Japan's 30-30-30 Real Estate Problem

People continue to speculate on how Japan's demographic issues will affect the way of life here. Recently, the media has been discussing the so-called 30-30-30 problem. In three decades, the population of thirty-somethings will have decreased by 30 percent relative to current levels. What effect will this have on the real estate market?

Changes in demographics and population size affects the demand for homes: a growing population needs more homes while a falling population needs less. It is also important to look at the breakdown of age groups within a population. People tend to buy a home after they get married. In Japan, men and women get married at around 30 years of age (29 for women and 31 for men). However, this key demographic is projected to decrease by 30 percent over the next 30 years, posing serious questions about demand for housing.

On top of this, marriage seems to be becoming less and less popular in Japan. Marriage rates in Japan are steadily falling and this has had an effect on the home ownership rate in this age range. The percentage of owner-occupied households where the head is between 30-34 years old fell from 45.7% to 26.3% between 1982 and 2018. Similarly, for those in the 35-39 age bracket, the home ownership rate decreased from 60.1% to 44.0%.

All else being equal, the 30-30-30 problem appears to signal that there will be a lack of demand for homes in the future. However, some bright spots do exist: while 30-somethings may be rejecting homeownership, older generations are to some extent replacing them as property buyers.

Many retired people purchase investment properties as a way to secure income for themselves. Owning real estate is also used to offset the cost of inheritance tax. The Japanese inheritance tax system significantly favors real estate assets over cash holdings. This creates a strong incentive for wealth preservation through property investment, especially in Tokyo. When Japanese tax authorities calculate inheritance tax, they don't use the market value of real estate but instead use a government-assessed value called "rosenka" (路線価). This assessment method typically values properties at approximately 50-70% of their actual market value in Tokyo areas, creating an immediate tax advantage.

Tax-savvy pensioners are currently driving some of the demand for new apartments in central Tokyo. However, this trend is unsustainable. The generations following the baby boomers are smaller in size, meaning future generations of older people will not be able to exert the same level of influence on the market that they currently do.

Japan's demographic situation is going to have a bigger and bigger effect on the way of life in Japan including on the real estate market. Property developers, investors, and policymakers would be wise to prepare for this inevitable shift in Japan's housing landscape.