Real Estate Japan recently conducted an e-mail interview with Shinichi Kawamura on how the announced October 2019 consumption tax increase (from 8% to 10%) will affect Japan’s residential real estate market. Mr. Kawamura is CEO of LINC KK, a real estate consulting company and brokerage in Tokyo.
Q1: Can you give us a little background on what happened in the residential real estate market the last time the government raised the consumption tax?
How did buyers and sellers behave in the one-year run-up to the increase?
Answer 1: Looking at the apartment supply and demand situation in 2014, the last time that the consumption tax was increased (from 5% to 8%), there was not a sudden rush to buy immediately prior to April 2014 when the tax was actually increased.
You can see that sales peaked in the July to September 2013 period, six months before the actual increase was implemented. Looking at the figures, the number of units sold was 19,249 units, (up 42.9% YoY, with a sales rate of 78.0%.)
The reason behind this is that buyers were taking advantage of temporary “transitional measures” meant to alleviate the expected effect of the consumption tax increase. For properties to be taken ownership of after April 1, 2014, buyers were permitted to purchase at a consumption tax rate of 5% by concluding their sales contract by September 30, 2013.
Also, the average sales price peaked between July and September 2013. This is partly due to the fact that a relatively large number of properties were sold as a result of the rush demand ahead of the tax increase.
The current consumption tax increase is scheduled to go into effect on October 1st, 2019. If it is implemented as planned, transitional measures will be applied to property contracts concluded by March 31, 2019.
Q2: What happened to buyer/seller behavior after the previous consumption tax increase? And what happened in general to listing prices? Actual sales prices?
The first year that that a consumption tax (of 3%) was introduced to Japan (1989), home sale prices did not decline. Indeed, they climbed sharply.
Rather, the fallout from the bursting of the asset bubble (from 1990 to 1991) had a much greater impact on real estate prices. It took the residential property market three years to recover (in terms of the number of units sold) following the collapse of the bubble economy.
The second consumption tax increase (from 3% to 5%) came in 1997. The following year, the number of units sold dropped by a whopping 21% (from 82,861 units to 65,470 units). It took two years for units sold to recover to the level prior to the tax increase.
In fiscal 2014, the consumption tax was again increased (from 5% to 8%) and the number of units sold decreased by 19% YoY, from 55,245 units to 44,529 units. Sales have not yet recovered to pre-consumption tax hike levels.
Basically, in the previous two sales tax hikes (1997 and 2014), the number of units sold fell about 20% YoY.
Q3: How do you think the upcoming consumption tax increase will affect how sellers choose to price their property?
Based on what has happened following previous consumption tax increases, there is no doubt that the number of properties going on the market and property prices will increase. This means that the number of both “good” and “bad” properties listed for sale will increase, so it will be key to be able to identify good properties.
At the same time, higher prices will have a significant impact on the number of units sold.
Therefore, although the number of available properties will increase, it is doubtful whether the number of units sold will increase.
Q4: How will the consumption tax increase affect the final price of a property, with respect to the various individual costs involved?
Actually, consumption tax is not charged to the land. Also see the table below.
With respect to re-sale properties, there are cases where consumption tax is not applicable.
However, sales expenses are subject to consumption tax. For example, consumption tax is applied to brokerage fees, but this will not have a big impact on the the total cost of the property.
Before purchasing, we recommend that you check whether the seller is an individual seller or a corporate seller; and calculate the approximate consumption tax in cases where the property is newly constructed and/or is being sold by a corporation.
Q5: Is there any other information you’d like to share with us?
Currently, we are often asked by clients whether now is a good time to buy a house. Indeed, home prices are at a fairly high level. However, at the same time, interest rates on mortgage loans have dropped to below 1.0% . In addition, the government is taking various measures to boost home buying. Mortgage deduction on taxes is one of these measures. This allow you to deduct up to 4 million yen when a loan is used to buy a house. There are many people who are going to buy while mortgage rates are at historic lows.
If you are thinking about purchasing a house, please also take the time to select the mortgage that is right for you.
Real Estate Japan Inc. and LINC K.K. are pleased to present a brand new series of seminars on buying your dream home in Japan. The seminar will be led by Mr. Kawamura (interviewed above) and Mr. Yasa from LINC KK, with interpretation provided by Real Estate Japan staff.
We put together this new series following the many requests we received from attendees at our well-received series on Getting Started in Japanese Real Estate, which focused on buying a single-unit apartment as na investment property.
In this seminar, we will cover the basics of buying a home, including:
- The process of buying a home in Japan
- How to get financing as a foreigner
- Tax benefits and tax deductions
- Government subsidies to help with a home purchase
- And much more
To learn more and to register, please visit the seminar page below: