Mar. 27, 2014, 17:00 JST

Diverging trends between land and condominium prices

There is a puzzling polarization trend in the residential property market in Japan. According to Residential Property Price Index (RPPI) published by Ministry of Land on March 26, the condominium price index rose by 9.1% year on year (YoY) as of December 2013, while that for land/detached house price fell by 2.3% YoY in the same period. As the aggregate value of land/detached house outweighs that of condominium, the overall RPPI is still falling. This result is in stark contrast to the common perception that real estate prices in Japan are starting to rise because of Abenomics. What is the true state of the real estate market in Japan?

The gap between the rising condominium price trend and the stagnating land/detached house price trend is widening. Since the beginning of 2009, the condominium price index has risen by 17% while that of land/detached house has fallen by 4%.

In terms of year on year change as of December 2013, the overall residential property price is still falling as the value of land/detached house outweigh that of condominium prices. Residential Property Price Index fell 0.9% YoY in December 2013. This fall of RPPI is due to declines in land/detached house price which fell by 2.3% YoY in December 2013. In contrast to the trend in land/detached house prices, condominium prices rose by +9.1% YoY in December 2013, the highest inflation rate since the statistics started in 2008.

The stark difference between the land/detached house price trend and the condominium price trend is puzzling. While we do not claim to have conclusive answers, following factors may help to explain the phenomenon. First, demand for housing in urban area, where the ratio of condominium is higher than in rural area, is growing. The annually-published Land Market Value survey reported that the growth rate of housing price in urban area is higher than in rural area (see below for details). Second, the recent rise of construction cost affects the condominium price and land price differently, because the cost of construction is included in condominium price and detached house price but is not included in land price. Lastly, the liquidity factor is likely to be playing a large role.

This trend may continue for a while, because the continuous shortage of construction workers would lead to further rise of construction cost and constrain the supply of condominium.

The annual Land Market Value survey was also published on March 18, 2014. In this survey, Japan’s residential land price at the beginning of January 2014 fell by 0.6% YoY. There were some disparity across the regions though. Residential land prices in major metropolitan areas turned to rise, while land prices in other areas continue to fall. Inflation rates of residential land price in Tokyo, Nagoya, and Osaka areas were +0.7% YoY, +1.1% YoY and -0.1% YoY respectively. On the other hand, residential land prices in other areas fell by 1.5% YoY on average.

Comparing RPPI results with the Land Market Value survey, we see a noticeable difference. While the Land Market Value survey tend to suggest land prices in metropolitan area are starting to rise, RPPI results tend to suggest they are not. Why does the result of Land Market Value survey differ from RPPI? In our view, the discrepancy comes from the difference in how to evaluate prices. The Land Market Value survey is calculated based on the appraised land value. On the other hand, RPPI is calculated based on actual transactions. We think it is possible that the appraised value in Land Market Value survey is affected by the recent upturn in in condominiums and commercial land prices. In our view, RPPI is a better reflection of what is actually happening in residential land price in Japan, as RPPI is based on the actual transaction, and value weighted across the country.