While Tokyo remains one of the world’s most expensive cities to live in, property prices in Japan, which soared during the late 1980s, have dropped for 13 consecutive years. This has had the effect of reducing the nationwide average price index to less than half of its peak level, the Japan economy survey points out. However, the cause of the decline has been shifting from a simple adjustment in asset prices to major structural changes that are taking place in the Japanese economy. In particular, the fall in prices in large urban centres is slowing due to buoyant commercial and residential demand, while the pace of decline in regional cities and the suburbs of large cities is accelerating.
According to a survey by the Japan Real Estate Institute, the rate of decline in average land prices in regional cities accelerated from 3.5% in 2003 to 4.4% in 2004. In contrast, the pace of decline in central Tokyo narrowed from 2.1% to 1.3% over the same period. Some central districts in Tokyo are even reporting price increases.
This on-going fall in land prices continues to take its toll on banks, which have traditionally been dependent on land as collateral. The share of bank lending with real estate as collateral declined from 27% in 1990 to 20% in 2002, while the share of unsecured loans without collateral increased from 32% to 36%. Added to this, because of the importance of land in household wealth, falling land prices have a negative impact on private consumption.
The Japanese government has responded with a series of measures, including promoting the revitalisation of urban centres through deregulation of planning and building codes, as well as financial assistance. Also, taxes on landholding and transactions have been reduced. However, so far such policies seem to have primarily affected land transactions and urban redevelopment in the centre of large metropolitan areas.
Indeed, structural changes such as the ongoing shift to a service-based economy, more population migration from rural areas to large urban centres, and the development of large-scale suburban retail centres all tend to reduce land prices in regional cities. Land price deflation on a nationwide basis will likely persist well after overall price deflation ends.
OECD (2005), OECD Economic Survey of Japan, Paris.
©OECD Observer No 246/247, December 2004-January 2005