Oct. 05, 2013, 20:00 JST

A clear upturn in house prices


The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) updated the Residential Property Price Index for May 2013 on October 2. According to the report, Residential Property Price Index (RPPI) rose by 2.1% year on year (YoY) for the last two months. As the chart below shows, we can confirm 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 the Tohoku area, we observe a clear upturn towards the end of 2011 and again in 2013. Among all 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 seems to have bottomed in the second half of 2012. In our view, the recent recovery trend in property prices show 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 which is exactly what we are observing in 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, but 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 in the next 6-12 months. In theory, property 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 different 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