It is classically said that the four ways to make money in real estate are loan amortization, income from rent, tax benefits, and appreciation of the value of the property. Each of those four are proven wealth builder in stable markets. While the first three have been completely relevant for Japanese real estate investors, the common expectation is that appreciation is not a strong feature of the Japanese real estate market.
However, recent sales data shows that both Japanese and international investors have good reason to be excited about real estate values in Japan; both land evaluations and sales prices are up in many locations across Japan.
Below we will show that while there are lingering memories of difficulties from Japanese real estate losses in the 1990s, there are many examples of appreciation in Japan today, including in some of the smaller regional cities.
In fact, the biggest gains in Japanese real estate values are happening in locations that may surprise you.
Japanese Real Estate Depreciation in the 1990s
Perhaps the greatest story in Japanese real estate history is about the appreciation in The Land Bubble in the period of 1985 to 1990, and the collapse in value that followed.
During this time, real estate prices in Japan appreciated dramatically, easily doubling in value (or more) in a period of just a few years. There was tremendous monetary lending in this period (with investors using inflated land holdings as collateral for loans), and the Japanese used that newfound funding to bid up real estate prices.
Here is the Harvard Business Review talking about the role of excess capital in real estate appreciation in Tokyo in the late 1980s:
“This… is what helped turn a speculators’ bubble into the genuine vortex of land price acceleration in Tokyo: 10.4% in 1986, 57.5% in 1987, 22.6% in 1988. Residential, industrial, commercial: the increases spread all across the real estate landscape.”
— Robert L. Cutts, Harvard Business Review, (1990)
During that bubble of the late 1980s, the price of real estate in Japan was a major international story. And as the bubble began to burst in 1990, and then collapsed in the subsequent years, real estate values in Japan began a 10-year decline.
The average price of real estate in Japan lost value year-over-year, until approximately 2010 when the market finally bottomed out. The subsequent period of decline and depreciation from 1991 to 2001 is sometimes referred to as The Lost Decade. And while the boom of the late 1980s made Japan famous for real estate gains, the decline that followed changed the expectations for real estate appreciation in Japan.
The period of The Lost Decade set a precedent for the value of real estate in Japan, and investors had low- or no- growth expectations. You could still make money in real estate in Japan (through tax benefits, mortgage amortization, and from rents), but a general appreciation was uncommon.
Recent data shows that the period of stagnation may be over, as there are several hot markets in Japan right now.
Hot Real Estate Markets in Japan
There are strong signs of real estate appreciation in Japan. The major metropolitan areas have seen real gains in the last several years. And the outlying regional cities have seen even greater increases in both land value and real estate sales prices.
“[T]he areas to focus on now are in the urban territories of Tokyo, Osaka, and Nagoya, as well as Fukuoka in Kyushu and Sapporo in Hokkaido.”
— Toshihiko Yamamoto, from The Savvy Foreign Investor’s Guide to Japanese Properties (2018)
Looking at the areas of greatest growth in recent data, the quote from Yamamoto above looks particularly prescient; while his book was published in 2018, current evidence from real estate sales fits his predictions (and locations) extremely well.
The Price of Real Estate in Tokyo is Increasing
Compared to the prices paid during the peak of the bubble years, the price of real estate in major cities like Tokyo, Nagoya, and Osaka had seen incredible losses through 2010. In fact, for recent average sales prices, the price of real estate in Japan’s major cities is still not anywhere near the bloated rates paid at the peak of the late 1980s. But for buyers that purchased in the last few years, some significant gains have been possible.
Recent data compiled by real estate company Utinokati shows signs of strength in the Japanese real estate market.
For example, in 2022 the average sales price for detached homes in Tokyo increased 7.6%. And for the period of 2018 to 2022, the average sales prices for those properties were up 14.1%. After years of decline and flat property values, this is welcome news to real estate investors.
The story is similar in the other major metropolitan cities in Japan. In Nagoya for the period of 2018 to 2022, there was a 9.0% increase in the sales price for detached homes. For Osaka, it was 5.6% (for the same period). For Japanese real estate investors in these cities, appreciation is once again part of the expectation for a return on that investment.
Unlike the bubble years when the story of increasing value and hot real estate in Japan was focused on Tokyo, these days real estate headlines include more cities; lesser-known locations including cities in Hokkaido and Kyushu are also in the news.
Increasing Real Estate Prices in Hokkaido
While most people in Japan live on the main Island of Honshu, there are other regions of Japan with robust economies and cities with strong real estate values. Of the four main islands of Japan, Hokkaido is the furthest north.
“With over one-fifth of Japan’s land, Hokkaido is the nation’s largest source of agricultural products, including seafood, beef, milk and cheese, rice, and vegetables. Tourism, forestry, and food-related industries play important roles in the economy.”
— Christopher Dillon, Landed Japan (2018)
While Hokkaido already had an international reputation for real estate in Niseko, many of the biggest gains in sales prices in Japan right now are from other cities in the prefecture.
Some of the areas with the greatest appreciation in real estate value in Hokkaido include the location of the new baseball stadium in Kita-Hiroshima, as well as the cities of Eniwa, Ebetsu, and Chitose. Each of those locations has seen year-over-year growth, and one-year increases of 10% for individual transactions are increasingly common.
The Price of Real Estate in Sapporo Has Increased 22.5% Since 2018
At 1.9 million residents, the biggest city in Hokkaido is Sapporo. While Utinokati’s sales data for detached homes in Sapporo for 2022 shows only a modest 2.4% increase in value, if we look at the period of 2018 to 2022, that data shows a 22.5% increase for real estate in Sapporo.
“We work with a lot of international buyers and investors from the United States and Canada, Australia, Europe, and throughout Asia. Our clients are very confident in real estate trends in Hokkaido, and Sapporo in particular. The expectation is that home values will hold or increase. And that investment property in Sapporo will provide good cash flow, and provide value through appreciation over time.”
— Find Hokkaido Agents
Comparing that number to the data from Tokyo, Nagoya, and Osaka, Sapporo has offered greater returns in the last five years than the larger cities. Other regional cities in Japan are also posting large gains.
Real Estate Prices in Fukuoka
Fukuoka is one more example of a regional city in Japan with strong real estate appreciation.
The city of Fukuoka is on the southwestern island of Kyushu. It has a population of approximately 1.6 million people. While Fukuoka may not be as popular with foreigners, it has a strong real estate market. Utinokati data for 2022 alone shows a 5.3% increase in the value of detached homes in Fukuoka. For the period of 2018 to 2022 that appreciation was 21.1%. Real estate agents in Fukuoka are seeing higher sales prices in real estate transactions with their own clients.
“Strong demand is helping investors to see more appreciation as they sell or upgrade properties in Fukuoka. In many cases, investors are getting better returns than in Tokyo, which is helping to attract more attention to real estate investment in our part of Japan.”
— Yes! Fudousan
These smaller cities are part of a larger story of the realities of appreciation in Japanese real estate.
Foreign Currencies Versus the Yen
While a strong yen was a feature of the bubble of the late 1980s, one factor that may be contributing to recent gains in Japanese real estate values may be a weakening yen versus foreign currencies.
Since 2018, the value of the US dollar is up 28.2% versus the yen. The British pound is similarly up 23.5% versus the yen. As the majority of the foreign visitors to Japan are from neighboring Asian countries, those economies are often more important in terms of the impact of foreign investment in Japanese real estate; the currencies of China, Taiwan, Hong Kong, Singapore, and Vietnam, have increased an average of 27.3% versus the yen in the last five years. Singapore is a standout example, with the Singapore dollar up 31.5% versus the yen since 2018.
While real estate values in Japan are increasing, the values of these foreign currencies are increasing even faster, giving foreigners increasing buying power versus the yen. As foreign money has more and more value against the yen, the incentives for foreigners to bring money to Japan for real estate investment increase.
A Bright Future for Real Estate in Japan
Taken together, real estate investors have a lot of evidence that we may be entering a new era for real estate performance in Japan. While values in cities like Tokyo still have not matched the inflated sales prices of 1990, in cities across Japan, sales data shows significant appreciation and signs of vitality in Japanese property values.
By Graham Hill