According to most business media, now is the time to act if you are thinking about buying a home. Though the Liberal Democratic Party has yet to confirm that it will go ahead with the consumption tax increases the Democratic Party of Japan passed last year, it seems likely that the first hike to 8 percent will go through as planned in April 2014. The prediction is that people will try to buy homes before the consumption tax goes into effect and interest rates rise as a response to Prime Minister Shinzo Abe’s effort to boost inflation. Because the consumption tax — which applies to new homes but not to land — is levied when the buyer takes possession of the property, experts are expecting a rush on new homes by the end of the summer.
Japanese real estate analysts chart trends in the housing market by looking at condominiums, since they tend to keep their value longer than single-family houses do. According to one research company, which was quoted in a recent issue of Shukan Asahi, last December, the average price of condos in the Tokyo metropolitan area rose by 0.2 percent over the previous month, even though the actual number sold went down. Prices of condos had continually dropped since 2010, but in the latter half of 2012 the opinion was that the market had “bottomed out.” And the closer you get to the center of Tokyo, the bigger the subsequent increase.
The average December price of condos in the 23 wards of Tokyo was 1.2 percent higher than it was in November. However, almost all the real estate agents we have talked to since the beginning of the year told us properties aren’t moving as much as this trend would seem to indicate. Because April is the start of the new fiscal and school years, realtors do the bulk of their business between January and March, and everyone said sales and new rental contracts are at about the same levels as they usually are this time of year.
Consumers need to consider a number of factors before rushing out and purchasing a home. In Japan, land keeps more of its value than structures do, and the closer a property is to the center of Tokyo or a major regional center, the more value it will retain over time. The same goes for proximity to a train station, especially for investment purposes, since transportation availability is the most important consideration for renters.
However, older properties lose their value at a slower rate than brand new ones simply because they start out cheaper. The main problem with older properties is that while they are inexpensive, there is a certain amount of risk involved in renovation. An older house may require structural renovation — and not just the cosmetic kind. Condos are a safer bet because they tend to be more structurally sound, but if the building is more than 25 years old, there’s the possibility that the current group of owners will want to rebuild in the near future, which means the buyer may suddenly be faced with a huge bill for her share of common property above and beyond the money she paid for her condo.
An important advantage of buying a brand new property is tax savings, and the government understands that the consumption tax increase may act as a brake on new home sales, so it has proposed changing the maximum amount of income tax cut for the balance of a mortgage from ¥200,000 to ¥400,000 a year after the consumption tax increase goes into effect.
If someone buys a ¥45-million new home where the land is valued at ¥25 million and the structure at ¥20 million, after the 8 percent consumption tax goes into effect, the buyer pays ¥1.6 million in taxes on the structure, or ¥600,000 more than would have been paid before the tax increase. If that person buys the home after Oct. 2015, when the tax is supposed to go up to 10 percent, then it would cost an extra ¥1 million. With the increase in the tax cut for mortgage balances, however, the buyer can save up to an extra ¥200,000 a year on both national tax bills and local tax bills. Over time that could more than offset the money spent on consumption tax. It depends on the buyer’s income and the price of the property.
Because new-home sales are still considered an engine for the economy, the government will likely think of more incentives to make people buy, especially with the population and regular full-time employment dropping. But just because the authorities and the housing industry make it easier to buy new homes, it doesn’t mean everyone should. In a recent issue of Aera magazine, housing journalist Tsutomu Yamashita predicted a “subprime crisis” for Japan. The American subprime crisis was about securities tied to housing loans that were pushed on lower income people who couldn’t afford them. In Yamashita’s view, the Japanese government and the financial industry are conspiring to make it easier for low-income people to take out risky housing loans. He reports that banks are lowering the income threshold for mortgages to below ¥4 million or even ¥3 million, and that borrowers don’t even need to have regular full-time jobs.
In January one realtor assured us that our self-employed status, which does not guarantee a minimum yearly income, would be no barrier to securing a loan. He said that he himself is not a regular employee of his company and yet was approved for a 35-year mortgage with no down payment by the semi-public Housing Finance Corporation. Yamashita reports that 10 percent of all new loan recipients in 2011 made less than ¥4 million a year. Another agent told us that he was surprised how many of his clients have been approved for loans lately; several years ago many would have probably been turned down. JP Bank, the financial arm of Japan Post, will start offering housing loans in April, and they are specifically targeting people who make less than 4 million, so the competition for low-income borrowers will only intensify.
Yamashita believes foreclosures will balloon as a result. In April, a special law that makes it easier for small businesses and homeowners in financial straits to postpone payment on the principal of their loans will expire. The used home market is already seeing a steady influx of properties being sold through auction after their owners defaulted on loans. The typical foreclosure involves a head-of-household between the age of 45 and 55, still supporting a family and having paid about half of the total mortgage. At that point, the home itself could have lost as much as half its original value, depending on the location, so selling it won’t necessarily resolve the balance of the debt.
Developers and builders are counting on all these factors to boost the new home market. If the demand turns out to be less than anticipated, there could be an oversupply of inventory, which, added to all the used homes that will go on sale (either through normal means or foreclosures) could drive down prices even more, so in that sense the consumption tax increase won’t make much of a difference.
The longer you wait, the cheaper properties will be. On the other hand, if developers get smart, they will limit the number of new homes released on the market in order to stabilize prices. These possibilities only make the decision to buy and when to buy more difficult for potential homeowners. Some may decide it isn’t worth it and just keep on renting.
Philip Brasor and Masako Tsubuku blog about Japanese housing at www.catforehead.wordpress.com.