How is the novel coronavirus affecting real estate prices in Japan?

For those looking to sell real estate in Japan, now may be the time to do it — as the country is bracing for a gradual decline in land prices.

At least, that’s what the latest figures indicate. Land prices in urban areas have fallen due to stalled transactions in the wake of the novel coronavirus, a pattern likely to be repeated across the country that may lead to a decline next year in the average posted land prices for the first time in six years.

Land prices in 38 of 100 intensively developed commercial and residential districts in the major metropolitan areas of Tokyo, Osaka, Nagoya and elsewhere dipped in the April to June quarter of this year, while only one district saw an increase, according to the quarterly Look land value report issued by the Ministry of Land, Infrastructure, Transport and Tourism late last month. The data marked the first time since 2012 that the number of districts seeing price declines outnumbered areas with rising prices.

Experts say the latest descent could be a major catalyst for change, possibly matching the scale of that seen in 2008 during the global financial crisis triggered by the collapse of Lehman Brothers.

Here’s a look at the latest data and the likely impact it will have on real estate prices in the coming months.

What is so significant about this report?

The quarterly survey looks at land value trends for 100 intensively developed commercial and residential districts near major stations in the metropolitan areas of Tokyo, Osaka and Nagoya and other major cities. The figures are considered a leading indicator of real estate market trends for major cities across the country.

The Look report had shown mostly steady increases in urban areas until the beginning of this year, thanks to sustained development and a rise in inbound travel demand.

Then came the coronavirus outbreak.

Reflecting a rise in the consumption tax from last October and a slump for hotels and department stores due to a sharp decline in inbound travelers, the report detected the first drop in urban land prices since 2014 in the first quarter of this year, although the majority of the 100 urban areas monitored still saw land values increase.

In the second quarter, however, the number of urban areas that saw land appreciate plummeted from 73 in the previous quarter to just one – the commercial district in front of Sendai Station in Miyagi Prefecture, where a huge redevelopment project is underway.

Of the 100 commercial and residential districts surveyed, 38 areas saw a decline in value, compared with four in the report three months earlier and zero six months earlier.

The remaining 61 districts saw no changes, up nearly threefold from the previous quarter. Eight districts, including famous commercial areas, such as Tokyo’s Kabukicho and Osaka’s Shinsaibashi and Namba, depreciated in value by 3 to 6 percent, posting the first such steep drops since the fourth quarter of 2011.

“Due to the COVID-19 pandemic, prospective property buyers maintained a ‘wait-and-see’ stance and transactions stalled in many districts,” the land ministry said in a statement. “Districts with high demand for hotels and retail stores were affected significantly by the novel coronavirus crisis and saw a decline in demand because of probable lower profitability.”

According to real estate analyst Kazuyuki Yamashita, “the latest data represents a dramatic change and clearly marks a harbinger of weakening real estate prices in Japan.”

“The Look report is a leading indicator and the decline detected at these major urban areas will have a ripple effect on suburban areas of major cities, and then to regional cities,” he added.

How big of a decline should we brace for?

Japan has experienced steep declines in land values in the past three decades, with major impacts felt from the bursting of the 1990s bubble economy, the 2008 financial crisis and the 2011 Great Eastern Japan Earthquake.

Some analysts say the impact of the novel coronavirus on real estate prices could be as severe as that of the 2008 financial crisis or the aftermath of the bubble economy, but chances of a significant decline in the short term are slim.

Average condominium prices in the Tokyo metropolitan area remained high in July, at above ¥60 million, a Real Estate Economic Institute survey showed last month, on a par with the peak prices seen when the bubble economy burst three decades ago.

“There are various reasons why the real estate prices won’t become cheaper easily, but basically the condominium developers would suffer losses if they lowered the prices of condominiums they built at high costs,” Yamashita said.

So should prospective buyers buy housing now or wait until prices come down?

Following the 2008 financial crisis, many Japanese banks were forced to curb lending. That prompted many midsize developers, in dire straits, to resort to liquidation sales, which led to a steep fall in condominium prices.

But with many small and midsize developers going out of business now, the supply of condominiums has stayed relatively low and their prices have remained stable at high levels.

“Now, the so-called major seven condominium developers — including Mitsui, Mitsubishi, Sumitomo, Daikyo, Nomura and Tokyu, and other stable firms — control around 70 to 80 percent of the market, and they’re unlikely to dump condominiums easily even if sales stalled,” Yamashita said.

But there are signs of a sea change in the offing.

Housing developers have typically lost out to hotels in acquiring land at premium spots — such as locations within a five-minute walk from a train station — due to the higher profit margin projections for hotels, Yamashita said.

But now that hotels have been battered by the virus, housing developers are beginning to acquire high-quality land at cheaper prices, he explained.

“Cheaper condominiums developed on these high-grade plots will enter the market in a year or two,” he said. “Japanese fundamentals are not that weak despite the coronavirus, so don’t expect a dramatic decline of 20, 30 or even 50 percent in value. If you have a property that you really want to purchase, then I’d say you’d better buy it now without hesitation.”