Japanese real-estate shares may tumble as much as 30 percent over six months after the government confirmed plans to raise the sales tax, damping demand for home purchases, according to Deutsche Bank AG.
The last time Japan announced an increase in the levy, in June 1996, the Topix Real Estate Index of the nation’s developers sank 23 percent in about half a year. The tax rate rose 2 percentage points to 5 percent. Prime Minister Shinzo Abe today said the government will lift the tax to 8 percent next April. It might then be increased to 10 percent in 2015. The drop in developers’ shares this time may be much greater because the rate increase is bigger, said Yoji Otani, a Tokyo-based real-estate analyst at Deutsche Bank who downgraded the sector on Sept. 20 after rating it overweight since 2010.
“I’ve been bullish on real-estate stocks for the past three years, but at this point it’s hard to see them gaining further,” Otani said. “Shares started falling in June 1996 when the government declared the consumption-tax increase. I anticipate a similar trend this time, if not worse.”
Prime Minister Shinzo Abe announced his decision on the tax today, its first increase since 1997, in a bid to rein in a national debt more than twice gross domestic product. A buyer of a new condominium costing 51.3 million yen ($524,000), the average price in Tokyo, would pay an extra 1.5 million yen in taxes at the new rate. The move to boost the levy in 1997, and the Asian financial crisis, helped push the country’s economy into three straight quarters of contraction.
Housing starts rose to 1.6 million units in 1996 and fell for two straight years after the tax was raised, according to the land ministry. Real-estate demand has been increasing recently as potential buyers seek to purchase before the levy increases. Monthly housing starts climbed to an annualized 975,000 units in July, capping the longest rising streak since February 1994, the ministry data showed.
Otani has been right on developers for the past two years. The Topix real estate index gained 80 percent in 2012 and 57 percent so far this year, during which he had buy ratings on the sector’s biggest companies including Mitsubishi Estate Co., Mitsui Fudosan Co., Sumitomo Realty & Development Co. and Tokyo Tatemono Co. He cut the four stocks to hold on Sept. 20.
The Topix Real Estate Index gained 0.2 percent today in Tokyo, recouping some of yesterday’s 2.2 percent decline. The measure is down 7.9 percent from its high this year on April 12. Mitsui Fudosan, Japan’s largest developer, gained 0.9 percent.
Abe will also unveil the size of a package of stimulus measures later today, he told reporters, in a bid to offset the negative impacts of the increased sales levy. Economists have projected a 5 trillion yen ($51 billion) plan that will include public works spending and tax breaks encouraging companies to boost capital spending and wages.
Also today, data from the government’s statistics bureau in Tokyo showed that household spending fell 0.5 percent in August from July, while the jobless rate rose to 4.1 percent last month from 3.8 percent.
Real-estate shares may continue their decline until economic indicators worsen, which will prompt the central bank to inject another wave of stimulus, Deutsche Bank’s Otani said.
“We think investors should resume investment in the sector when the next monetary easing occurs,” he wrote in the Sept. 20 report. “It would be ideal if the consumption tax hike and further monetary easing were announced simultaneously, but we think this is unlikely.”