How to follow Japan’s real estate market in a rapidly changing environment

Real estate price indexes tend to be published 3 months after the fact, so anyone looking for up-to-the-minute details on the impact that the coronavirus is having on Japan’s real estate market needs to consider other sources of information.

Two leading indicators are the stock market and REITs. REITs have high market liquidity, compared to physical property which is generally illiquid. Their liquidity means they reflect current market conditions. The Tokyo Stock Exchange REIT Index has taken a steep dive since February, dropping 49% between February 20 and March 19, and reaching a level not seen since late 2012 when the property market was at rock bottom. It has since gained around 35% in the weeks following as some savvy investors take advantage of the low price.

The second-hand apartment market obviously lacks the liquidity of REITs, but property prices do follow stocks and REIT prices with maybe a three to six-month lag. If poor market conditions and low consumer sentiment continues, apartment sellers may see dire conditions in the coming months. In fact, we are already seeing some signs of panic selling here and there, with some large discounts and a few bulk sales over the past month. Unless we see a sharp recovery, the situation could continue until the end of this year. 

In these coming months it is going to be more important to follow price movements in the existing apartment market rather than new construction. Resale values follow the simple rule of supply and demand. Private sellers of existing homes are more likely to be influenced by market sentiment and business conditions. The majority of new condos, however, are supplied by a small number of mega developers who are not short on cash and can afford to wait out market dips longer than the resellers. New construction prices are also determined by land acquisition and construction costs, both of which have been high over the past few years. There is little room for developers to drop prices and little necessity for the major ones to do so at this stage. 

For buyers looking at the existing real estate market, this might provide an opportunity we haven’t seen since the global financial crisis in 2008. 

Sources:
Diamond Online, March 31, 2020.
MLIT, March 25, 2020.

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