It is said that the carrion stench of a burst property bubble attracts the foulest of vermin. Is Niseko, a booming market still very much in its infancy, headed for that most tragic of fates?
Niseko has seen some of the highest land price increases in Japan for two years running. On the surface this would certainly indicate the danger of a bubble, but Niseko has some unique features working to prevent this from happening. Namely, no direct bank financing, a fledgling market and a small band of spunky ex-pats carving a place for themselves in Japan’s frozen north.
Rental return-driven growth results in a self-correcting market: In the land of common sense a boom becomes a bubble when return on investment drops below zero. To put it another way, when investing no longer makes any sense, you have entered the bubble. A major cause of the crisis in Western property markets is that institutional lenders and mortgage brokers do not live in the land of common sense, they live in a land where commission-based decisions rule over all. The bigger the loan a bank makes, the bigger the profit to the bank. The higher the book value of said property goes, the greater the asset value to the bank. So you can see that banks love a bubble. At least in the short term.
In a perverse twist, it is thanks to this absence of bank finance that private investors still largely fund investment in Niseko. As such, property prices in Niseko are based on investors expecting to get a return. The majority of people wealthy enough to be in a position to invest in a ski resort rental property are, generally speaking, financially savvy enough to realize that the financial commitment required must provide a suitable return. If it does not, they are probably not going to commit the money. Thus prices in Niseko remain comfortably within the bounds of common sense.
An example of commissions-fuelled loan practices and their blatant disregard for common sense would be a relative of mine from London who recently sold her small three-bedroom townhouse. This property, which could be charitably described as a “fixer upper” in a crack dealer infested neighbourhood sold for an astonishing $US1.1 million. If the buyer were planning to rent it out for a return, he or she would be a very disappointed landlord (dealing crack just doesn’t pay what it used to). Nobody seems to consider how the young professional couple that took out the mortgage will survive the crushing loan payments if one of them were to be so foolish as to stop work to raise a family. It is just assumed that they can sell it for $2.2 million in a few years time and retire to Spain. Provided this couple bail in time, they might just survive. You might say that the London property market is just a thinly disguised Ponzi scheme. In the short term and the long term, that sort of bubble just does not make any sense at all, and therefore cannot be sustainable. Incidentally, my cousin now lives in Spain.
Currently investors in Niseko are getting a return of 3~4% on a mature rental property. This return is realized on what amounts to a short ski season of about 100 days. There is room for tremendous growth in terms of rental opportunities in this fledgling market. Summer tourism is developing. The arrival of Hilton Hotels and the rumored Four Seasons cements Niseko as an international destination. Skiing has become the sport of choice for upwardly mobile Chinese, yet China has little to offer in terms of quality skiing. Niseko being four hours from 40% of the world’s population has much to offer and has really only just begun to market itself to the world.
A further feature contributing to Niseko’s continued success and development is the band of local ex-pats who have invested heavily in Niseko’s future. These are people who have settled down, started families and committed themselves, intentionally or not, to the wellbeing of Niseko. For these people, Niseko’s success and future growth is tied to their own. So you can be assured that they are taking the long-term view on the development and stewardship of the mountain.
– Graeme Glen
Sales manager for West Canada Properties.