What is the 2022 real estate investment problem that land-owners should know about?

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In the real estate industry, there is growing concern that the market will cool off during the Tokyo Olympics in 2020. This is sometimes referred to as the 2020 problem. The belief is that after the economic peak of the Olympics, will come a significant downturn that will affect real estate prices.

In addition to this, many investors are talking about the 2022 problem. Here’s what the 2022 problem is and what to expect.

What is the 2022 problem?

To understand the 2022 problem, we need to explain the policy of creating productive green space in urban areas. Productive green areas are spaces designated to farming within urbanised locales. If you have ever seen farmland amongst a row of urban buildings and condominiums, this will likely have been developed as a productive green space.

As urbanisation began to eat up farmland in the late eighties, concerns were voiced around decreasing food self-sufficiency and a loss of green space. The Productive Green Space Law was revised in 1991 to promote farmland in urbanised areas as designated productive green space. A system was created in which, even in urbanised areas, property tax and inheritance tax were favourable if the land was earmarked to be used as farmland for the next 30 years.

In 2022, it will be 30 years since this law was passed. The 2022 problem raises concerns that the real estate market will be flooded with large amounts of urban agricultural land that has matured of its farming obligations.

What will happen to the real estate market thanks to the 2022 problem?

There are three options for owners of productive green areas that have completed their 30-year farming obligation.

① Ask the local government to purchase the land
② Convert it into residential land
③ Sell it

Budgetary constraints will prevent local governments from purchasing the majority of plots, so most of it will likely be converted into residential land or put up for sale on the real estate market.

In Japan, the rapid increase in the number of vacant houses has become a social problem. As of 2013, the number of vacant houses had reached 8.2 million, with the problem even extending to some urban areas.

If a large amount of real estate is supplied through residential land conversion where there is already a lot of real estate including vacant houses, the impact on the real estate market will be significant.

Considering the impact beyond 2022

Though the 2022 problem is predicted to begin in the eponymous year, it will be just the beginning of the crisis as not all the farmland designated as productive green space will be converted all at once.

There is one potential preventative measure against the 2022 problem, an inheritance tax grace if the owner continues to farm for the rest of their life even beyond the 30 years of farming duty.

There may be a considerable number of people who do not convert their land to residential land to benefit from this tax break. So the impact of the 2022 problem may not be as dramatic as first imagined. That said, it is worth keeping in mind for real estate investors who own properties in urban areas.