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Mortgage Rates Drop to Lowest in Two Years as Economy Slows: Japan Credit

Japan’s home-mortgage costs are dropping, with rates at the lowest since 2009, as a recession deters borrowers and keeps benchmark government bond rates low.

The 10-year fixed-mortgage rate is 3.75 percent at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest listed bank, compared with more than 4 percent in May, according to data compiled by Bloomberg. Home-loan costs fell in September, tracking a drop to record levels in the U.S., as Japan’s 10-year sovereign yields slid for a sixth-straight month.

“Government bond yields should hover at low levels,” said Kenro Kawano, head of Japan interest-rate strategy at Credit Suisse Group AG in Tokyo, one of the 25 primary dealers obligated to bid at the government’s debt sales. “The mortgage rate could go lower as banks struggle to find borrowers. There’s no need to rush to buy a house.”

Falling mortgage costs may support a housing market where property prices have fallen for two decades, based on figures from the Ministry of Land, Infrastructure, Transport and Tourism. Standard & Poor’s cut its forecast for Japan’s economic growth on Sept. 14 and said the rebound from a record earthquake on March 11 is likely to be “less robust” than expected.

“After the March 11 earthquake, real estate waned for a while,” said Takashi Ishizawa, a property analyst at Mizuho Securities Co. in Tokyo, part of Mizuho Financial Group Inc., Japan’s second-biggest bank by assets after Mitsubishi UFJ Financial Group Inc. “The slowdown wasn’t permanent. Demand for the earthquake-resistant houses and buildings has especially increased.”

Housing Starts

Ten-year fixed mortgage rates are 3.75 percent at Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Resona Bank Ltd., Bloomberg data show. Mizuho Bank charges 3.6 percent, according to data provided by Mizuho Corporate Bank Ltd. Mortgage costs dropped in September at all the lenders, units of Japan’s four-largest banks.

Housing starts climbed to an annual rate of 955,000 units in July, the most since January 2009, according to the land and infrastructure ministry. Gross domestic product growth this year will be almost nothing, according to S&P, compared with its pre- quake estimate of 1.3 percent.

Average land prices nationwide dropped 3.4 percent in the year ended July 1, compared with a 3.7 percent decline in the prior 12 months, figures from the land ministry show.

Government Bonds

The 10-year fixed mortgage rate may fall 20 basis points in the months ahead as the economy struggles, Credit Suisse’s Kawano said. Homeowners can further cut borrowing costs with promotions offered by lenders. Bank of Tokyo-Mitsubishi offers a 10-year fixed rate of 2.35 percent to customers who make a down payment covering at least 20 percent of the purchase price, according to the bank’s website.

Japan’s 10-year government bond yield was 1 percent as of 11:49 a.m. today in Tokyo, versus this year’s low of 0.965 percent on Sept. 22, according to Japan Bond Trading Co. That compares with the five-year average of 1.395 percent.

The International Monetary Fund said Sept. 20 that Japan’s economy may contract 0.5 percent this year, down from a prior estimate of a 0.7 percent decline. Growth in 2012 should reach 2.3 percent, the IMF said, 0.6 percentage point less than its June estimate.

Bond rates in Japan fell along with U.S. 10-year yields, which slid to a record 1.6714 percent this month, as the economic recovery faltered. In the U.S., the average rate for a 30-year fixed loan dropped to 4.09 percent this month, the least on record, according to Freddie Mac, the mortgage financing company in McLean, Virginia.

U.S. Mortgage Spread

The difference between U.S. 10-year yields and 30-year fixed-rate mortgages was 2.14 percentage points, after widening to 2.37 percentage points on Sept. 22, the most in 30 months.

The Bank of Tokyo-Mitsubishi rate was 2.75 percentage points more than Japan’s 10-year yields. The spread has averaged 2.74 percentage points for the past three years, according to data compiled by Bloomberg.

The Fed said on Sept. 21 that it will reinvest maturing housing debt into mortgage-backed securities to help support the home-loan market. “The housing sector remains depressed,” central bankers said in their statement.

Policy makers also said they will extend the average maturities of the Treasuries in the central bank portfolio by purchasing $400 billion of long-term debt to cut benchmark borrowing costs.

Real Estate Bonds

The Bank of Japan is scooping up government debt, corporate obligations, and shares in real estate investment trusts and exchange-traded funds as it tries to spur the economy.

Japan government bonds have proved a better bet than property debt over the past six months as the economy struggled. Sovereign securities returned 2.3 percent, versus 1.4 percent for real estate bonds in the nation, according to Bank of America Merrill Lynch data.

Elsewhere in the nation’s credit markets, the extra yield investors demand to own Japanese corporate debt instead of similar-maturity government bonds has narrowed to 69 basis points from 78 basis points in June, according to Nomura Research Institute Ltd.

The difference between yields on Japan five-year government bonds and inflation-linked securities, a gauge of trader expectations for consumer prices over the life of the debt, was negative 34 basis points compared with negative 68 basis points in March, the biggest gap this year.

Credit-default swaps insuring Japan’s sovereign debt for five years climbed to a record 142 basis points, or 1.42 percentage point, on Sept. 23, according to New York-based CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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