Japan’s Housing Market to Weather First Sales-Tax Rise Since ’97

Japan’s housing market will weather a consumption levy increase because of a tax break on home purchases, according to Mizuho Securities Co. and Morgan Stanley MUFG Securities Co.

Prime Minister Shinzo Abe said Oct. 1 the levy will rise to 8 percent in April from 5 percent now, marking the first increase since 1997. In January, the government doubled the homebuyers’ tax exemptions to as much as 4 million yen ($41,000) per transaction, compared with 1.8 million yen in tax breaks back in 1997, according to Mizuho Research Institute Ltd.

While expectations of the higher sales tax has spurred last-minute buying among potential homebuyers, concerns that demand will dry up after the increase has prompted Deutsche Bank AG to cut the rating on the country’s real estate industry for the first time since 2010.

“The housing tax exemptions are bigger than the actual sales tax increase,” said Takashi Ishizawa, chief analyst for real estate research at Mizuho Securities in Tokyo. “So we expect a drop in housing demand to only last for a few months.”

To cushion the impact of a tax increase, Abe also unveiled a 5 trillion yen stimulus plan to rein in the world’s biggest debt burden without negating efforts to end deflation.

Housing Starts

Monthly housing starts rose for a 12th straight month in August, capping the longest rising streak since February 1994, a land ministry data showed on Sept. 30. The last time when Japan announced an increase in the levy in June 1996, housing starts fell for two years, according to the ministry.

Yoji Otani, a Tokyo-based real estate analyst at Deutsche Bank, expects Japanese real estate shares to tumble as much as 30 percent over the next six months after the government confirmed the plans to raise the sales tax.

Otani, who had correctly forecast developers’ share moves for past two years by recommending investors to overweight these holdings since 2010, lowered his recommendation on the industry to market weight on Sept. 20.

Developers are still trying to embrace an expected increase in demand prior to the consumption tax increase. The number of apartments offered for sale in Tokyo and surrounding areas gained 53 percent in August from a year earlier, the biggest same-month increase since 1996, according to the Real Estate Economic Research Institute.

The Topix real estate index has risen 53 percent his year, making it the fifth-best performer among the 33 industry groups that make up the benchmark. The property index has more than doubled since the start of 2010, compared with the 29 percent advance by the Topix.

“Better macro sentiment is raising consumer interest in homebuying,” Tomoyoshi Omuro, an analyst at Morgan Stanley MUFG, said in a report published on Sept. 30. “With added government measures we do not expect as severe a backlash as the market.”

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