Demand for construction in Japan in 2020 is at a historic low, largely due to the stagnation of economic activity caused by COVID-19. Specifically, in 2020, nationwide demand for construction starts was 113.74 million square meters on a floor area basis, which is lower than the 115.49 million square meters in 2009, the year of the Lehman Shock, and the lowest level in 54 years, following the 109.74 million square meters in 1966 as mentioned in the previous article.
As of November 2021, COVID-19 is not yet under control, but as economic activity gradually resumed in 2021, demand for construction in Japan is on the way to recovery. In this report, we will present the following information on nationwide construction demand trends up to September 2021, based on the Statistical Survey of Building Starts (Ministry of Land, Infrastructure, Transport and Tourism), from the perspective of housing and non-housing, to understand the state of recovery and future construction demand trends.
- Overview of construction demand trends
- Residential demand trends
- Non-residential demand trends
- Future trends in construction demand
1. Overview of construction demand trends
First, looking at the overall domestic construction demand on a floor area basis, it decreased by about 10.8% in one year from 127.55 million square meters in 2019 (before the new corona outbreak) to 113.74 million square meters in 2020. Then, in 2021, it increased by about 4.4% year-on-year to 89.36 million square meters by September, indicating that it is on a recovery trend.
Next, we will look at residential and non-residential demand, as construction demand is largely categorized into residential and non-residential. Residential construction demand decreased by about 11.2% from 74.88 million square meters in 2019 to 66.45 million square meters in 2020 due to the COVID shock, but has recovered by about 5.7% year-on-year to 52.43 million square meters as of September 2021.
On the other hand, construction demand for non-residential buildings decreased by about 10.2% from 52.68 million square meters in 2019 to 47.29 million square meters in 2020, and then increased by about 2.6% year-on-year to 36.93 million square meters by September in 2021.
Thus, while overall construction demand has recovered by about 4.4% by September in 2021, residential construction demand has recovered by about 5.7% and non-residential construction demand by about 2.6%, indicating that the recovery of residential construction demand, which accounts for about 60% of overall demand, is having an impact on the recovery of overall demand.
We will now introduce details of these residential and non-residential construction demands in detail.
2. Residential demand trends
We will now look at trends in demand for residential construction by the following purposes of use.
1) Construction demand trends for owner-occupied houses
Construction demand for owner-occupied houses, which are built for the purpose of the owner’s own residence, decreased by about 10.4% from 34.39 million square meters in 2019 to 30.8 million square meters in 2020, but recovered by about 9.4% year-on-year to 24.8 million square meters by September in 2021.
2) Construction demand trends for rental housing
Construction demand for houses for rent, which are built by builders for the purpose of renting, decreased by about 13.1% from 16.23 million square meters in 2019 to 14.1 million square meters in 2020. 2021 saw a year-on-year increase of about 3.8% to 11.01 million square meters by September.
3) Construction demand trends for condominiums for sale
The construction demand for condominiums for sale decreased by about 11.5% from 8.42 million square meters in 2019 to 7.46 million square meters in 2020, and further decreased by about 5.5% year-on-year to 5.53 million square meters by September in 2021.
4) Construction demand trends for detached houses for Sale
Construction demand for detached houses for sale decreased by about 11.4% from 15.33 million square meters in 2019 to 13.59 million square meters in 2020. 2021 saw a recovery of about 6.4% year-on-year to 10.77 million square meters by September.
As described above, by September 2021, demand for residential construction by purpose of use is recovering in the case of owner-occupied houses, rental houses, and detached houses for sale, while demand for condominiums for sale continues to decline. As a result, overall residential construction demand recovered by 5.7% year-on-year by September 2021.
3. Non-residential demand trends
Next, we will look at demand trends for non-residential construction by application.
1) Office Construction Demand Trends
Construction demand for offices decreased by about 3.7% from 6.41 million square meters in 2019 to 6.18 million square meters in 2020, but increased by about 6.9% year on year to 5.06 million square meters by September 2021, with the rate of increase not only exceeding the rate of decrease in the previous year, but also surpassing the level of September 2019 before the Corona shock.
2) Construction demand trends for stores
Construction demand for stores decreased by about 10.4% from 4.38 million square meters in 2019 to 3.92 million square meters in 2020; in 2021, it increased by about 17.5% year on year to 3.18 million square meters as of September, and as with offices, the rate of increase exceeded the rate of decrease in the previous year.
3) Construction demand trends for factories
In 2021, the demand for factory construction has recovered to 4.89 million square meters by September, up about 8.3% from the same period last year, but it is still low compared to the level in 2019 before the COVID shock.
4) Construction demand trends for warehouses
The construction demand for warehouses increased significantly by about 26.1% from 9.08 million square meters in 2019 to 11.46 million square meters in 2020. Warehouse construction demand is the only building use covered in this report that saw an increase in demand in 2020, despite the COVID shock. In 2021, the demand for warehouses increased to 9.17 million square meters as of September, up approximately 3.0% from the same period last year, continuing the upward trend from the previous year.
5) Construction demand trends for schools
School constuction demand decreased by about 7.0% from 2.38 million square meters in 2019 to 2.21 million square meters in 2020, and decreased by about 9.3% year-on-year to 1.55 million square meters by September in 2021, not only continuing the downward trend from the previous year, but also exceeding the rate of decrease in 2020. 3-6.
6) Construction demand trends for hospitals
The construction demand for hospitals decreased by about 13.8% from 2.04 million square meters in 2019 to 1.76 million square meters in 2020, but increased by about 28.7% year-on-year to 1.82 million square meters by September in 2021. In addition, the level of demand is already higher than the annual demand for 2020.
7) Construction demand trends for hotels
Hotel construction demand decreased significantly by 29.7% from 2.53 million square meters in 2019 to 1.78 million square meters in 2020, and in 2021, it decreased by 30.8% year-on-year to 990,000 square meters by September. As in the case of school construction demand, not only is there a continuing downward trend from the previous year, but the rate of decrease is also exceeding the rate of decrease in 2020.
8) Construction demand trends for welfare and nursing care facilities
Construction demand for welfare and nursing care facilities decreased by approximately 8.9% from 3.17 million square meters in 2019 to 2.89 million square meters in 2020, and is continuing to decline in 2021 as well, decreasing by approximately 8.0% year-on-year to 1.95 million square meters as of September.
Thus, by September 2021, the demand for non-residential buildings is different for each area. The trend is recovering for factories, improving for offices, stores, and hospitals, continuously declining for welfare and nursing care facilities. For schools and hotels, the trend is declining, but at a lower rate than that of the previous year. Furthermore, for factories, the trend is on a continuous rise. As mentioned above, the overall demand for non-residential buildings is on a recovery trend of 2.6% year-on-year by September 2021.
4. Future trends in construction demand
Finally, we will discuss future trends in construction demand. As mentioned above, overall construction demand in Japan is greatly influenced by the trend of housing demand, which accounts for about 60% of the total.
Therefore, there are two possible scenarios: one is that domestic demand for residential construction will increase significantly and recover to the level of 2019, before the COVID shock, and the other is that demand for residential construction will level off or decrease and the recovery trend will slow down.
Although lumber prices have been rising since the beginning of 2021 due to the so-called wood shock, the construction cost level of owner-occupied detached wooden houses nationwide has remained high and will remain generally flat until September 2021. In other words, construction companies are currently absorbing the increased costs of materials and labor caused by the soaring price of lumber, and if these increased costs are passed on to construction costs in the future, the level of construction costs will rise.
In general, when prices (construction costs) increase, demand decreases. Therefore, if the increased costs are passed on to construction costs, the level of housing construction costs will rise, and the current recovery trend will gradually slow down.
In addition to the above cases, there may be cases where, for example, demand for non-residential buildings, which account for about 40% of construction demand, surges along with the economic recovery, and domestic construction demand recovers to the level before the COVID shock.
However, the prices of steel products such as reinforcing steel bars and steel frames, which are often used in non-residential buildings, have been rising since the beginning of 2021, as have the prices of lumber, and the level of construction costs for non-residential buildings is expected to rise in the future.
Even if economic activity recovers in 2022 to the level of 2019, the year before the COVID shock, there is a concern that it may take some time for domestic construction demand to return to such levels.
This is due to the fact that, in the past, when the price of major construction materials soared, construction costs rose significantly in the following year. The reason for this is that the rise in construction costs will put a brake on the recovery of construction demand.
In this report, we examined the extent to which construction demand in Japan recovered from the COVID shock in terms of residential construction demand by purpose and non-residential construction demand by use, and introduced future trends in construction demand.
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