the upward trend, more and more Japanese people have begun to pay attention to home ownership, especially young couples, both of whom have jobs and incomes, and are willing to borrow leverage to purchase real estate for self-occupation, so as to meet their housing needs and enjoy the benefits of real estate appreciation.
03
Real estate prices in Japan are about to enter a process of rapid bubble
3.1. The macro policy shift will not happen overnight, and the low interest rate environment will continue in Japan amid inflation. From April 2022 to February 2024, Japan has had 23 consecutive months of core inflation above the 2% target. However, the Bank of Japan maintained a negative interest rate policy until March this year, when it canceled the YCC policy and exited the era of negative interest rates.
Japan's abolition of YCC does not mean that the low interest rate environment has been completely abandoned. First, the main adjustment is the short-term interest rate of the policy rate account, that is, the interest rate target for 1-year Treasury bonds has changed from -0.1% to 0-0.1%, which is very small. Second, the Bank of Japan will continue to buy long-term bonds and maintain QE. Bank of Japan Governor Kazuo Ueda made it clear that if Japanese government bond yields soar, the Bank of Japan will increase bond purchases to avoid a sharp rise in interbank lending rates. This shows that Japan does not have a strong desire to suppress inflation, but still wants to maintain an accommodative monetary policy and will not completely change the low interest rate environment in the short term.
Current interest rates remain attractive to home buyers. As a result, the real estate market remains buoyant and has not been affected by interest rate hikes. In addition, more and more young Japanese are starting to buy houses, mainly because of the expected income growth in the future. At the beginning of this year, Japanese labor unions and companies engaged in labor-management negotiations, and the goal of "Haruto" was to increase average wages by more than 5%. As of April this year, the Japan Federation of Trade Unions (Rengo) announced the results of the third "spring fight" this year, with the overall average wage rising by 5.24% and the average wage of small and medium-sized enterprises rising by 4.69%, a 30-year record high.
In contrast, wages have risen more than prices. In 2023, Japan's CPI will increase by 3.2% year-on-year. The current market expects Japan's CPI to grow by a median of only 2.3% year-on-year in 2024. But in the future, once wage inflation spirals, buying real estate now is a good option. On the one hand, you can hedge against currency depreciation, and on the other hand, you can also enjoy the increase in personal assets brought about by the rise in property prices. 3.2. The Heisei generation has become the main group of home buyers, driving the recovery of home ownership among its own citizens
"The fortunate use their childhood to heal their lives, and the unfortunate use their lives to heal their childhood", we know that this phrase expresses the profound impact of childhood on a person, and the same is true for the decision to purchase real estate. If a person's childhood and adolescence experience a rising housing price, then his willingness to buy real estate in the future will be significantly higher, just like China's post-80s and post-90s generations are significantly more willing to buy a house than the post-95s and post-00s.
Similarly, the young Heisei generation (post-95~post-00) is growing up, and the impact of the last round of Japanese real estate crisis and the 98 financial crisis has gradually declined, in other words, this generation has not experienced the tragic decline of the previous cycle, and even at the stage when they began to have a concept of prices, Japan's housing prices have begun to resume the upward trend, so this generation's understanding of real estate is completely different from that of the previous generation.
In terms of the main home buyer population (25-54 years old), the proportion of the Tokyo metropolitan area has remained stable due to the continuous inflow of population, reaching 44% in 2020, a slight decrease of only 2 percentage points from 1975. In stark contrast, the proportion of the country's main home buyer population has dropped from 45% in 1975 to 38% in 2020. A stable home buyer population will provide a stable demand for home ownership, and with the increase in the proportion of the young Heisei generation in the home buyer population, the actual home purchase demand in the home buying population should also be stable and rising.
In addition, another new buying power may come from independent working women. According to the World Bank, Japan's female labor force participation rate has risen since bottoming out in 2012 and has risen to 54.9% in 2023, a significant increase in the past decade. This data is completely consistent with the feeling of our field visits, and more and more dual-staff families and independent working women are becoming the core force of real estate purchases.
In general, the younger Heisei generation, who did not experience the real estate crisis of the 90s, are becoming the main homebuyers, and the increasing female labor force participation rate will definitely increase their investment in real estate with the help of low-cost leveraged funds in the future, and in the face of rising incomes and faster housing prices, housing prices in the Tokyo metropolitan area will begin to rise rapidly. 3.3. Price anchoring effect of high-end projects in the upcycle
One of the 116-square-meter apartments is priced at nearly 50 million RMB, equivalent to more than 300,000 yuan per square meter, while higher-end luxury projects such as Aman Residences are priced at 100 million yuan. The irreproducibility of core location, top quality, and scarce products are the common characteristics of these top luxury properties, which also creates their irreproducible pricing.
The price of this kind of top luxury property will form an anchoring effect on the local market, that is, although the average transaction price of the normal apartment is far from the price of the top house, the price of the top luxury is equivalent to setting an upper limit on the price of the local market, so in the upward stage of the local real estate market, ordinary apartment traders will unconsciously compare with the price of the top house, so as to conclude that the real estate price they trade has a lot of room to rise such an overly optimistic expectation, and then promote the price of the house price to continue to rise. The most typical example is Shenzhen Bay One in Nanshan, Shenzhen in 2019, and some earlier examples can be traced back to Tomson Yipin in Shanghai.
We observe that Tokyo seems to be maintaining the supply of top luxury projects through the renovation and renewal of super complexes in the central area, thereby strengthening the price anchoring effect of top luxury projects, and from this perspective, the increase in housing prices in Tokyo may have just begun.
04
summary
In summary, the low interest rate environment that will not change in the short term, the inflationary spiral of rising wages and rising real estate prices is gradually forming, and the young Heisei generation, who are more open to buying real estate, has become the main home buyer, and combined with the continuous and considerable amount of overseas investment funds, we can draw a relatively clear conclusion: housing prices in the Tokyo metropolitan area of Japan may have entered a rapid upward channel and are expected to bubble again.
Risk Warning
(1) Monetary policy exceeds expectations
The Bank of Japan has abandoned negative interest rates, and the pace of future rate hikes may exceed expectations. (2) If the population concentration in the Tokyo metropolitan area does not continue to flow continuously, it may suppress the demand for home purchases. (3) The inflow of overseas funds slows down, and if housing prices rise too quickly, the corresponding rental returns will no longer constitute a strong attraction to overseas funds.