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Homebuyers in Japan seen at risk on floating-rate loan rush

by Mariko Ishikawa, Yumi Ikeda, and Kazumi Miura

Bloomberg

Homebuyers are piling into floating-rate mortgages, stirring debate over whether they are too complacent as Bank of Japan stimulus revives inflation.

The proportion of home loans with adjustable rates climbed to 42.8 percent of new lending in February, the highest since December, according to data from the Japan Housing Finance Agency (JHFA).

The lowest variable mortgage rate at the three biggest banks was at 0.775 percent, compared with a 10-year fixed rate of 1.3 percent.

Outstanding housing loans to individuals expanded to ¥113.7 trillion as of the end of June, the most since 1974 as BOJ Gov. Haruhiko Kuroda’s monthly sovereign bond buying aimed at ending deflation made it cheaper than ever to finance a home purchase.

Borrowers like 30-year-old retail employee Eriko Brown, who chose a flexible-rate mortgage to buy a house this year, are betting rates won’t rise significantly, even as global policymakers fret over how to exit from easing.

“The market has become complacent about risks as monetary easing continues,” said Satoshi Okumoto, chief executive officer and president of Fukoku Capital Management Inc., which oversees around ¥1.84 trillion. “Homeowners aren’t worried about the risk of yields rising even if they borrow in floating-rate mortgages. They could be caught off guard.”

The BOJ last week maintained its pledge to increase the monetary base to ¥270 trillion by the end of the year by buying about ¥7 trillion in sovereign debt a month. All of the 34 economists in a Bloomberg poll expect no tapering before the first half of 2016, with half saying an end to stimulus is unforeseeable.

Japan’s 10-year government bond yielded 0.51 percent Wednesday, down 22.5 basis points this year and the lowest globally after Switzerland.

“Yields may rise, but I don’t expect them to climb so much in the next decade or so,” Brown said of the house she purchased with her husband in Yokohama. “I figured all of the debt could be paid down by then.”

That’s what Yusuke Kawano, a 31-year-old financial industry employee, is counting on as well. He took out a 35-year variable rate mortgage in late 2012 to buy an apartment in Tokyo and plans to repay it within five to 10 years.

Home loans that are fixed for two to three years before changing to a variable rate are the most popular now, according to Takeo Okuhara, a senior fund manager at Daiwa SB Investments Ltd.

The proportion of home loans with adjustable rates has exceeded that of fixed-rate mortgages since at least November 2012, when the JHFA began compiling bimonthly data. Floating mortgages accounted for 38 percent of Japan’s new lending in the two months ended June, from 40.5 percent in March to April, compared with 31.4 percent for flat-rate mortgages, a JHFA report showed Wednesday.

Rising prices are unlikely to force BOJ policymakers to taper stimulus any time soon, according to credit market indicators. The 10-year break-even rate, derived from the difference between yields on conventional and index-linked bonds, was at 1.2 percentage point. Kuroda is targeting 2 percent inflation.

The Abe administration is considering whether to raise the consumption tax to 10 percent in 2015. The 3 percentage point hike in April caused gross domestic product to shrink an annualized 6.8 percent in the second quarter, the sharpest contraction in more than three years, according to preliminary data released Wednesday.

“The low mortgage rate will continue for some time as the BOJ continues to flood the market with cash,” said Akito Fukunaga, director and chief rates strategist for Japan research at Barclays Plc. “As we head toward the second increase in the levy, we could see housing demand pick up somewhat.”

The average 35-year fixed-rate mortgage dropped to 1.69 percent in August, the lowest on record going back to 2004, according to the latest report from the JHFA. The 30-year U.S. mortgage cost was at 4.14 percent last week, Freddie Mac data show.

“When we think of a five- to 10-year time horizon, both yields and inflation will be higher than where we are now,” said Takahiro Niimi, a researcher at NLI Research Institute, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer. “Consumers will switch to fixed-rate mortgages once they foresee a rise in yields at some point.”