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Japan’s property market is buzzing again – that’s great news for investors
After Japan’s real estate bubble burst in the 1980s, the country fell out of love with property as an investment. But now that’s all changing, says John Stepek.
The Imperial Palace in Tokyo is the Emperor of Japan's main residence.
It encompasses an area a bit more than a square mile in size.
There's a very famous story about how, during the Japanese bubble in the 1980s, this tiny area was worth more than all of the property in the state of California.
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Those days are long gone. Unlike most of the rest of the developed world, Japanese property prices are still way below where they were in the days of the bubble.
But thanks to prime minister Shinzo Abe's economic policies, that looks like it's changing fast
Tokyo is bargain central for the international jet-set
According to Bloomberg, house prices in Tokyo (per square foot) come in at around 120,000 to 150,000 (that's about $1,200 to $1,500). By the standards of the international market, and Asia in particular, that's cheap.
It's less than half the price of similar property in Hong Kong. It compares well to Singapore on $2,000 to $2,500 per square foot too. And it bears no comparison with central London, on about $3,100 per square foot.
"Property prices in major Japanese cities are still less than half their peak at the height of the bubble economy in the 1980s," reports the newswire. On top of that, from an international perspective, Japanese property prices have become a lot cheaper over the past year.
Last summer, a dollar would buy you as little as 75. Today, you'll get closer to 100. That adds up to a lot more property for a lot fewer dollars. It's similar to the way that the crashing pound made London property a lot more desirable for international buyers after 2008.
Jones Lang LaSalle has been holding Japanese property investment seminars in Singapore. One big Taiwanese real estate broker has sold more Japanese properties to Chinese buyers in the first half of this year, than in the whole of 2012, notes Bloomberg.
Housing starts have been rising for ten months in a row the longest winning streak since 1996.
And it's not just residential property and fancy flats that are climbing in popularity. Commercial property transactions rose by 50% in the first half of this year, compared to 2012, reports Jones Lang LaSalle. Investors spent $10.6bn in Japan, compared to $4.8bn in Hong Kong (down 2%), and $3.8bn in Shanghai (up 22.5%).
Japanese inflation expectations are rising
But perhaps what's more interesting is the idea that domestic Japanese consumers now feel some sort of impetus to start buying. As The Wall Street Journal recently noted, "would-be homeowners are now buying largely because they see higher mortgage rates ahead." They are also more keen to lock into fixed mortgage rates.
This is all because they expect to see higher prices. Alien as it may seem to us in inflation-prone Britain, that's quite a radical idea for Japan. And as investors start to expect inflation rather than deflation, they'll shift their money from bonds to property and stocks. That's because bonds lose value as inflation rises. As one hedge fund manager tells the WSJ, "household assets that have been like glaciers before will now start to defrost."
The good news for investors is that we're only at the start of this process. There's still plenty of scepticism hanging over the Japanese market. Investors have had their fingers burned too many times to count, and now they are taking a lot of convincing to buy' the Japanese story. The latest big worry is that a threatened hike in the sales tax will derail the recovery, as it did in 1997. When that blows over, there'll be another excuse not to buy.
It's not surprising that investors are nervous, given the history. But in a world where very few investments look like they are genuinely cheap, Japan is one of the few areas that could be embarking on a major bull market for the first time in two decades. Needless to say, we think you should be investing there.
James Ferguson looks at the importance of the Japanese property market to the overall economy, and why the outlook remains good for the nation, in the next issue of MoneyWeek magazine, out on Friday. If you're not already a subscriber, subscribe to MoneyWeek magazine.
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