How to read the Land Value LOOK Report – Have real estate prices surpassed their pre-global financial crisis levels?

According to the Trend Report of the Value of Intensively-Used Land in Major Cities (Land Value LOOK Report) for the third quarter of 2014 (July 1 to October 1), announced on November 28, 2014, by the Ministry of Land, Infrastructure, Transport and Tourism, districts witnessing an increase in land value continued to increase to 83% of total surveyed districts and there were no districts experiencing a decrease.

This survey is considered valuable among Japanese real estate price indices as data reflecting the most recent market sentiment. However, it has its limits, such as the approximately two months of lag time between a survey and its announcement, or the fact that the survey targets only land prices and does not include the combined real estate prices of land and buildings. Since statistical data only enables analysis of past trends, we would like to update our implicit knowledge of actual real estate market conditions to know where to look for sign of a turning tide.

The first Land Value LOOK Report, announced in 2008, indicated the results of the survey conducted in the fourth quarter of 2007. At the time, land value increased in over 87% of districts surveyed. After that, 41% of districts saw an increase and 9% a decrease in the first quarter of 2008, 13% increased and 38% decreased in the second quarter of 2008, and 0% increased and 85% decreased in the third quarter of 2008, in which Lehman Brothers collapsed.

When was the turning point during the last period of rising real estate prices? According to the Land Value LOOK Report, the peak time was most likely to have been either the fourth quarter of 2007 or the first quarter of 2008. But this could be only recognized in June 2008 or September 2008 when the survey results of the first quarter of 2008 or the second quarter of 2008 were announced, which was too late to start shifting the direction of real estate investment. (The published land prices for Minato-ku, Tokyo, also indicate January 2008 being the peak time.)

It seems to me that the current real estate prices in central Tokyo have almost recovered to the peak level of before the global financial crisis. The level of cap rates has become even lower than that of the previous peak. While the real estate value of high-end condominiums and commercial facilities in central Tokyo is experiencing a recovery to its previous peak level, rental apartments and office buildings have only realized 70-80% recovery. The published land prices of representative districts in Tokyo show the recovery reaching only 60-80% of the previous peak. However, this is due to rising construction costs and sluggish rent growth suppressing land prices.

Events before the global financial crisis

  • Nov. 2005Falsification of earthquake-resistance data revealed
  • Mar. 2006Quantitative monetary easing policy of the Bank of Japan lifted
  • June 2007Building Standards Act revised (lengthened period from building confirmation application to start of construction)
  • July 2007Nikkei average marks 18,261 yen (record high since the IT bubble)
  • Sept. 2008Subprime loan problem in the U.S. exposed
  • Aug. 2007Financial Instruments and Exchange Act put in effect
  • Oct. 2007-Mar. 2008Real estate market peak
  • Mar. 2008String of collapses of emerging real estate companies, beginning with REICOF CO., LTD. (continuing into 2009-2010)
  • Sept. 2008Collapse of Lehman Brothers
  • Oct. 2008Nikkei average marks 7,162 yen (new record low since burst of the bubble economy)

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