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Housing market exemptions to offset tax hike impact

Bloomberg

The 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 Tuesday the sales tax will rise to 8 percent in April from 5 percent now, marking the first increase since 1997. In January, the government doubled home-buyer tax exemptions to as much as ¥4 million per transaction, compared with ¥1.8 million 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 home-buyers, concerns that demand will dry up after the increase has prompted Deutsche Bank AG to cut the rating on Japan’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. “So we expect a drop in housing demand to only last for a few months.”

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

Monthly housing starts rose for a 12th straight month in August, capping the longest rising streak since February 1994, land ministry data showed Sept. 30. The last time 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 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 the past two years by recommending investors to overweight these holdings since 2010, lowered his recommendation on the industry to market weight 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 index. 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 home-buying,” Tomoyoshi Omuro, an analyst at Morgan Stanley MUFG, said in a report published Monday. “With added government measures, we do not expect as severe a backlash as the market.”