On September 23rd, UBS released their 2024 Global Real Estate Bubble Index report, highlighting Tokyo, along with Miami and Zurich as being in bubble-risk territory.
According to the report:
Price bubbles are a recurring phenomenon in property markets. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.
But historical data reveals patterns of property market excesses. Typical signs include a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity.
The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns. The index does not predict whether and when a correction will set in. A change in macroeconomic momentum, a shift in investor sentiment, or a major supply increase could trigger a decline in house prices. (Page 5)
In other words, the report ranks cities in the bubble-risk index based on price movements in relation to wage and rent levels.
The report does not say definitively that Tokyo, Miami and Zurich are experiencing a property bubble; only there is risk that one is present.
Page 5 of UBS report, linked at bottom of this article.
What does the 2024 UBS Global Real Estate Bubble Index say about Tokyo?
Tokyo’s real estate market continues its upward trajectory, with home prices rising by about 5% over the past year, following a multi-year trend of steady growth. Over the last five years, home prices have surged by more than 30% in inflation-adjusted terms, significantly outpacing rent increases.
Page 14 of UBS report, linked at bottom of this article.
Urban migration, paired with depopulation in rural areas, continues to fuel housing demand, pushing prices even higher.
Despite slightly higher financing costs, demand remains robust, especially with the yen’s depreciation, making Tokyo more attractive to international investors.
Page 13 of UBS report, linked at bottom of this article.
With housing prices continuing to climb, concerns about a real estate bubble have grown. The high property values largely stem from the Bank of Japan’s extended period of low-interest rates and loose monetary policies.
What does Patience Realty think?
Last year, we discussed the income side of the price-to-income ratio. We argued that incomes were rising, not only with employees at large companies but especially with job hoppers.
According to the Nikkei Asia on October 2nd, Japan’s economy overall has done the following to date in 2024:
Economic Recovery & Consumption Trends:
Japan’s domestic consumption is rebounding despite inflation pressures.
The Bank of Japan's Tankan survey shows strong sentiment in accommodations and food services (index: 52) and retail (index: 28, up 9 points).
Retail Performance:
Daimaru Matsuzakaya: Same-store sales up 5.4% in September.
Inageya: Sales and customer traffic both rose by 3.7%.
Uniqlo: 6% growth in August, marking eight months of continuous gains.
Tourism & Foreign Demand:
Inbound demand from Western countries, China, and Taiwan drove a 20% sales increase for Prince Hotels (Occupancy up 5%).
International tourists are fueling demand at Tokyo’s top hotels.
Rising Wages & Prices:
Real wages grew in June and July, supporting domestic consumption.
October price hikes: 2,911 products will see increases, the largest surge this year.
Business Outlook & Labor Shortage:
Companies expect a 2.3% sales increase in fiscal 2024 but a 5.7% drop in pretax profit (improvement from June).
Worker shortage: Large manufacturers face a 19-point gap between insufficient and excess workers; for non-manufacturers, it’s 39 points (worst since 1991).
Hotel Industry Struggles:
Miyako Hotel Kyoto is 20% understaffed, using temporary reassignments to cover staffing gaps.
Marriott Tottori has delayed opening due to labor shortages and high materials costs.
Wage Increases to Combat Shortages:
Suntory Holdings plans a 7% pay raise for 2025 to tackle labor shortages, following a similar raise in 2024.
As long as the Bank of Japan holds interest rates around the current levels and wages keep on growing above the rate of inflation, Tokyo’s real estate market should be fundamentally healthy moving forward.
Yen levels hovering between 140 and 150 to the USD should keep Japan attractive for tourists and property buyers alike.
What could derail sustained buyer demand in the real estate market is a sudden strengthening of the yen due to an overseas economic slowdown, so it isn’t completely smooth sailing from here.
Domestically, further unwinding of yen-carry trade positions like we saw in August could contribute to a stronger than expected yen should the Bank of Japan raise interest rates again.
However, our thesis on wage growth in the J-economy continuing to rise higher than inflation, thus keeping the bubble at bay in the real estate market, seems to be holding true.
Only time will tell and of course, nothing is guaranteed.
Source:
UBS 2024 Global Real Estate Bubble Index (English only)
Japan's domestic spending propped up by wages and tourism by Nikkei Asia (English only; paywalled)
