Rising construction costs and project delays are causing the supply of new apartments in the greater Tokyo area to plummet. In 2013, the total number of brand new apartments to hit the market dropped 23.8% from the previous year to 56,478 apartments.

From August 1, MUFJ, SMBC and Mizuho Bank lowered the prime rate on their 10-year fixed rate home loans to a record low 1.3%. While long-term interest rates are showing signs of falling, the recent rise in the consumption tax rate has led a drop in housing starts as well as a drop in sales of new apartments. Banks are now competing to attract borrowers.

While new apartment sales have slowed, they still remain at healthy levels. The contract rate on new apartments in June was 76.6%. Although this was a decline of 5 points from June 2013 and 2.3 points lower than the previous month, it is still above the level of 70% which is considered the threshold for healthy sales.

What is worrying, however, is the drop in supply. According to the Real Estate Economic Institute, 3,503 brand new apartments were offered for sale in the greater Tokyo area in June 2014, down 28.3% from June 2013 and down 18.5% from the previous month. This level is very close to the last low of 3,441 apartments offered for sale in June 2011 (a few months after the 2011 Tohoku disaster). 

In the past it has been common for developments to sell out prior to completion, but amidst rising construction costs, developers are slowing down sales. While developers were holding off on sales following the 2011 earthquake due to a drop in demand, the drop in supply in 2014 is due to a steep increase in construction costs and a shortage of labour. Although these conditions might be contributing to the delay of some projects, the real reason is that developers are now taking a lot longer to decide on final apartment sale prices.

If costs are rising, it would be easy to assume that a developer will add these costs into the final apartment price. However, with the higher consumption tax and no change in average income levels, apartment buyers are now taking extra care when searching for a new apartment.

The Real Estate Economic Institute remarked that developments in suburban areas are facing some very serious conditions. Residential projects in suburbs tend to be larger in scale, which results in greater investment costs and a longer time frame for construction and sales. To avoid pricing themselves out of the market, developers are trying to lower end costs by reducing apartments sizes (eg. 2-Bedroom apartments instead of 3-Bedroom apartments). However, there is a mis-match as demand in suburban areas is primarily for ‘family-type’ 3-Bedroom apartments. With a risk that sales of suburban projects might stall, major developers are focusing their efforts on more urban areas in Tokyo’s 23 wards, Yokohama City and Kawasaki City.

Source: J Cast, August 1, 2014.

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