Avoiding consumption tax increase too late for some

It may already be too late for some buyers looking to build their own home before the planned consumption tax increase next year. A last minute rush by buyers nationwide and a shortage in land and building materials means that some buyers will miss out on the current 5% tax rate.

A clause in construction contracts states that ‘if the contract was signed at least 6 months prior to an increase in consumption tax, the tax rate applied at the time of hand-over will be the rate in effect at the time the contract was signed‘. This means buyers must have their construction contracts signed before the end of September 2013 in order to lock-in the 5% consumption tax rate, otherwise they may be subject to the 8% rate which is scheduled to kick in on April 1, 2014.

This is of particular concern to buyers in disaster hit areas in Tohoku as reconstruction work has meant many builders are fully booked and building materials are scarce. It is not unusual for buyers in these areas to wait 6 months or more before construction can start on their home.

Home-builder ‘Universal Home’ set up an office in Koriyama City in Fukushima Prefecture. Within the first two days, their model house had been visited by over 40 people. A large majority had been displaced by the Fukushima Daiichi nuclear disaster and were living in temporary housing and rental apartments. Many of those who were facing the prospect that they would never be able to return to their original homes had decided to build in Koriyama, 70 km east of the nuclear plants.

Some of those visiting the model house had not yet been able to find land to build on. Since spring, there has been a growing shortage in available building land. As displaced residents began to receive compensation for the nuclear disaster, the number of evacuees who had been living in temporary housing for the past two years have finally started to seek land relocate and re-start their lives.

Iwaki City has been particularly popular, but a shortage in land has meant many evacuees have had to look further afield to Koriyama and Fukushima City.

The increased demand, however, has led to higher land values. According to the government assessed land values (koji-chika) announced in March, land values in new residential development areas in Iwaki City have increased by over 10%. Borrowing costs are up too, as major banks increased their 10-year fixed mortgage rates for the second month in a row.

While buyers may have missed out on locking in a 5% tax rate, they are now looking to buy land and start building before the consumption tax rises to 10% in 2015.

Temporary housing in Iwaki City

Source: The Yomiuri Shimbun, June 25, 2013.