Limited Impact of Japan Consumption Tax Increase on the Property Market

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  • Newly completed market for individual homeowners and investors, together with improved business confidence, sees growth of demand stimulated by increased supply of projects before the enforcements of the tax rise
  • Impact of homebuyers’ market on investments by property funds would be limited due to the likely downsizing of residences and use of lower-grade materials in new developments
  • Funds have not shown the need to rush purchases before the tax increases

 

The Japanese government led recovery has been popularly labeled ‘Abenomics’ due to Prime Minister Abe’s push forward with the Liberal Democratic Party stimulus package. The private sector, with significantly improved business confidence, is expected to drive the recovery forward in 2013. However, consumption tax rises appear imminent.

 

According to a research published today in Cushman & Wakefield’s Assessing the Impact of Japan’s Consumption Tax Hike on Property Markets, the implications of the tax rise for each property type, in particular, the newly completed residential market for individual homeowners and investors will experience growing demand, stimulated by an increased supply of projects before the enforcement of the tax rise. Nevertheless, it is still premature to bullishly raise prices as affordability is unlikely to keep pace. Meanwhile, hikes in land and construction costs are causing developers to reduce the average size of residences, and resort to lower cost materials in some cases.

Property funds may be affected by this downgrade of units in new developments due to the overwhelming size of homebuyers’ market. Given investment funds’ predilection for new projects and an inelastic demand created by the current bullish sentiment across property investment markets, the effect of a consumption tax rise on funds’ motivation for purchase would not be significant. Accordingly, they have not shown the need to rush purchases, whereas the higher consumption tax could divert some investors’ demand from residential to other properties like offices.

 

IMPLICATIONS FOR PROPERTY MARKETS

Overall leasing is the least likely to be affected as property-related expenditures do not explicitly increase, but they do rise in tandem with other expenditures; in addition, residential rents are tax-free. However, institutional investors may be affected by the market of homebuyers, which is considerably larger, resulting in demand being frontloaded before the enactments come into force. With regards to residential funds, they have reportedly not been as reactive to the tax increase unless the effects of completing transactions before the enactments are obvious, as changes in asset purchase plans normally incurs additional financing cost which funds would want to avoid.

 

Overall, there are many key factors that funds consider, such as market rent levels and occupancy rates, and strive to maximize, other than the rise in consumption tax.

 

CONCLUSION

Overall leasing markets across property types are less likely to be affected by the rise in consumption tax because property-related expenditures rise in tandem with rises in other expenditures. However, only the residential capital transactions market would be affected. The newly completed market for individual homeowners and investors, together with improved business confidence, is expected to experience higher demand, stimulated by an increased supply of projects before the enforcements of the tax rise, whereas transitional measures are expected to act to prevent demand from frontloaded before the enforcements and mitigate reactionary falls of demand thereafter.

Nevertheless, it is still premature to raise prices by taking advantage of the rise in demand, as affordability levels is unlikely to keep pace. Rather, the continual rise in price is caused by sustained increases in land and construction costs. Accordingly, developers’profit margins will likely be squeezed, although the increased number of buyers will offer some encouragement. This may cause developers to reduce the average size of residences and, in some cases, resort to more cost-effective materials. Meanwhile, the resale market may deprive the newly completed market of potential buyers who are dissatisfied with the reduction in size or are effectively priced out of the high price market. On the other hand, the impact of homebuyers’market on investments by property funds would be limited to the likely downsizing of residences and use of lower-grade materials in new developments.

 

Keisuke Yanagimachi, Head of Research, C&W Japan commented “that Given investment funds’ penchant for new projects and an inelastic demand created by current bullish sentiment, the effect of consumption tax rise on funds’ motivation for purchase would not be significant.”

 

 

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