Japan raised rates — but Tokyo apartment prices keep climbing

Even as the Bank of Japan pushes its benchmark interest rate to a 31-year high, apartment prices across Japan show little sign of retreating. Analysts say cash-rich buyers and stock investors continue to funnel money into the real estate market, while a sharp drop in new apartment supply is providing additional price support.

The conventional wisdom — that higher rates raise borrowing costs, dampen housing demand and bring prices down — has yet to play out clearly in Japan.

The Bank of Japan raised its policy rate to around 1 percent last month, the highest level in 31 years, according to the Nikkei Shimbun on Friday.

The move is expected to push up variable mortgage rates, which 70 to 80 percent of Japanese home loan borrowers use. Rates for new borrowers could rise to around 1.3 percent annually around October, while existing borrowers may see the same increase take effect around January 2027.

Even so, the prevailing view in Japan's real estate market is that rising rates will not translate directly into falling apartment prices.

In central Tokyo, a significant segment of buyers is largely indifferent to higher borrowing costs. The Nikkei Shimbun highlighted the case of a man in his 50s whose financial assets exceeded 100 million yen ($610,000) after gains in semiconductor-related stocks and other equities.

The man is searching for an apartment in central Tokyo priced at around 100 million yen, planning to sell part of his stock holdings to fund the purchase and take out a loan for the remainder. "My goal is to reduce my exposure to volatile stocks and rebalance my assets," he said. "A rate increase is no reason to stop buying."

Experts say high-income earners and cash buyers like him are underpinning demand for premium housing in central Tokyo, a segment relatively insulated from interest rate movements.

"In the most central wards of Tokyo's 23 wards, many ultra-premium properties are purchased outright with cash," said Toshio Nakayama, deputy director of the Lifull Home's Research Institute. "There is a sense that prices have peaked, but there are no signs of a collapse."

Another factor limiting the dampening effect of rate hikes is that Japan's policy rate, even at a 31-year high, remains well below the levels seen during the tightening cycles in the United States and Europe.

The US experience is frequently cited as a reference point for Japan's market. After the COVID-19 pandemic, the US and Europe aggressively raised rates. While home prices fell in Germany and France, they continued to climb in the United States.

The Daiwa Research Institute noted that in the US, high-income households maintained their housing demand even as rates rose, while the purchasing power of ordinary households declined, paradoxically reducing the supply of lower-priced homes. The result was a polarized market: transaction volumes fell, but prices stayed high.

A similar dynamic is emerging in Japan. As cash buyers prop up prices for premium apartments in central Tokyo, end-users are being pushed toward the outer wards and key cities in the broader metropolitan area. This is driving price increases beyond the city center to the wider metropolitan area as a whole.

According to Tokyo Kantei, the average price of a used 70-square-meter apartment in Tokyo's six central wards remains in the 180 million yen range. Some months this year have seen month-on-month dips, but the overall price level remains high.

Used apartment prices in Tokyo's 23 wards edged down last month, but the metropolitan area average continued to rise. The Kinki region's apartment market is showing a similar trend.

Money generated by the stock market rally is also flowing into real estate. Japanese experts say used apartments in central Tokyo are increasingly seen as assets with lower price volatility than stocks and a hedge against inflation, drawing investment demand.

Real estate is also used as a tool to reduce inheritance taxes. Investors who have seen their assets grow on the back of rising share prices may continue to cash out and redirect the proceeds into urban apartments.

A severe supply shortage is another factor propping up Japan's apartment prices.

According to the Real Estate Economic Institute, new apartment supply across Japan totaled 59,940 units last year — roughly one-third of the peak recorded in 1994. Supply in the metropolitan area in the first half of this year remained similarly low.

Labor shortages and rising construction costs have curtailed new apartment supply, pushing demand into the used-home market and lifting prices there as well, creating a self-reinforcing cycle.

"Rate hikes will have some moderating effect on prices, but average prices will not fall in the short term," said Osamu Nagashima, founder of real estate consultancy Sakura Office. "The decline in new construction stems from structural factors such as labor shortages, so the upward price trend will not be easy to reverse."

However, not all areas and properties are holding strong. Apartments in regional areas far from city centers and poorly served by public transport may feel the impact of rate hikes more acutely. Properties in poor condition or with limited demand could become difficult to sell altogether.

Experts broadly expect Japan's apartment market to hold near its current highs for now, but see little chance of the broad, sharp price gains seen in the past.

If rising rates and stagnant prices occur at the same time, households that stretched to take on heavy loans to buy homes could face significantly greater financial strain.

Specialists at Condominium Asset Management advised consumers considering a home purchase to stress-test their repayment capacity against a scenario in which variable mortgage rates rise to around 3 percent annually.

Experts also cautioned that the risk of buying beyond one's income and asset level — driven purely by expectations of future price appreciation — has grown considerably.