Let's talk Tokyo, and more specifically the Tokyo affordability paradox, which is this – how is it possible that Tokyo is simultaneously known as one of the world’s most expensive cities, while at the same time being constantly ranked as one of the world’s most liveable cities?
Which is it? Crazy expensive, or comfortably affordable? Well, there are really a few aspects as to why this is the case.
The first and most straightforward reason is, that a large part of Tokyo’s “crazy expensive” reputation is a thing of the past, leftover from the eighties when the city – and the rest of Japan as well - was indeed insanely expensive. However, those days are long gone. Japan’s last big economic bubble burst in the early nineties, and since then, all the way up until late 2012, prices of everything – from the cost of goods and foods and properties, and cost of living generally – have been sliding down – with property specifically more than halved during that period. Now, it’s true that central Tokyo property prices have seen a revival between 2012-2016, and are now almost at that peak again – but A), that’s only the most central and heavily populated areas, and B) these prices are now not nearly as expensive for those residing overseas, since the rest of the world has moved on, inflation and cost of living have brought prices and salaries at least slightly up in the rest of the developed world, so those prices aren’t nearly as bad as they seemed back in the eighties, at least for those of us residing overseas.
Now, the other reason this stigma of “one of the world’s most expensive cities” lasted, is that a lot of the industry publications which rate the price of global property, and tend to include Tokyo in its top five or ten priciest cities regularly, don’t actually take into account the serious lack of space and average size of Japanese apartments – which is quite different to many other cities in the world. So, to be comparing apples with apples, we need to look at what it is that we’re actually comparing. Japan, is increasingly turning into a singles’ society – with far more singles than couples or families renting apartments in the country’s major cities these days – and the typical Japanese apartment, which is where most people live, is a lot smaller than a typical apartment anywhere else in the world, aside from maybe Hong-Kong, and a few other cities where space is also a highly expensive commodity. So, if we’re comparing places that are 200 or 300 square metres yes, Tokyo is very expensive, most definitely – but, while a 100 or 200 square metre apartment in Sydney or New York is not a rare thing – in Tokyo it’s exceptionally rare and up-market, and so is priced accordingly. The vast majority of singles and couples actually live in apartments that are somewhere between 20-60 square metres, in most large cities in Japan, and definitely in Tokyo – and if you actually compare these types of spaces with their counterparts in other major cities around the world, you’ll find there’s a huge difference in price – since the price graph shoots up very dramatically once you’re talking about properties that are larger than, say, 70 or 80 square metres, or where the layout is larger than 2 bedrooms and a living area.
So again – if you’re counting in price per square metre or square foot – yes, Tokyo can be quite expensive, since space is strictly limited and population density is very very high – but the Japanese are experts at making the most of smaller spaces, and are absolute wizards when it comes to space utilization, compartmental and practical interior design, like sliding and re-arrangeable doors and even walls, retractable furniture that can be tucked away into alcoves and panels, minimalist furnishing, super-functional multi-purpose rooms, and so forth – which means that a Japanese studio or one bedroom unit that is 45 square metres in size, actually feels and looks a lot larger and more comfortable when compared to the same living space anywhere else.
Another reason is that the Japanese are obsessed with the new and modern, the latest and greatest, in all things – and homes are definitely included – if you’ll recall, we’ve spoken about building standards and materials here, and how things are generally not built to last as long as in other countries – for this reason, prices tend to trend downwards very sharply after any structure reaches about 15 years of age – rental prices, incidentally, also trend down as a property gets older, but not nearly as sharply – so again, if you’re comparing large, brand new residences, yes, Tokyo is up there with most of the world’s most expensive cities – but as soon as you look at smaller, older properties, it’s quite a different picture.
So, here are some examples that demonstrate this. First, let’s look at a 16 square metre studio unit, in Edogawa – that’s in the Eastern suburbs of Tokyo – 15 minutes by train to the city centre, so quite convenient – 16 metres may sound small, but it’s actually quite normal for a Japanese studio apartment – so, suburban, small and relatively old apartment – priced at JPY5.5 million, approximately USD50,000 – hardly expensive, is it? If you were to renovate this place up to the latest and greatest modern design standards, including everything discussed earlier as far as minimalist furnishing and compartmentalising go – you’d be adding 20-30,000 dollars to this price tag at best. How about rent? Well, you’d be renting this unit – as is, before any such renovation – at only JPY50,000 – that’s about USD450 per month, not week, month.
If we look at a newer, bigger structure, for example, an entire building in Tokyo’s Western suburb, of Suginami – again, only about 15 minutes by train to the city centre – but this building is just one year old, with 9 units of various sizes, from studios of 20-30 square metres, up to 3 bedroom apartments of about 90 square metres, built on 127 sqm of land, and totalling about 250 cubic metres all up in structured property – well, this one’s priced at JPY220 million, which is approximately USD2 million – now, that comes up to an average of about USD220,000 per unit, on average, which is more what you’d expect from a city like Tokyo – not as bad as central properties, since this is still the suburbs, but definitely not cheap – an average of 32 dollars per cubic metre.
Now, these units are very different to that smaller, older studio we were looking at just before – they’re spacious, full of light, and are already up to the latest building and design standards – hence the huge difference. And the average rent for these units is about USD900 per month, so again – more than the smaller, older units, but not nearly the 3 or 4 times difference we’ve seen in the purchase price. If you look at houses, the differences become even more evident, since you’re now talking about owning your own private bit of land, and are using a lot of space, which, again, is in high demand – the larger and newer, the more you’ll spend. Brand new residences, while not the most expensive in the world, are definitely on par with New York, London or Sydney – suburban homes will start from USD 220 to 350,000 – central ones will start at about half a million dollars, and, of course, the sky is the limit.
So, to summarise – yes, Tokyo CAN be expensive – but can also be very affordable – it’s really a matter of what you’re buying. For investment purposes, though, one thing is true in all cases – monthly rental yields are, percentage-wise, the lowest in Japan. The city has huge international appeal, and prices shoot up whenever the economy does even remotely well, due to its reputation as one of the world’s most livable cities and a global tourism and business hotspot – so, just be aware, if you’re buying in Tokyo – yes, 2012-2016 were good for speculators, but we’re still talking about Japan, where economic growth is always tempered with caution, due to the fast decreasing population and the huge debt to GDP ratio – so speculating on Tokyo properties with low rental yields is still very much a gamble – you may be better placed to consider other cities, as we’ve discussed here.
For more information about Tokyo's property market, email Ziv Nakajima Magen of Nippon Tradings International via the contact details listed below.
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