Japanese Home Purchases Rise Before Corolla-Size Tax: Mortgages

Record low mortgage rates and the prospect of a consumption tax increase that will add the price of a new Toyota Corolla to the cost of an average home spurred Sumiko Morigaki into action.

“Tax hikes have been looming, so that gave me a push to buy,” said Morigaki, 43, a manager at an apparel retailer in Tokyo, who bought a three-bedroom condominium in Kanagawa prefecture, neighboring Tokyo, earlier this year.

New housing loans jumped 14.7 percent in the second quarter this year from a year ago, the most since March 2006, buoying a housing market entering its third decade of deflation. About 1.3 trillion yen ($16.5 billion) of extra home purchases are expected by the end of March 2014, in the year when the sales tax increases to 8 percent from 5 percent, according to estimates by NLI Research Institute, a Tokyo-based research and consulting unit of Nippon Life Insurance Co.

“The housing market has been dead for so long it shouldn’t take much to put a flame under it,” said Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo. “Banks, particularly regional banks, stand to benefit from the rush of home loans ahead of the tax hike.”

Housing investments rose 3.8 percent to 13.1 trillion yen in the fiscal year ended March 31, marking the first increase in five years, according to government data. Japan’s banks offered 2.98 trillion yen worth of new loans for home purchases in the three months ended June 30, bringing loans outstanding to 107.1 trillion yen, according to the Bank of Japan.

An index of residential land prices has slid by half from its 1991 peak, Japan Real Estate Institute data show.

Banks Dominate

Commercial banks accounted for the biggest share of new loans by lender type, making up 66 percent in the first three quarters of the fiscal year that started April 2011, followed by Japan Housing Finance Agency which constituted 15 percent, according to a July 23 report from Standard & Poor’s. The rest came from other financial institutions, according to S&P.

Prime Minister Yoshihiko Noda in August won parliamentary approval for his bill to double the country’s sales tax of 5 percent for the first time since 1997, to lessen the government’s reliance on debt. Property and fund association groups are asking for a reduction of taxes on home purchases to counter an expected slowdown after the increase in the levy.

The bill raises the tax to 8 percent in April 2014 and to 10 percent in 2015. A clause allows for implementation to be canceled based on an assessment of economic conditions.

Last Increase

Ahead of the last increase to the tax to the current 5 percent, from 3 percent, at the start of the Asian financial crisis in 1997, housing investments in Japan surged to almost 28 trillion yen in April 1996, according to NLI Research. Last- minute buying of houses ahead of that tax increase was about 2.4 trillion yen.

The peak for such last-minute buying demand this time around may come in the fourth quarter of 2013, said Taro Saito, Tokyo-based director of economic research at NLI. Developers and construction companies will probably benefit the most from the increase in demand for housing, he said.

The 44-member Topix Real Estate Index (TPREAL), which tracks Japan’s property companies, has returned 30 percent this year, making it the best performer among the 33 industry groups in the stock benchmark. Sumitomo Realty & Development Co. (8830) and Tokyu Land Corp. (8815) are among the top 10 performers. The property index today fell 0.4 percent at the close after rising as much as 1.3 percent.

History shows the boost may be temporary: Japan entered a 20-month recession after the tax was raised in 1997. Housing investments declined to about 19 trillion yen a year after the initial surge, according to NLI, using government data.

Regional Banks

Japan’s regional banks, which rely on home loans for a larger slice of their profits compared with the nation’s biggest banks, may get the biggest boost from a lending binge, said Shinichi Ina, a Tokyo-based bank analyst at UBS AG.

“Expectations are rising that mortgage lending will increase ahead of the tax increase,” Ina said. “Regional banks that have been centering their businesses in housing loans may see more benefits.”

Regional banks, including 77 Bank Ltd. (8341) and Shizuoka Bank Ltd. (8355), stand to outperform, said CLSA’s Smith in a report dated June 25. The biggest banks underperformed from April 1996 to April 1998, when the consumption tax was raised last time, he said.

Buildings are subject to the tax, while land isn’t. For a condominium worth 46 million yen -- the average for new apartments in the Tokyo metropolitan area -- the levy will rise to 2.3 million yen, from the current 1.15 million yen, in three years, supposing that half the apartment price, excluding the land value, is subject to the sales tax. The price of a Toyota Motor Corp. 2012 Corolla sedan starts at about 1.38 million yen in Japan.

Record Rates

The Bank of Japan (8301)’s policy to maintain rates near zero as it struggles to spur the world’s third-largest economy has already benefited homeowners. Japan’s benchmark 10-year yield fell to a nine-year low of 0.72 percent on July 23, and remains the third-lowest globally after yields in Switzerland and Hong Kong. The rate was at 0.81 percent today.

Tracking the benchmark bond yield, mortgage rates have declined to record lows. The 30-year fixed-rate mortgage offered by Mitsubishi UFJ Financial Group Inc. was at 2.4 percent in August, according to the bank. That compares with the average 30-year fixed-rate mortgage of 3.66 percent in the U.S., according to a Freddie Mac index.

The index measuring the number of potential home buyers visiting apartment showrooms increased to 51.7 points as of April 1 from minus 21.2 on Jan. 1, suggesting increased appetite for purchases, according to a survey based on 32 property companies by the Land Institute of Japan.

“Given the hike this time is 5 percentage points not 2 percentage points, the pre-buying is likely to be substantially larger,” CLSA’s Smith said.

To contact the reporters on this story: Tomoko Yamazaki in Singapore at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Rob Urban at robprag@bloomberg.net

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