Buyers have been out in force at home display centres and condominium sales galleries. The main drivers behind the increased activity is the planned increase in Japan’s consumption tax and a fear of rising interest rates.
Should you buy now just because consumption taxes are going to increase?
The government is expected to decide next month whether to implement the planned increase in consumption taxes.
For many, buying a home will be one of the biggest purchases they make in their lifetime. A rise in consumption tax may see their purchase costs increase, which has created a sense of urgency about buying before the tax changes. But should you rush out and purchase now?
After the consumption tax was raised from 3% to 5% in April 1997, economic conditions slowed down and house prices dropped.
According to the Tokyo Stock Exchange House Price Index for greater Tokyo, prices fell 0.95% between March and April in 1997. By March 1998, prices were down 9.01% from the year before. (The index is based on sales of existing second-hand apartments in greater Tokyo.)
Coincidentally, the 1997 Asian financial crisis took hold in July, so it is difficult to say how much of the property decline was due to the tax increase.
After adjusting for the consumption tax increase, prices increased slightly in the month following the tax hike, but were still lower one year later.
|March 1997||April 1997||March 1998|
|Adjusted house price index||101.80||102.02||93.71|
Impact of a rise in consumption tax
As an example, assume you will purchase a brand new apartment for 40 million Yen where the land component is 16 million Yen and the building component of the purchase price is 24 million Yen. You take out a mortgage of 36 million Yen.
In this example, the consumption tax applies to the building portion of the new apartment price. With a consumption tax rate of 8%, you will be paying 720,000 Yen more in tax than when the rate was 5%.
If property prices fall as much as they did between 1997 and 1998, your property could fall in value by as much as 3.8 million Yen. This loss would far outweigh the extra 720,000 Yen in tax you sought to avoid by buying before the tax increase.
*Note: consumption tax does not apply to the sale of secondhand properties between private buyers, although it does apply to brokerage fees.
Fear of rising interest rates
The Bank of Japan’s governor Haruhiko Kuroda has set an inflation rate target of 2% within the next two years.
As a general rule, if prices rise, so too will interest rates. If we see inflation of 2%, we may also see interest rates rise by around 2%.
How would this affect borrowing?
Assuming the same example as above, if you take out a 36 million Yen ‘Flat 35’ mortgage with a 35-year term and an interest rate of 1.99%, monthly repayments would be 119,069 Yen.
If you waited to buy and the interest rate increased to 3.99% in the meantime, your monthly repayments would be 159,183 Yen. The total principal and interest paid by the end of the mortgage would also increase by 16.85 million Yen.
|Monthly repayments:||119,069 Yen||159,183 Yen||40,114 Yen|
|Total principal and interest:||50,000,000 Yen||66,850,000 Yen||16,850,000 Yen|
Between January 2004 and July 2013, the minimum interest rate for the Flat 35 home loan has varied from 3.17% in August 2008 to a recent low of 1.8% in April 2013. Over a six month time span, the rate has varied by an average of 0.22%, but on a month-to-month basis the rate has only varied slightly.
|Flat 35 Interest Rate Changes||Max. variation||Min. variation||Average|
Source: The Nikkei Shimbun, August 20, 2013.