In December 2025, the Bank of Japan raised its policy rate to 0.75%. Reaching a level not seen in 30 years signals a full-fledged transition into a "world with interest rates." This shift is not affecting the real estate market uniformly. Instead, it is creating a clear gap in market temperature between the end-user segment (homebuyers) and the investor segment. In this article, while taking an overarching view of the market's structural changes in 2026, I will organize what landowners and real estate owners should be considering now and how they should act.
What does the era of a 0.75% policy rate mean?
The Bank of Japan ended its negative interest rate policy in March 2024, then raised the policy rate step by step to 0.1% in July of that year, followed by 0.25% and 0.5%. In December 2025, it moved ahead with an additional hike to 0.75%. Another rate increase in 2026, bringing the policy rate to 1.0%, is widely viewed as likely, and the shift to a "world with interest rates" is becoming an irreversible structural change.
Home loans are where this change is hitting most directly. Major banks raised variable mortgage rates in April 2026, and the impact will begin to appear in actual repayment amounts from the July payment cycle. Variable rates that once sat below 0.5% have now risen above 1%, and fixed rates are moving higher as well. Based on a trial calculation assuming total borrowing of 40 million yen over 35 years, a 1% increase in interest rates would raise monthly repayments by about 20,000 yen and total repayments by roughly 7 million yen. For many end-user buyers, that is far from a minor number.
For investors, however, a different issue is emerging. Real estate cap rates in Tokyo's southern central areas are around 3.8% (according to Savills Investment Management). The yield gap over the 0.75% to 1% policy rate is steadily narrowing, and because higher borrowing costs directly reduce investment profitability, the standards used for investment decisions are beginning to change. I explain the calculation method for the yield gap and how to apply it to property selection in detail in a separate article.
What is the "wall of purchasing power" facing end-user buyers?
Alongside rising interest rates, another major change is progressing on the supply side. New condominium supply in 2026 is expected to be about 23,000 units, which would be the lowest level in the past 50 years. With construction material prices and labor costs continuing to rise, developers are postponing projects that do not meet profitability thresholds, and the squeeze in supply is being driven by structural factors.
Even though prices continue to be pushed up by both demand and supply conditions, the purchasing capacity of end-user buyers is not keeping pace with those increases. While rising interest rates are adding to repayment burdens, real wage recovery remains limited, and purchasing power is nearing its limit. Still, this should not be understood as the disappearance of demand, but rather as a "shift into a zone of fit."
More specifically, demand is becoming increasingly concentrated in central and station-accessible properties. There is a stronger tendency to choose properties with solid asset value and convenience that can also be sold more easily if circumstances change. By contrast, demand for suburban properties and properties far from stations is thinning, and pressure for price adjustments is rising. This behavioral shift among end-user buyers is becoming another factor that further widens regional disparities in the real estate market.
The reality of the investment market: Why are professionals and amateurs responding differently?
The investment market is even more complex. According to JLL research, overseas investors increasingly view Japan's rate-hike phase as "already priced in," and their appetite for Japanese real estate remains strong even in 2026. The share of office investment accounted for by overseas investors expanded from 1% in 2023 to 42% in 2025, showing that selective concentration is continuing.
One factor supporting this trend is the movement toward asset-light strategies among operating companies. Companies continue to sell owned real estate to improve asset efficiency, and that is creating a new wave of high-quality properties coming to market. For professional investors and overseas players, this is also a phase in which opportunities to acquire high-quality assets are increasing.
At the same time, changes in the lending environment are a growing concern. In its "Policies for On-Site Examinations and Off-Site Monitoring in Fiscal 2026," released in March 2026, the Bank of Japan explicitly identified lending to the real estate industry as a priority inspection area. Outstanding lending reached approximately 115 trillion yen as of December 2025, up 7.8% year on year, and the BOJ is watching for signs of overheating. I explain this policy in greater detail in the BOJ's inspection policy and tighter real estate lending.
As financial institutions move toward stricter credit screening, short-term flip-style investments with unclear exit strategies are becoming more difficult. Properties that could still work with low yields during the low-rate era face a greater risk of falling below profitability in a rising-rate environment. Those being forced to retreat are primarily individual investors who relied heavily on leverage.
What kind of market polarization is being created by the gap between end-user and investment demand?
Within the structural changes created by the gap in market temperature between end-user buyers and investors, there is one paradox. Investment capital is flowing into areas where end-user buyers are hesitating to purchase. End-user households that can no longer afford expensive central-city properties are being forced to remain in rental housing, and that rental demand is becoming the source of investment returns.
Rents continue to trend upward nationwide, and vacancy rates remain stably low especially in central areas and near stations. Because rental demand from the end-user segment is increasing, the structure that underpins investor income is being maintained. In other words, the mechanism unique to a rising-rate environment is functioning: the fact that "end-user buyers cannot afford to buy" is "supporting rental income from investment properties."
By contrast, older suburban properties face a double challenge. They are not becoming a destination for shifting end-user demand, and rental demand is also weakening, which is pushing vacancy risk higher. Rising repair costs and falling rents are occurring at the same time, and more cases are emerging in which holding costs exceed income.
Under this new conventional wisdom of "interest rates that split the market in two," the divide between central and suburban locations, and between newer and older properties, is likely to widen further. Reading this polarization accurately is becoming a prerequisite for asset protection.
What actions should owners and investors take now?
Precisely because this is a fast-changing phase, calm review that does not rely on instinct or habit is essential. The first task should be to confirm the "interest-rate sensitivity" of the properties you hold. Please start by understanding your outstanding variable-rate borrowings, LTV (loan to value), and current yield gap in numerical terms. From there, the starting point is to estimate the impact on cash flow if interest rates rise another 0.25% from here.
For those considering acquiring new properties, I recommend using "whether end-user-supported rent can be achieved" as the key standard. Properties where surrounding market rents and projected rent are significantly out of line carry high vacancy risk and cannot maintain stable returns under a rising-rate environment. For the overall picture of asset strategy in a "world with interest rates", please also refer to the separate article.
I should also touch on the option of selling. The market remains at a high price level, and properties in quality locations are still relatively easy to sell. Even for properties originally intended for long-term holding, there are cases where a review of the interest-rate environment and one's overall portfolio leads to the conclusion that "now is the exit." It is important to make that decision based on numbers and market conditions, not on emotional attachment.
If you choose to continue holding, stronger property management to reduce vacancy rates becomes your most effective lever. Even without forcing rents down, maintaining occupancy through cleanliness, equipment standards, and quality of response can help prevent a decline in effective yield.
My view: Reading the "temperature gap" is the first step in protecting assets
Through this BOJ rate-hike cycle, what I consider most important is "understanding the market's temperature gap in your own words." The fact that end-user buyers are under strain and the fact that professional investors remain bullish may appear contradictory, but in reality they are simply different angles on the same market.
Both perspectives are valid. That is precisely why the first priority is to confirm which position you yourself are in. Are you considering a home purchase for your own use, continuing investment operations, or evaluating whether you should sell? If you do not face that question honestly, there is little value in following market trends alone.
Long-term holding, appropriate rent levels, and maintaining management quality. These fundamentals do not change in any interest-rate environment. If anything, it is in a rising-rate phase that returning to these simple principles most directly supports asset stability. Structural market change is not a "crisis" but an "opportunity for revaluation" in which properties with fundamental value, and properties that only appeared expensive, are reassessed. I believe what is required now is to make decisions with a long-term perspective, without being swayed by short-term fluctuations.
Summary
- The Bank of Japan raised the policy rate to 0.75% in December 2025, and the "world with interest rates" is moving into full force
- End-user buyers are facing a wall of purchasing power due to rising variable rates and historically low levels of new supply
- Demand has not disappeared, but a "shift" is occurring toward concentration in central and station-accessible areas while suburban areas hollow out
- Among investors, overseas investors and professional players remain highly active with the situation already priced in, while individual short-term flippers are being forced to withdraw
- Under the BOJ's fiscal 2026 inspection policy, lending to the real estate industry has been designated as a priority review area, and the financing environment is changing
- A paradoxical structure is functioning in which the rentalization of end-user demand supports investment returns, leaving central and station-accessible rental properties relatively stable
- It is important to review the interest-rate sensitivity of held properties and judge new acquisitions based on whether "end-user-supported rent can be achieved"
- With the market still at elevated levels, now is also a good opportunity to review your portfolio, including the option of selling
Frequently Asked Questions (FAQ)
Q1. If variable interest rates rise, by how much will repayment amounts increase?
Based on a trial calculation assuming total borrowing of 40 million yen over 35 years, a 1% increase in interest rates would raise monthly repayments by about 20,000 yen and create a difference of roughly 7 million yen in total repayments. However, the actual change in repayment amounts varies depending on the outstanding loan balance and the size of the rate increase, so in practice I recommend asking your financial institution or a financial planner for an individual estimate.
Q2. If the BOJ's inspection policy is tightened, will it become harder to obtain real estate loans?
Under the BOJ's fiscal 2026 inspection policy, lending to the real estate industry has been designated as a priority review area, and financial institutions are being pushed toward more cautious screening in response to the growth in outstanding lending. That said, this does not mean financing for properties with clear profitability, repayment capacity, and collateral value will be categorically excluded. Rather, it is more realistic to assume that financing for well-planned investors will continue, while projects that are difficult to explain will face stricter review.
Q3. I own a suburban property. What should I do going forward?
Please begin by accurately understanding your current cash flow (income vs. repayments, management costs, and repair costs). If the property is producing income, the top priority is to maintain occupancy through stronger management. If income has already turned negative, or if maintenance costs are expected to increase going forward, I recommend considering the option of selling sooner rather than later. Acting before market conditions change further is important for minimizing losses.
Q4. Even though the yield gap is shrinking, is real estate investment still effective now?
The gap between cap rates in Tokyo's key areas, at around 3.8%, and borrowing costs has certainly narrowed. However, in areas where rents continue to rise, real returns are being maintained, and real estate continues to function as an inflation hedge. The important point is to choose properties where "yield > interest rate" can be maintained, and as the first benchmark for that, I recommend confirming whether end-user-supported rent can be achieved.
Citations and Reference Materials
- Bank of Japan, "Policies for On-Site Examinations and Off-Site Monitoring in Fiscal 2026" (March 10, 2026)
- JLL, "What Will 2026 Bring? Outlook for Japan's Real Estate Investment Market"
- JLL, "Trends Among Overseas Investors in Japan's Real Estate Market During a Rising Interest Rate Phase"
- Savills Investment Management, "Interest Rate Sensitivity of Cap Rates in the Japanese Market"
