Everything you need to know about the paradigm shift on homeownership in Tokyo

Owning a house used to be a major goal for the Japanese, but now more people prefer renting over buying.

The ownership of a newly built home was traditionally considered a major goal for Japanese households, representing a significant milestone for an individual or family. However, a Savills report says this norm has seen significant changes over the past decade. The market size for new condominiums has been shrinking, while those of used condominiums and rental condominiums have been on the rise, and many units are purchased with the intent of future resales. 

“The rising prices of condominiums and the increased presence of institutional investors, along with a shift in the mindsets of individuals toward housing, are believed to be major contributors to this paradigm shift,” the report adds.  

Here are Savills’ findings on the changing perspectives on homeownership and the evolving dynamics of the residential market in Tokyo:

Firstly, average prices of condominiums have been increasing for the past decade due to rising land and construction costs. Furthermore, condominiums have also risen in popularity compared to detached housing amongst the wealthy, leading to a growing supply of luxury condominiums well-integrated into the transport network, especially in central areas. 

In Tokyo 23W, average prices of new condominiums increased by 56% from 2012 to 2022, while average rents for residential units increased by only 13% over the same period. The widening price disparity has likely encouraged a growing number of households to rent instead of buy, leading to a more stable leasing market.

Indeed, rents have not risen as much as the price of new condominiums, and there are a few factors that have led to this. Firstly, institutional investors have become much more active in the residential sector, and cap rates have compressed significantly over the past decade, by about 200 basis points. Together with the lowering costs of financing, this has allowed investors to attain desired returns without the need for significant rental appreciation. 

Institutional investors, notably J-REITs, have capital and access to high levels of professional property management, and timely renovations have greatly improved the quality of such rental condominiums, making them more attractive to live in. Moreover, Japanese laws are protective of tenants, making increasing the rents of existing occupiers difficult in practice, and resulting in staggered rental increments, which usually take place only when a new tenant is contracted. 

Lastly, the desire to own property in Japan has declined, and a growing number of individuals appear content with renting. According to the Ministry of Land, Infrastructure, Transport, and Tourism's "National Survey on Public Awareness of Land Issues," the percentage of individuals aspiring to own property has decreased from 80% in 2012 to 65% in 2022. 

This shift is particularly prominent among individuals in their 20s and 30s, suggesting that this figure could decline further in the future. Part of this change could be attributed to a change in mentality, where homebuyers view their properties as assets that could be sold for a profit in the future, rather than using them solely as long-term residences. 

Overall, a paradigm shift with regard to renting over buying appears to have materialised over the past decade. Supply side issues from the declining number of new condominiums built and disproportionately rising prices over rents, and a general change in mindset of younger people have been the primary contributors to this trend. Going forward, demand for rental units in Tokyo should therefore continue to grow.