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Condo builders in ‘crisis mode’ - debt at top five real estate firms up 17%

December 14, 2007
By Ken Worsley


Albrecht Stahmer, a good friend of Japan Economy News and the creator of BizCast Japan, has long been saying that there is a bubble in Tokyo’s condo markets - but we haven’t seen much of anyone listening to him just yet. That’s about to change: The Nikkei tells us today that not only is interest-bearing debt at Japan’s top five real estate development firms projected to jump 17% in the current financial year, but that condo builders are now in ‘crisis mode’ as demand for new condos has dried up.

The Nikkei tells us that according to the Real Estate Economic Institute Company, “Inventories as of Nov. 30 stood at 8,669 units, up about 30% year on year, and 70% of them are in suburban areas in Saitama, Chiba and Kanagawa prefectures.”

Perhaps more significantly, the Nikkei tells us that a sea change is going on in the way that new condos are being marketed. One very popular way of advertising new developments is to build ‘model rooms’ that potential customers can check out before they decide to put down a down payment - in fact, customers can check them out before building itself even starts. However, this is all changing:

Condo sales ordinarily begin with model units before actual units are available, but recent poor sales have led some midsize developers to dismantle their model rooms and postpone sales until the developments are complete…When carrying out sales before the units are finished, developers usually distribute flyers in about 10 seperate “rounds,” with each distribution effort costing about 3 million yen. Deciding that it is useless to try talking uninterested consumers into buying when there is nothing tangible to see, developers are switching to post-completion sales, where customers can see the actual unit and decide whether to buy on the spot.

30 million yen for flyers isn’t very much, but model rooms can be expensive. Where I live, both Mitsubishi and Mitsui have recently shut their doors on building that formerly housed model rooms. One of them now hosts a hula dance studio. We will be reporting on its bankruptcy in a few months, but that’s beside the point. The news for condo builders gets worse with the Nikkei telling us, “There are even cases in which developers are cutting prices to the point of losing money just to shed inventory.”

Ouch. So why is this all happening? Apparently, condos used to cost ten million yen less than a house. That gap is closing fast, and the Nikkei says it is now as little at 910,000 yen in some places. I saw a renovated 2 story home with 140m2 of space at about $600,000 in Setagaya advertised tonight about a 5 minute walk from where $600,000 condos are being built.

Which one would you rather live in? I mean, if you happen to have a drum kit.

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Comments

16 Responses to “Condo builders in ‘crisis mode’ - debt at top five real estate firms up 17%”

  1. wondering on December 15th, 2007 1:45 pm

    I have been wondering about this myself for a loooong time. I live one hour from Nihonbashi station in Chiba. There are Condos being built near the station here that can run up to 43 million yen, only about 100 square meters. My house (167 sqaure meters) and land (330 square meters) cost less than that (ncluding over 3 million yen in furniture plus Add in the fact that I had to put in a well and a sewage system, fences,stairs, driveway, outside boader walls,shed,etc. In addition, I have real siding, insulation imported from the U.S and CENTRAL heating and aircon!!!

    It just leads me to believe that Japanese people are INSANE. Although I guess they don’t even know what Central heat/aircon. is because I have to explain it to almost every guest that comes over. I guess this means they are starting to figure out that houses are a better deal. Next they have to figure out that buying land and building a house on it is cheaper too. These companies that force you to use their companies to build your house when you buy land mark up about 10 milliion yen or more. Houses in my area, smaller, older than mine go for over 50 million yen easy.

  2. John S on December 16th, 2007 4:59 am

    Condo prices make no sense for the quality, but if the buying public knew the truth, the construction industry would be in real trouble. I’m not sure where the gap with housing prices is happening, but I doubt it’s within the 23 wards. Outside there, it makes no sense to buy a condo. In Japan, it’s like buying a car…within hours 20% of value is gone and there’s still a loan to pay off. If you want a condo, go to a bankruptcy auction or buy one that’s 3-5 years old to shed that initial 20% loss in value.

  3. Steven on December 16th, 2007 11:39 am

    I would think it is market manipulation.

    Housing starts down 40%, due to new regulations.

    And this without an equal fall in demand, just a bureaucratic tangle.

    Economics 101 for where prices are going with this.

    Funny, in July there were the fewest new condos on the market for something like 13 years.

    “The institute said developers are holding back on sales of completed condominium units in the 23 wards because they expect prices to climb later on the back of increasing land prices”

    Why would they sell now with new supply stifled which will lead to the ability to sell at higher prices later.

    http://www.asahi.com/english/Herald-asahi/TKY200707180135.html

    The big boys just need to make sure they aren’t caught and folk/media don’t realize there are obviously a few backroom meetings that have taken place.

  4. Matt on December 16th, 2007 2:55 pm

    I’m not sure where the gap with housing prices is happening, but I doubt it’s within the 23 wards.

    I would guess that would be where the gap is largest, since property prices would be so high.

  5. Ken Worsley on December 16th, 2007 4:32 pm

    The big boys just need to make sure they aren’t caught and folk/media don’t realize there are obviously a few backroom meetings that have taken place.

    I’d be willing to bet they’re already aware of that, or just assume it to happen. The DPJ might be able to kick up a bit of a stink with the majority in the upper house now, but I think the way the Lockheed scandal played out pretty much showed the public/media have no way of getting to the bottom of such things and effecting change.

  6. WG on December 17th, 2007 11:52 am

    Steven, name pretty much any domestic market…food, construction, insurance, newspapers, TV - they’re all manipulated and price fixed. The public is well aware of it, but tatemae dictates that one pretend it’s fair, open and honest.

    Johm, what choice would the public have? There’s no discount builder…nobody like Book Off trying to come in and actually move things at a lower price. That would mean ‘lower quality’ rather than ‘fair prices’, right?

  7. David on December 17th, 2007 3:11 pm

    Rather than a discount builder, I think the biggest thing needed to bring more clarity into the market is a thriving resale market. In Japan housing is so much seen as a lifetime investment and Japanese dislike of second hand items means the resale market is tiny for a city as large as Tokyo. I would love to see this changed around but have no idea how it would be done.

  8. Wondering on December 17th, 2007 3:29 pm

    WG - you are 100% correct, no such thing as a natural market here.

    Actually there are some discount builders out there “Tokuto home” is one. They build crap houses for cheap prices. “Cheap” is relative though as you said, but they do undercut prices a bit. Not on a huge enough scale to effect anything though.

  9. Wondering on December 17th, 2007 9:03 pm

    David, there is truth to what you are saying but there are also several “used” houses/apts. for sale

  10. Ken Worsley on December 18th, 2007 12:08 am

    Well, the Ministry of Land encouraged builders to build homes and condos that would be intended to stand for 40 years a couple of years ago. Previously they were built to last 30 years. Kind of not good for the buyer who is often on a 35 year mortgage.

    No wonder no one wants to buy a used house or condo. They’re just not built to last.

  11. wondering on December 18th, 2007 9:08 am

    Where I live, the used houses and apt. get snapped up within a month or so. Of course there are some crappy ones in bad locations that sit there forever. I’ve been watching this market for a while now. Keep in mind, “reform” prices have been going down quite a bit.

    The guy who lives next door to me had a house built about a year ago. He has no 2 x 4’s, the wood isn’t bolted to the foundation, and they have the insulation stuffed between the wood. No aircon, the lady was outside all summer with her kids because it was “over 35 degrees” in the house as she put it. Now people pass by her house and think it is so “beatiful” and “traditional”. That describes it perfectly if you add “uncomfortable”. The Japanese just have no clue about comfort when it comes to living in a house. I used to walk around my mother in law’s house with a scarf and coat! Tatamae is more important than Honne, even in comfort.

  12. David on December 18th, 2007 10:24 am

    Wondering, I agree there are used apartments and houses for sale out there. However, in comparison to Australian or US cities the number for sale as a percentage of total number of dwellings in the city would be much smaller.

    Ken, for your comment that the houses are not built to last can be said about many countries. In Australia even where they like to use bricks (note: these are really about appearance more than structural) the construction method is not all that different. In about 2000 I went to one of the golf course type developments in Arizona . The houses were fairly expensive (golf course frontage) and the construction method for the external walls was as follows:
    Wooden frame (similar to Japan - probably weaker without the large sections of plywood bracing)
    20mm (approx) polystyrene sheet
    Chicken wire
    Mortar screed with paint finish.
    My comment at the time was that it would be easier to break in to the house through the wall than through the doors or windows. I know that there are also better constructed houses in the US but that is also true for Japan.

  13. WG on December 19th, 2007 3:59 am

    in comparison to Australian or US cities the number for sale as a percentage of total number of dwellings in the city would be much smaller.

    I’d like to see hard numbers on that.

  14. wondering on December 19th, 2007 8:27 am

    of course there aren’t as many for sale as the U.S.- the bubble burst in the U.S. and there are tons of houses/apt./condos on the market.

    another reason may be that Japanese fathers tend to move themselves without their families when they get a job in another part of Japan. Where as in the U.S. usually the entire family moves. I have no numbers on this one, just through observation of the culture for 13 years.

  15. Steven on January 24th, 2008 12:28 pm

    [i]I’d like to see hard numbers on that.[/i]

    “89% of British homes have had more than one owner, and 78% of homes in America and 66% in France, only 13% of Japanese homes have ever been resold.”

    http://www.economist.com/finance/displaystory.cfm?story_id=10431721

    I believe the economist is incorrect, however. Last time I checked the stats it was 17% for Japan, but may have been calculated in a different way. Need to hunt around for the link…

  16. Ken Worsley on January 24th, 2008 1:00 pm

    Thanks for the link Steven. Homes in Japan haven’t been built with the intention of lasting long enough to be resold. If a house has a lifespan of 30 years, it’s hard to resell. No real market ever develops.

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