Tourism and rising land prices

The 0.1 percent year-on-year rise in Japan’s average land price as of July 1 — the first such gain since 1991 at the height of the asset-inflated bubble boom — reflects strong office demand by businesses earning robust profits and the continuing boom in inbound tourism that’s pushing up demand for hotels and shops. Land price increases continue to be particularly steep in areas that attract large tourism demand.

Fixed asset taxes levied on real estate based on property value is a key source of revenue for local governments. Both in order to ensure stable tax revenue and create more jobs for youths to reverse the population exodus, local governments across Japan should make all the more efforts to promote their local tourism sector.

Back in 1990, the national average price of land including commercial, residential, industrial and other use rose 13.7 percent — the sharpest on record — but after a 3.1 percent gain in 1991, property prices have been on a downtrend for more than a quarter century as Japan’s economy entered the protracted doldrums of the post-bubble years. Even with the halt to the downtrend, residential land prices remain around 50 percent and commercial land about 30 percent of the levels observed during the bubble.

What shored up average land prices was the sharp gains in the three big metropolitan areas around Tokyo, Nagoya and Osaka, where commercial property prices went up 4.2 percent, as well as the core regional cities of Sapporo, Sendai, Hiroshima and Fukuoka, which on average saw an even steeper 9.2 percent increase, whereas land prices continue to fall year on year in many regions that are confronted with the population exodus and rapid aging.

Another contributing factor is the recovery of the economy, which is now considered to be in an extended boom cycle that began when the Abe administration took over in December 2012. Under the Bank of Japan’s massive monetary stimulus program and aided by the yen’s weakness against the dollar, large corporations continue to earn record profits. The resulting robust demand by businesses, as illustrated by falling office vacancy rates, is pushing up commercial land prices. Improvement in the job market and income conditions have also led to rises in residential land prices, especially in locations convenient for commuting.

While the increased liquidity under the BOJ’s monetary easing programs supported the pickup in land prices, the current uptrend is marked by sharp increases in areas that are in strong demand. And the gains are particularly steep in areas popular among tourists. Last year, the number of inbound travelers to Japan hit a record 28.7 million. The total this year topped 20 million in mid-August and appears on course to exceed 30 million by the year’s end, moving closer to the government’s target of boosting the number to 40 million by 2020.

The booming trade has pushed up demand for hotels and shops that cater to tourists. Land prices in Tokyo’s Ginza district, bustling with tourists from overseas, keep rising, and commercial land at a site in Kyoto, also popular among foreign visitors, was among the top 10 gainers in assessed value over the past year.

The tourism and resort development demand is also pushing up land prices outside of the three big metropolitan areas. This is illustrated by the town of Kutchan in Hokkaido — home to the internationally popular Niseko ski resort — where the rise in land prices was the sharpest in Japan. In such areas, the increase in tourists has led to the construction of more hotels and shops, which in turn has boosted accommodation demand among employees of such facilities and pushed up residential land prices.

In Okinawa — whose annual number of visitors has topped that of Hawaii — increases in land prices have become steeper. Even on the small island of Naoshima, Kagawa Prefecture, in the Seto Inland Sea — known for attracting large numbers of visitors to its contemporary art exhibits and festivals — residential land prices rose unusually high for such a location.

These examples show that efforts by local authorities, communities and businesses to attract tourists and related investment can have a significant impact on reinvigorating local economies and shoring up land prices. Development of local tourism should provide more jobs for local young people, which in turn could slow down or possibly reverse the population exodus to big urban areas. Such efforts should be sustained to maintain the recovery in land prices.