Asset price is a rough indication to evaluate economic health
In 2023, it became a topic of conversation that the average price of newly built condominiums in Tokyo’s 23 wards surpassed 100 million yen. Price of newly built condominiums in Tokyo city center have almost doubled in the past decade. It makes us wonder who buys them? For example, when we watch such news, we need the idea of “asset price.”
In our modern society, there are various types of assets. Based on the calculation of the national economy such as GDP figures, assets can be broadly categorized as financial assets represented by stock certificates and deposits, and non-financial assets, including real estate such as land and buildings. These can be further classified as produced assets and non-produced assets, and there are various assets from familiar ones to complicated ones. Whatever they may be, the price attached to all these assets is called asset price. Why is this important? It is important because this presents a rough indication of the health status of the national economy.
The actual asset derived by deducting debts from the national asset is expressed as the national wealth. Japan’s national wealth reached about 4 quadrillion yen at the end of 2023, and it is said that half of it consists of real estate such as land. In other words, the Japanese economy and national wealth are likely to be affected by real estate prices.
Suppose that you kept 100 million yen in cash under a mattress. In the next year, owing to price fluctuations, the real value (= purchasing power) will change, while the nominal value of 100 million yen will not change, and continue to be 100 million yen. However, in the case of real estate, if a property was bought many years ago, unless it has been bought and sold, it is very difficult to accurately determine its current price. In addition, the balance sheet that shows the asset price only states the price at the time of purchase, which is many decades ago.
It is very difficult to ascertain the true state of the asset price of real estate. Nevertheless, if we keep it vague, it could be a risk because we cannot notice even if its price decreases significantly. Moreover, as real estate constitutes a considerable portion of Japan’s national wealth, it is also important to predict prices properly in order to understand the Japanese economy.
Exclude the bias and separate specs and environmental changes
Now, how is the asset price of real estate determined and how does it change? I will explain this by using the example of a condominium.
Suppose that you bought a 4-bedroom apartment no. 301 with a living/dining room, located on the 3rd floor of a condominium building. Even if it is in the same building, the neighboring apartment no. 302 is inexpensive because it is a 3-bedroom apartment with a living/dining room. On the other hand, apartment no. 1001 with the same floor plan, situated on the 10th floor, has a higher price than room no. 301, because it has a nice view. This ‘having a nice view” or distance from the station, or (non)existence of parks and shopping facilities in the neighborhood, are the specs that are valued by buyers. Most selling prices will be determined by a combination of these specs.
Furthermore, what makes the prediction of real estate asset prices difficult is the fact that the same thing never exists. The average price of condominiums in Tokyo is published every year. However, it is quite unusual that the same property is traded two years in a row. Thus, we cannot simply compare the price. A rough price of the land of Meiji University may be calculated. However, it was never actually traded during past 100 years, so we cannot tell the real price.
Therefore, I have conducted research to accurately understand the change of real estate prices by fixing a specific place and predicting the price of the place every year. What is important here is to divide the temporal price fluctuation in the market into fluctuation due to change of product specs and fluctuation due to change of the economic environment. This is an adjustment method used to calculate things like the consumer price index besides real estate. For example, if there was a 5% price increase from the previous year concerning personal computers and smartphones, how much percentage did the product spec improvement contribute to the rise, and to what extent did the market environment impact the price? We cannot see the real background of price fluctuations if we do not think about them separately. It will be important to “correct” = “quality control” the market data appropriately in order to accurately understand price fluctuations.
Moreover, the real estate market has a low transaction frequency and small number of players. Thus, it has the characteristic of being likely to generate bias concerning specs and price. Especially in the case of commercial properties such as office buildings that have less samples than residential buildings, this tendency is more noticeable. In order to alleviate this bias, it is better to have more forecast information that can be used as a reference. With this in mind I am continuing my research.
Furthermore, the price fluctuations of properties in urban areas have considerable implications. Price hikes and drops can occur not only owing to the floor plan and the building age but also by mere increase or decrease of economic power in the area or the city. Everything, including the vitality of economic activity, demographics, and infrastructure such as education and medical care in the relevant area, will be reflected in the real estate value. This is also considerably relevant to policies such as urban planning.
Moreover, the level of infrastructure will be one of the specs, such as easy access and schools and hospitals nearby, from a personal perspective. I think it is beneficial to understand the relationship between these specs and real estate also at the individual level for many people who are thinking about buying a home. Because we can say that real estate prices are the aggregation of specs.
Because predictions are not 100% accurate, there is a point in doing it
After the 2011 Great East Japan Earthquake, the price of high-rise condominiums dropped tentatively. However, that was a brief moment, and the current price is soaring, as previously discussed. This is because for some people a view from the higher floor is a valuable spec. Whether these have high value or not depends on each individual’s preference. However, if you think about what the truly necessary specs are for you, wouldn’t it be a little easier for you to choose a property? For the child-rearing generation, educational infrastructure, convenience in shopping, and for families with two incomes, access to their workplace, etc. To consider a reasonable price for yourself, you could also dissolve various functions of a property and understand them as an aggregation of specs. By prioritizing these specs within your budget, it should become easier to judge, for example, whether it is important to pay more money for a spec such as a higher floor with a view. For other purchases, the awareness of these specs is also important.
Moreover, assets should be basically understood from the revenue generated by owning them. For example, if you have a stock certificate, you will receive dividends from the company. Farmland purchase price is also determined by the prediction of how much revenue it will generate when crops are produced there. Real estate value is also based on its revenue, and the benefit from its specs is also a part of its revenue. However, when this starts to become detached from the price, we will be concerned about a “bubble.” Price increases in Tokyo city center condominiums are also called a real estate bubble. If this is indeed significantly influenced by foreign investors as rumored, we also need to pay close attention to foreign economic trends.
Now that connection with the global economy has become stronger owing to globalization, I feel that there are more needs by foreign investors who want to know about Japan’s real estate market situation. By presenting appropriate forecast information, it should be possible to attract money from abroad and contribute to job creation and economic growth.
Forecasts are no more than predictions, and they are not something that prove to be 100% accurate. However, if a highly precise predictions based on correct information reach people who require them and are used for decision making, their life and society will change for the better in the future.
* The information contained herein is current as of May 2024.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.
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