Actually, there are other risks relating to a plunge in the real estate market. They are (1) A downturn following the Tokyo Olympics, (2) The end of preferential tax treatment for productive green land, (3) The end of monetary easing policy instituted by The Bank of Japan.
Regarding (1) there is concern that investment funds gathered by the Olympics will disperse. This wouldn't just be real estate. Facilities, hotels, and real estate etc, would see the same effect across their respective industries. Regarding the condominium market, due to the development of the Olympic village, there is the possibility of oversupply focused around the gulf areas. However, more worrying than price adjustments due to a breakdown of the supply-demand balance, is the image of "prices peaking around 2020" taking precedence in the lead up to it. Investment involves a form of Keynesian beauty contest, so there are many cases where the market is moved by investor psychology without the actual market situation being taken into account.
If investment peaks out in 2020, investors will want to sell and fix their profits before this happens. However, relating to the supply-demand gap before and after the Olympics, there is the possibility that foreign visitors to Japan will cover this to some extent.
With regards to (2), the "Productive Green Land Act" was passed enacted to 1974 to resolve housing shortages in large cities. In 1992, farmlands located in urban areas were divided into "productive green areas" and given tax incentives. This preferential treatment expires around 2022. According to The Ministry of Land, Infrastructure and Transport's investigation, productive green land covers over 13,000 hectares nationwide, of which the Tokyo metropolitan area’s counts for about a quarter. This is almost the same size as Itabashi Ward in Tokyo. There is a possibility that all of this will become available on the residential land market all at once. If this happens, areas such as Nerima and Setagaya ward, with large amounts of said land will inevitably see price drops.
In fact, June of this year saw the Productive Green Land Act revised to allow for the possibility of 10 year extensions. If there are many landowners who choose to continue farming (or indeed to start agricultural businesses on that land), that risk will end up as nothing more than a concern. However, many of the land owners are aging. It is likely that they will deem it difficult to continue their agricultural business, and sell the land for residential use.
Among the three risks mentioned, the biggest is (3), that the Bank of Japan will end their monetary easing. Starting with the FRB or ECB, world financial institutions are beginning to tighten things up. With this a a background, the Bank of Japan continues to spread huge amounts of yen around the market via monetary easing on a completely different level, with no exit in site even now. Considering that The Bank of Japan is still far from achieving inflation of 2%, for now is seems there is very little possibility of them tightening their monetary easing.
However, it is also true that it will have to end at some point. In July of this year, The Bank of Japan's Haruhiko Kuroda said "(regarding an exit strategy) BOJ have enough tools". In fact, the bank of Japan has reduced its purchase of government bonds from 80 trillion yen a year to 60 trillion, and it is clear that Kuroda is beginning to seek an exit from monetary easing. While The Bank of Japan could ensure a soft landing if they were to demonstrate exceptional adjustment skills, if this doesn't happen the an exit strategy will inevitably lead to increased interest rates and reduction of investment money. The rise in interest rates is directly linked to real estate development and sales, so damage to the real estate market including that of disappearing investment money will be unavoidable.
The key point is next April's BOJ personnel affairs. President Kuroda's reappointment is rumored, but there is the possibility that a new president aiming to more actively shrink the balance sheet (meaning an end of monetary easing) will be appointed. For investors, this situation is one they must keep their full attention on.
However, the three risks mentions here are all just "possibilities". In the meantime, the market conditions of commercial and office facilities are performing well, and land prices in urban areas are still rising. Of course, the real estate market may clear all these risks and be maintained. Since there are also many unknown quantities at this time, starting with price trends going forward, the number of visitors to Japan, office building situation, foreign investor trends, and the successor of the BOJ personnel affairs and their monetary policy are all things that need to be watched to read the changes in the market.
Oct. 30, 2017