We are now in October and already in the second half of this fiscal year. Ishiba won the LDP election and became the 102nd Prime Minister of Japan, and a general election is scheduled for October 27th. The following month, on November 5th, the US presidential election will be held. Domestic and global situations continue to be volatile.

Each time, stock prices fluctuate. Sometimes as expected, sometimes contrary to expectations, they fluctuate wildly or remain static… So how about the real estate market?

As the term “political economy” suggests, politics and economics are essentially separate entities, but they are closely intertwined. As someone involved in the real estate market, which is an “economic activity” and whose movements are influenced by policies, I am naturally very interested in domestic politics and international trends. However, the real estate market does not fluctuate wildly in a day like stock prices, so to put it bluntly, there is no need to worry too much about politics or economics.

There are three methods for calculating real estate prices: the cost method, the comparative transaction method, and the income capitalization method, and each is calculated as follows.

If construction costs rise due to political trends or the economy, what will happen to real estate prices? According to the cost method, prices will rise, but since the purchasing power of buyers does not increase even if the cost rises, sales will worsen, and prices may fall according to the comparative transaction method. On the other hand, prices may rise because the used market looks “cheaper” compared to the new construction market.

Even with construction costs alone, it is difficult to predict whether they will rise because the cost rises, or whether they will not sell because they rise, and then fall. There are many other factors that make it very difficult to predict the trends in the real estate market.

Of all these factors, the one that has the greatest impact on buyers is undoubtedly interest rates. If interest rates rise, the amount paid will increase even for properties of the same price, making it difficult to purchase, and working in a negative direction on the market. However, if interest rates rise, prices may rise due to those rushing to buy.

So, what should we use as an indicator? If there is one, it is rent.

Unlike real estate prices themselves, rents are not easily affected by economic conditions. As mentioned above, one method of determining real estate prices is the income capitalization method, which derives the amount from future income, i.e., real estate rents. According to the income capitalization method, real estate prices do not change much even if the economy fluctuates. Especially in residential areas, it is rare for rents to be raised immediately because the economy has improved, or vice versa. Even if interest rates rise and real estate prices fall, if rents are supported and the income capitalization method shows that the price is cheap, there will be purchases from an investment perspective.

From this perspective, when purchasing real estate, it is the right choice not to be overly sensitive to economic trends and to check the rent balance.

However, it is important to note that even those who purchase as an investment may find it difficult to purchase due to rising interest rates, and the number of investors entering the market may decrease. The defense against this is to purchase good properties which are popular with investors and will not be affected by rising interest rates. For example, properties in areas with high rental demand, such as city centers where the population is on the rise.

That probably goes without saying for the reader.

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