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Japanese Home Prices Have Fallen Too Far

News Posted On: 08 January 2013

Japan’s home prices may have fallen too far from an overvalued high during the 1990s bubble, according to Bank of Japan Deputy Governor Kiyohiko Nishimura. Japan’s house prices have continued to fall amid a weakening recovery, accompanied by an appreciating Yen and deflation. ‘In the case of Japan, property prices are too low compared to fundamentals,’ said Mr Nishimura in San Diego on Tuesday.

In Japan’s major metropolitan areas, prices have fallen markedly. In the Tokyo Metropolitan Area, the average price per square metre for a newly built city-centre condo has fallen by 5.1% year-on-year to August 2012, reaching JPY691k (US$8.8k) according to figures released by the Land Institute of Japan. This compares with a per-square-metre price of US$11.4k in Manhattan. Existing condominium prices fell 3.3% year-on-year to US$4.9k, while detached house prices fell 1.7% to an average price of US$408k during the same period.

Meanwhile in the Osaka Metropolitan Area, the per-square-metre price of new condominium units fell by 3.2% to US$5.8k during the year to August 2012, and existing condominium units saw a 1.6% fall to US$3k during the same period.

However, land prices have proven more resilient. The average land price in Tokyo remained unchanged during the year to August 2012, at US$2.4k per square metre, while in Osaka it rose slightly to US$1.5k per square metre. Additionally, the prices of rental apartments, rather than condominiums, has risen by 3.24% from US$12.6k to US$13k.

While prices have fallen, at least in the upper reaches of the market, both new builds and sales have risen. In Tokyo, condominium sales rose by 10.6% while detached houses rose by 9.5% during the first 8 months of 2012. However, this may be due to the reconstruction efforts following the Great Tohuko Earthquake, according to the Ministry of Land, Infrastructure, Transport and Tourism.

However, these factors make Japan a more tempting location for foreign investors. In particular, Taiwanese investors who fear a Chinese reappropriation of what their giant neighbour regards as its wayward province see Japan as a safe, profitable place to put their money and an increasing number seek to make second homes there.

Every month now, staff working for Haruo Yamamoto, president and founder of Largo, a Tokyo-based property company, go to Taiwan to hold seminars on buying properties in Japan; at the same time, back in Japan, Largo isn’t the only firm to offer courses on how to sell property to Chinese from Taiwan and elsewhere. Mainland Chinese also see Japan as desirable, for the same reasons; the market clearly intends to oblige friendly relations between two cultures who historically regard each other as barbarians.

Even though Japan is a market subject to perils from its aging, shrinking demographic, and from deflation and falling prices, these risks remain constant; Japan represents a highly stable investment environment, and one that’s attracting an increasing number of investors from outside Asia. It’s become a market which investors treat as a savings bank: rather than expecting gigantic returns on investment in rapidly growing markets, buyers are seeking comfortable homes for their money.

For overseas investors in Japanese property, rental yields remain healthy at between 4.46% and 6.34%. Smaller and larger apartments offer the best returns, with 45m2 and 200m2 apartments offering comparable rates of 6.34% and 6.16% respectively. Meanwhile midprice apartments are less lucrative, with a 90m2 unit fetching 5.20%.

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