By Steven Jacobson
Steven Jacobson is a sophomore at the University of Pennsylvania studying business and history.
Japan became the latest country to take the once-unthinkable plunge on January 29, announcing that it would cut its interest rate below zero for the first time. The move is the latest in the world’s third-largest economy’s efforts to banish the stagnation and deflation that has plagued it for a quarter century. The Bank of Japan hopes that the risky decision will prompt savers to start spending and also devalue the currency to make the country’s exports more attractive to trading partners. The reduction to -0.1 percent will also likely boost Japan’s long-sluggish but steadily climbing property market, but could threaten to lay the groundwork for a real estate bubble.
Japan’s real estate market, along with its stock market, soared during the country’s asset bubble in the late 1980s and early 1990s. The bubble burst in 1991 as Japan entered its Lost Decade, a period of economic malaise that has often been extended to 2010 by economists. Japan’s house price index, as measured by The Economist, plunged 43 percent from the first quarter of 1991 to the third quarter of 2007, at which point the market began a modest surge before crashing again during the global financial crisis.  The market has experienced fits and starts since bottoming out in early 2012 but has grown steadily since early 2013.  This three-year increase has been partially driven by an influx of capital from China’s newly wealthy into Japan’s property market. 
Although such Chinese demand for Japanese property might be taking a hit as China’s economy begins to slow, negative interest rates promise to sustain and possibly accelerate Japan’s real estate momentum. Lower interest rates make money easier to borrow and push mortgage rates lower. This is a boon for consumers, who take advantage of such easier access to financing by increasing their demand for real estate, driving prices up. This is also good for those who develop, hold, and invest in real estate, as this means their assets’ values augment. Mitsui Fudosan, Mitsubishi Estate, and Sumimoto Realty and Development, three of Japan’s largest real estate developers, received sizeable bumps on the Tokyo Stock Exchange after the Bank of Japan’s announcement.  Hirosi Okubo, head of research at CBRE, a commercial real estate company, predicts the move could also make real estate investment trusts’ dividend yields more attractive. 
To those interested in the effects of extended periods of negative interest rates on property markets, the examples of Sweden and Denmark are instructive. Sweden’s real estate market has had the opposite trajectory of Japan’s, as, except for brief blips such as the global financial crisis and a brief and disastrous experiment with raising interest rates in 2011, it has grown steadily since 1993. Sweden’s central bank reversed course in 2011, cutting interest rates to -0.35 percent, becoming the first economy in the world to go below zero. Since then, its housing prices have increased by 21 percent.  Cheap money has exacerbated a surge in borrowing, which has risen at twice the rate of economic growth since 2009. 
Denmark followed its Scandinavian neighbor into negative territory in mid-2012 and has only cut further since then. In the ensuing three and a half years, property prices in Copenhagen, the country’s capital, jumped by 40 to 60 percent as short-term mortgage rates have shrunk to nearly, or in some cases, below, zero.  The problem has been specific to Copenhagen, which holds about one tenth of the country’s population, as oversupply exists in the rest of the country. The situation is similar in Japan, which has seen a recent increase in land and house prices near urban zones such as Tokyo and Osaka, Japan’s two largest metropolitan areas. Office rents and prices for condominiums, which have become increasingly popular among Japanese in the last decade, have gone up as well. In fact, the average price of a condominium in Tokyo rose nearly 6 percent during the first six months of 2015, reaching levels not seen since 1992. 
Scandinavian financial institutions have begun to warn of impending bubbles in Denmark and Sweden. Nykredit, Denmark’s largest mortgage bank, said in October there is a “real risk” Copenhagen is in the midst of a property bubble. Although the bank does not believe such a collapse is imminent, if prices continue to rise at their current pace, they could soon become unsustainable.  SBAB, SEB, and Swedbank, three of Sweden’s largest financial institutions, have warned also warned of such unsustainability in the Swedish property market and have limited their exposure to real estate. 
Yet, others remain bullish overall on negative interest rates’ impact on the real estate market. PFA, Denmark’s largest commercial pension fund, announced an investment in a Morgan Stanley Asia-Pacific core fund that heavily includes Japanese property after the company had invested 4 billion kroner, or $607 million, into the Danish property market. Nykredit has also qualified its warning of a Danish housing bubble with the assertion that real estate price growth looks likely to slow to 5 or 6 percent in 2016 and 2017.  Such a pace, it states, would not cause a bubble.
Denmark has been able to stave off even wilder price jumps in Copenhagen’s property market by requiring property buyers to pay a deposit of at least 5% of the property price up front.  Sweden’s financial watchdog has also heightened capital requirements on mortgages and required banks to hold counter-cyclical capital buffers on risky assets, which will help if a bubble does burst.  Mortgage rates have begun to rise again in Sweden as these measures have caused upward pressure. 
Japan’s long-dead real estate market should receive a boost in the face of global headwinds from the central bank’s decision. In a country that has dealt with static and sometimes declining asset prices for over two decades, this would be a welcome development. However, if left unchecked, it could price many out of the market and create a bubble similar to that which sent Japan’s economy into a tailspin from which it is still recovering. Japanese policymakers should keep an eye on the real estate market and adopt measures to stave off such a development should prices approach a dangerous peak.
 The Data Team, "Location, Location, Location: Global House Prices," The Economist, October 7, 2015.
 Kathleen Chu and Katsuyo Kuwako, "The Chinese Descend on Japan's Property Market, Pushing Prices Up," BloombergBusiness, July 2, 2015.
 Kae Suefuji, "Property Sector Skeptical about Bump from BOJ Move," Nikkei Asian Review, February 2, 2016.
 IPE Staff, "Negative Interest Rates in Japan Could Benefit J-REITs, Says CBRE," IPE Real Estate, February 1, 2016.
 The Data Team, "Location, Location, Location: Global House Prices."
 Amanda Billner and Niklas Mangusson, "Swedes on a Debt Binge Now Face Test of Rising Mortgage Rates," BloombergBusiness, November 8, 2015.
 Christian Wienberg, "In Copenhagen, Apartment Prices Jump 60% After Rates Go Negative," BloombergBusiness, October 21, 2015.
 Kana Inagaki, "Japan’s Real Estate Agencies Fear Darker times Ahead," FT.com, September 29, 2015.
 Wienberg, "In Copenhagen, Apartment Prices Jump 60% After Rates Go Negative.”
 Niklas Mangusson, "Sweden's ‘Distressing’ Housing Market Triggers Bank Warnings," BloombergBusiness, October 21, 2015.
 Wienberg, "In Copenhagen, Apartment Prices Jump 60% After Rates Go Negative."
 "Home Is Where the Heartache Is," The Economist, November 7, 2015.
 Billner and Mangusson, "Swedes on a Debt Binge Now Face Test of Rising Mortgage Rates."
Photo Credit: Flickr User Sandro Bisaro
The opinions and views expressed through this publication are the opinions of the designated authors and do not reflect the opinions or views of the Penn Undergraduate Law Journal, our staff, or our clients.