Oct. 05, 2013, 20:00 JST

A primer on the new House Price Index

Introduction

It is hard to come by market price statistics for real estate, not just in Japan but in most countries across the globe. Their 'market price' is not visible most often as trades in each property take place only once every few years at most. Moreover, each property is unique as they differ in conditions such as location, structure of the building and tax treatment. Even when we observe a change in the price of a certain property, it is not easy to ascertain if the change is due to a change in its market price or due to a change in other conditions, for example a train station newly built in the neighborhood. 

Problems with existing statistics on real estate prices

In Japan, the annually-published Land Market Value survey (Ko-ji Chika) has been the representative statistic for real estate prices in Japan. This statistic surveys the prices of 26,000 land locations in Japan. However, it suffers numerous shortcomings. The 'price' in this survey is an evaluated price, rather than the actual transaction price. It is also a statistic only for land prices and does not include price information on condominiums. Another important, although slightly technical problem is that the 'national average' as published in the Land Market Value survey is a simple-average, rather than value-weighted average. The difference between the two can be quite large, as real estates with high value, such as prime areas in Tokyo, tend to be quite volatile. For example, from 1983 to 1990, the accumulated change in the national average in the Land Market Value survey was an increase of 83%. However, past research shows that the value of land in Japan has almost tripled during the same period. According to national accounts statistics, the value of residential land in Japan increased by 184% during the same period. 

Land Market Value statistics tends to underestimate the volatility in property markets

 

The large difference between the simple average and weighted average could have led to a significant underestimation of the macroeconomic effect of the real estate bubble in Japan in 1980s. Lastly, there is the problem of reporting frequency. Land Market Value survey is an annual statistic. Other than the Land Market Value survey, there are a few other statistics on real estate prices, such as the bi-annual survey done by Japan Real Estate Institute, but they tend to suffer similar shortcomings.

Development of better house price statistics  

Since early 2000s, there has been an increasing international interest on producing reliable and internationally comparable information on housing prices. The need for such statistics became paramount in the aftermath of the Great Recession in 2008-09 in which the bursting of the housing bubble played a major role. To help each country produce such statistics, Eurostat, together with a number of international organizations including OECD and IMF, produced a 'Handbook on Residential Property Price Indices' in 2011. 

In step with such international efforts, Japanese government developed new statistics on house prices and a monthly publication of the statistics started in August 2012 (the data begins from April 2008). The statistics is officially known as 'Residential Property Price Index' (RPPI). The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is responsible for the statistics. In the preliminary reports, the RPPI consists of 2 sub-indices, a price index for land and detached house, and another price index for condominiums. National as well as a number of regional indices are available. The statistics are currently in a 2-years testing phase. 

Recent data shows Abenomics spreading to the real estate market

MLIT published May 2013 data on October 2, 2013. Residential property price index (RPPI) rose by 2.1% year on year (YoY) in May. As you could see from the chart below, there is a clear recovery trend in the residential property price in Japan.

Residential property price turned to YoY rise in April-May this year

 

Among regions in Japan, the rise in property prices are most pronounced in Tohoku. The following chart shows the level of property prices in Tohoku, Kanto (centered in Tokyo) and Kinki (centered in Osaka). In Tohoku area, there was a clear upturn toward the end of 2011, and again in 2013. Among all the regions in Japan, Tohoku is the only region whose property price is back to the level prior to Lehman shock.

Property price levels by regions

The recovery trend is less clear for Kanto and Kinki area, but their property prices seem to have bottomed in the second half of 2012. In our view, these recent recovery trend in property prices shows that the Abenomics policy is starting to have a visible effect on real estate prices. The combination of a rising inflation expectation and monetary easing should result in higher asset prices and that is exactly what we are observing from the property prices in Japan. 

Condominium prices have been rising for the past 4 years

The statistics show an interesting comparison between land prices and condominium prices. In the 2008-09 recession, land prices and condominium prices declined uniformly till early 2009,  while land prices kept falling until late 2012, condominium prices turned upward in 2009 and their price levels are already well above pre-Lehman shock. 

Condominium prices have been rising for the past 4 years

 

The near term outlook for property price in Japan

In our view, the rise in property price is likely to continue over the next 6-12 months. In theory, the prices should be affected by fundamentals such as expected stream of income, inflation expectation as well as market factors such as the level of risk free rate and risk aversion. As the following chart shows, it has a strong correlation with the equity price, with a lag of around half year. Considering the lag, and favorable fundamentals, it seems reasonable to expect that the property price would continue its recent upward trend in the next 6-12 months. What would happen beyond such short time horizon is completely another question. We are in the opinion that the current upturn in the Japanese economy is likely to prove to be temporary. Thus, we do not have particularly favorable opinion on the medium term outlook on the property prices in Japan.

Property prices seems lag behind equity price by 6 months