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  • Writer's pictureAdam German

Not all Tokyo areas rise equally in high tide

On January 29th, Ayumi Tanaka of the Nikkei Shimbun opined that in the Tokyo real estate market, a prevailing optimistic sentiment among industry insiders suggests that the prices of second-hand condos in the capital region will continue to rise in 2024, akin to the trends observed in the preceding year. 

However, there is a contingent of industry professionals who remain cautiously optimistic, anticipating potential challenges. 

Tanaka’s analysis delves into the potential factors shaping this year's dynamics.

Limited Impact from Financial Policy Revisions

A prevalent concern among pessimists centers around the possible repercussions of a Bank of Japan policy review, specifically the lifting of negative interest rates. 

The fear is that such a move could trigger an upswing in variable interest rates for housing loans, potentially leading to a decline in demand for second-hand condos. 

While some foresee the possibility of a negative interest rate reversal in April contingent on the outcome of spring labor-management negotiations, the extent of the interest rate increase remains a critical question.

In theory, there is the notion of raising policy interest rates to the level of the neutral interest rate, which does not adversely affect the economy. 

The neutral rate of interest (or R-star) is the interest rate set by central banks that equilibrates the economy in the long run. Less formally, it is the real interest rate that is neither expansionary nor contractionary when the economy is at full employment. 
The theory goes that if a central bank sets the base rate below R-star then policy is accommodative – the further below R-star the more accommodative. The opposite is also true - the further above base rates are to R-star, the more the economy should contract.  Further explanation from JP Morgan Asset Management can be found here.

Considering a natural interest rate of -0.5% and an inflation rate of 2%, the combined neutral interest rate would be 1.5%. 

However, a sudden increase of the current policy rate from -0.1% to 1.5% is deemed to have a disproportionately significant negative impact on the economy. 

Given that many individuals secure housing loans with variable interest rates tied to policy rates, a rapid increase is feared to have an oversized influence on the real estate market. 

Consequently, there is a prevalent opinion that, if policy rates were to rise, they would likely stay within the range of 0% to 0.5%, limiting the impact of interest rate increases in the current year.

Disparities in Urban and Suburban Regions

Among industry professionals expressing reservations about the outlook of the second-hand condo market, attention is drawn to regional disparities. 

Concerns arise from the contrasting trends between areas where prices continue to surge and those experiencing stagnation.

Courtesy of the Nikkei Shimbun, translated by Patience Realty.

The above graphical representation illustrates the price index trends in three areas: the entire Tokyo 23 wards, the central three wards (Chiyoda, Minato, and Chuo), and the peripheral wards (Ota, Setagaya, Suginami, Nerima, Itabashi, Kita, Adachi, Katsushika, Edogawa). 

Notably, the index for peripheral wards is based on transactions of properties located more than a 15-minute walk from the nearest station.

Three key observations emerge. First, since 2013 a widening gap in price appreciation is noticeable between the central three wards and the peripheral wards. 

The rise in the proportion of dual-income households has likely contributed to an increased emphasis on convenience, impacting these trends.

Secondly, there is minimal divergence in the trends between the entire 23 wards and the central three wards. 

While the overall 23 wards trend represents an average, which is meaningful when variations are small, caution is needed as larger disparities may mask underlying polarizations.

Lastly, a substantial decline in price momentum in the peripheral wards is observed for 2023, despite the overall stability in the 23 wards' price trends. 

This shift is attributed to the likelihood that the prices of second-hand condos in these areas have approached their upper limit concerning the purchasing power of the buyer demographic.

Divergent Trajectories for Popular and Less-Favored Areas

Considering these factors, unless unforeseen global economic events significantly impact Japanese financial institutions and corporate wages (e.g., commercial real estate loans in Europe and the United States sour, affecting global financial institutions), it is likely that second-hand condo prices in the central three wards and other popular areas within the 23 ward region will maintain a robust upward trajectory through 2024.

Conversely, the outlook for condos situated in the peripheral wards, particularly those in more distant locations from the nearest stations, is anticipated to experience a gradual ascent or remain relatively stagnant. 

While a drastic surge in interest rates is not expected, it is believed that there will be some discernible influence on individuals purchasing second-hand condos in the peripheral wards. 

The pricing dynamics in these peripheral areas are expected to distinctly differ from the central 23 wards. 

Not just Tokyo but any real estate market is a hyper local game.  While all boats rise in high tide, there are valleys between the waves where value operates differently than from marquee areas.

The difference between average and outsized gains is access to nuanced information and for that, market participants need agent advisors steeped in the specific areas being evaluated.


Nikkei Shimbun (Japanese only; paywalled)

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