Stock Market Gains and Limited New Supply Continue to Support the Market

A recent Nikkei article, “Will Condominium Inflation Continue Despite BOJ Rate Hikes? Stock Market Gains Drive Capital Inflows,” reports that condominium prices may remain elevated for the time being, even as the Bank of Japan raises its policy rate.

In general, higher interest rates increase mortgage payments and place downward pressure on real estate prices. However, Japan’s current condominium market has several structural factors that make a significant price decline less likely. This article summarizes the factors supporting prices and the points prospective buyers should consider.

Higher Interest Rates Do Not Always Lead to Lower Housing Prices

International experience shows that housing prices do not necessarily fall simply because central banks raise interest rates.

After the pandemic, Germany and France experienced declines in housing prices as European interest rates rose. In the United States, however, housing prices generally continued to increase despite a substantial rise in policy rates.

In the U.S., higher borrowing costs reduced the purchasing power of ordinary households, while demand from higher-income households remained relatively stable, supported in part by stock market gains. At the same time, higher financing and construction costs made it less attractive to supply lower-priced new housing.

As a result, transaction volumes and overall market activity weakened, but prices themselves remained high.

The Impact of Japan’s Rate Hikes May Be Limited

The Bank of Japan has raised its policy rate to around 1%.

Although this is the highest level in 31 years, Japanese interest rates remain low compared with those seen in the United States and Europe during their recent tightening cycles. The pace of rate increases has also been gradual, leading some experts to conclude that the effect on condominium prices will be limited.

This is particularly true for ultra-high-end properties in central Tokyo, where many buyers purchase with cash rather than relying heavily on mortgages. Because these buyers are less sensitive to borrowing costs, they continue to support prices even as interest rates rise.

Signs of a Peak Are Emerging in Central Tokyo

This does not mean that condominium prices in central Tokyo will continue rising at the same pace indefinitely.

In 2026, used condominium prices in Tokyo’s six central wards began recording month-on-month declines more frequently. Nevertheless, the average price for a 70-square-meter unit remains above ¥180 million.

The pace of appreciation may be slowing, but the market has not yet shown signs of a broad or substantial price collapse.

High Central Tokyo Prices Are Pushing Demand Outward

As prices in Tokyo’s six central wards become increasingly unaffordable, many owner-occupier buyers are expanding their searches to other parts of the 23 wards and to major regional cities within the Greater Tokyo area.

This shift tightens supply-demand conditions in surrounding areas.

High-end central Tokyo properties remain supported by cash-rich buyers, while ordinary residential demand moves outward. As a result, average condominium prices across the Greater Tokyo market may continue to rise. A similar pattern has also been observed in the Kansai region.

By contrast, less conveniently located condominiums outside major urban areas are more vulnerable to rising interest rates. However, because transaction volumes in these areas are relatively small, even significant price declines are unlikely to have a major effect on broader market averages.

Stock Market Gains Are Supporting Condominium Demand

The article introduces the case of an employee in his 50s whose financial assets exceeded ¥100 million following gains in semiconductor-related stocks. He is now considering purchasing a condominium in central Tokyo with a budget of approximately ¥100 million.

He plans to sell part of his stock portfolio and use a mortgage for the remainder. For him, the purchase is mainly a way to rebalance a portfolio that has become heavily concentrated in equities. Rising interest rates are therefore not sufficient reason to cancel the purchase.

Central Tokyo used condominiums are attractive to such buyers because they are generally less volatile than equities and may provide a degree of inflation protection. Real estate may also be purchased for inheritance tax planning purposes.

The presence of buyers who are relatively insensitive to mortgage rates is another factor supporting condominium prices.

Used Condominium Prices Have Tended to Move with the Nikkei Average

Used condominium prices in Tokyo’s 23 wards have shown a tendency to move in line with the Nikkei Stock Average, often with a time lag.

When stock prices rise, the financial assets of investors increase, and part of those gains may be transferred into real estate.

However, the recent stock market rally has been driven disproportionately by a limited number of high-priced shares. It is therefore uncertain whether the resulting wealth effect will extend to a broad range of buyers.

A rising stock market does not automatically lead to higher condominium prices. The breadth of participation in the rally is also important.

Limited New Supply Is Supporting Used Condominium Prices

Another major factor keeping prices high is the decline in new condominium supply.

In 2025, only 59,940 new condominium units were supplied nationwide, roughly one-third of the peak level recorded in 1994.

Structural constraints, including labor shortages, make it difficult for developers to increase supply quickly.

When fewer new units are available, buyers who cannot secure new properties move into the used condominium market. This tightens supply-demand conditions and helps well-located and high-quality used properties maintain their value.

Even when the market appears close to a peak, limited supply may prevent prices from actually flattening or declining for some time.

Buyers Should Stress-Test Mortgage Rates at 3%

Although condominium prices may remain high, rising mortgage rates remain a significant risk for buyers.

The article recommends testing whether repayments would remain manageable if floating mortgage rates rose to approximately 3%.

Purchase budgets should not be based only on current borrowing costs. Buyers need to assess affordability under higher future interest rates.

The risks of purchasing beyond one’s financial means in the hope of future price appreciation have also increased. Buyers should evaluate repayment capacity, long-term asset value and the market rent for comparable properties before proceeding.

Our View

We also believe that the latest rate increase is unlikely to trigger an immediate and substantial decline in condominium prices.

Japan’s interest-rate level remains low by international standards, and cash purchases account for a meaningful share of transactions in the high-end central Tokyo market. In addition, wealth generated by stock market gains and the structural shortage of new condominium supply continue to support used condominium prices in Tokyo and the Greater Tokyo area.

At the same time, the market is no longer in a phase where all properties rise uniformly.

Differences in location, walking distance from stations, building management, rental demand and scarcity are likely to have an increasingly significant effect on each property’s ability to retain value.

Going forward, investment and purchase decisions should not rely primarily on short-term capital appreciation. It will be increasingly important to determine whether the property can be held through a higher-rate environment and whether sufficient demand will remain when the time comes to sell.

Conclusion

The Bank of Japan’s rate hikes will exert some downward pressure on the condominium market.

However, stock market-related capital inflows, cash purchases of high-end central Tokyo properties and the decline in new condominium supply are likely to keep prices elevated, particularly in the Greater Tokyo area.

At the same time, signs of a market peak are beginning to emerge, and the number of properties capable of delivering substantial future appreciation is likely to become more limited.

Prospective buyers should therefore prepare for further rate increases and establish purchase budgets that remain manageable relative to their income and savings.

Owners considering a sale should also avoid relying solely on headline market averages. Location, age, management quality and market liquidity must be assessed on a property-by-property basis.

Source: Nikkei, “Will Condominium Inflation Continue Despite BOJ Rate Hikes? Stock Market Gains Drive Capital Inflows”