On September 20th, UBS released their Global Real Estate Bubble Index 2023 report. The report tracks 25 cities in terms of their historical real estate prices and ranks them as whether they are:
Fair-valued
Overvalued
Bubble risk
According to UBS, Zurich and Tokyo are the only cities measured that are identified as being bubble risk real estate markets.
To preface what comes next, it is important to remember that market bubbles can only be identified after they pop.
Opinions until the pop clearly happens are all just speculation.
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.
UBS Global Real Estate Bubble Index 2023 page 5
That said, ignoring indicators is a sure fire way to lose money. So, we looked at the main indicators that UBS used for Tokyo to form this opinion and found them to be somewhat accurate but lacking in the whole story.
Below summarises what the 25 page report says about Tokyo, followed by our interpretation from a boots-on-the-ground perspective.
What does the report say specifically about Tokyo?
In recent quarters, global housing market risk scores have shown a significant decrease, primarily due to a surge in inflation and interest rates worldwide.
Zurich and Tokyo have maintained their high-risk status, despite low mortgage and inflation rates not causing market disturbances.
Page 5
Tokyo's housing market has transformed from undervalued two decades ago to a bubble risk today. This transformation has been driven by consistent real estate price increases over the years, detached from the national trend, fueled by favourable financing conditions and population growth.
International investors seeking Tokyo's resilient residential market have further accelerated price growth.
Factors such as widespread remote work and the availability of larger housing units have pushed people away from city centres.
While average house prices have slightly declined, income growth has remained stable over the past year in the cities analysed. However, affordability remains a significant concern.
In most global cities, purchasing a 60-square-metre apartment exceeds the budget of those earning the average annual income in the skilled service sector.
Page 13
House prices continue to outpace local incomes in Tokyo, Paris, Tel Aviv, and London, with more than ten times the annual income required to buy a 60-square-metre flat.
Patience Realty’s Interpretation
Bubble is a loaded term in Japan, harkening back to the late eighties, early nineties when the property bubble burst.
To put today’s prices and the notorious bubble into perspective:
Back then, more and more debt was lent to ever increasing unqualified borrowers, driving up the prices of everything.
Then, in December of 1989, The Bank of Japan inaugurated a new governor, Yasushi Mieno, who said in his very first speech “Thank you for appointing me to this position. Bad things are happening in my country. A graduate from the best university, entering to work for the best company in Japan, can no longer dream of ever being able to afford living in an apartment within a 2 hour commute. This is a bubble, this is bad, and I will burst it.”
The Bank of Japan then raised interest rates from 3 to 8 percent within a half year and the bubble subsequently collapsed.
So, in short, if the UBS Global Real Estate Bubble Risk 2023 report was written in 1989, it would be more accurate.
Not so this year and this is due to the “income” side of the “price-to-income” ratio held up as the main criteria for labeling Tokyo in bubble risk territory.
Wages are finally rising in Japan after prices got a head start. Earlier in 2023, the Keidanren and the various labour unions it negotiates yearly with, came to an agreement to raise worker wages by nearly 4 percent; the largest wage rise since 1993.
Inflation is also nearly 4 percent which effectively cancels out the purchasing power increase that should have come along with the wage hike.
That said, a more powerful trend amongst Japanese workers is the rise of mid-career job changes.
A May of 2023 article by the Nikkei Asia outlines the increasing trend of job-hoppers who receive a 10 percent plus boost in wages from their new company.
Some financial and REIT employees have reported seeing their wages raise 40 to 50 percent this year at new firms, according to various Tokyo based recruiters.
This wage growth is starting to turn pandemic induced supply-scarcity inflation into demand-driven inflation; the good kind.
Courtesy of CNBC.
Wage growth leads to further household spending which in turn allows business to do better, pay more taxes and allow the government to fund efforts to continue making Tokyo a better place to live; a virtuous cycle.
Unfortunately, by saying Tokyo real estate prices are in bubble risk territory, UBS is displaying a lack of granular understanding of what is driving the Tokyo market.
Prices still have more room to grow, as long as wages keep pace. The interest rate likely isn’t going to rise anytime soon.
Further Reading:
UBS Global Real Estate Bubble Risk 2023 report (September, 2023)
Japan’s Elite and Leading by Example (August, 2021)
