Japan's housing glut adding to growth fears

Business Times - 13 May 2008

Japan's housing glut adding to growth fears

Scandal over falsified engineering data at root of housing problem

(TOKYO) When a regulatory hitch hit Japan's housing sector last year, Tokyo assumed the crunch would be short-lived. But almost a year later, a growing backlog of unsold apartments threatens to dent already feeble economic growth.

Rather than making a modest positive contribution to overall growth as the government had hoped, housing is now likely to offer little or no help, with one pessimist suggesting it could knock a full percentage point off growth this year.

'Developers are running their businesses on a hand-to-mouth basis. We cannot sit back on condominiums that are not selling,' said Hiroyuki Ito of developer Azel Corporation.

At the root of Japan's housing debacle is not loose lending or the popping of a price bubble, as in the US, but a scandal over falsified engineering data for new apartment buildings that prompted an overhaul of regulations.

The new rules, in force since last June, require additional checks of structural calculations for new buildings and have extended a checking period, delaying construction approvals by several months.

Furthermore, bureaucrats had failed to get the guidelines on the new rules ready in time, keeping the market in a limbo for two months. As a result, housing starts in the second half of last year plunged 30 per cent from the same period of 2006, shaving 0.4 per centage points of overall economic growth in 2007.

The downturn has knocked down real estate stocks, such as Mitsui Fudosan and Mitsubishi Estate, and is blamed for the bankruptcy of more than 60 smaller firms and lost jobs of hundreds of workers, from plumbers to printers.

The government has bet on a recovery once builders got used to the new rules, predicting that housing investment would rise 9 per cent over the next year after a 12.7 per cent plunge in the year to March, adding 0.3 percentage point to overall economic growth.

But just as the effect of the new regulations began tapering off, so did demand, and developers found it hard to sell completed apartments to increasingly tight-fisted consumers, worried by stagnant wages and worsening business prospects.

The growing backlog of unsold homes in turn hit new construction and the latest available data from March showed that housing starts plunged 15.6 per cent from a year earlier.

Housing investment accounts for only about 3 per cent of the economy, says Takashi Ishizawa, chief real estate analyst at Mizuho Securities Co. But he warns that the slump's ripple effect on sectors ranging from interior decorators to makers of cars and furniture could cut total investment by up to five trillion yen (S$66 billion) - about one per cent of the economy - in the year to March 2009.

'Housing starts will not rebound much this year because we cannot expect an improvement in condominium sales,' he said.

Sales of new apartments fell to a 14- year low in Tokyo and neighbouring prefectures in the year to March, while average prices hit a 15-year high, according to the Real Estate Economic Institute, a property market research firm.

The fate of a condominium block in Higashimurayama in Western Tokyo seems to justify Mr Ishi-zawa's pessimism. Last year, several such apartments were sold ahead of completion. Now prices are being cut as the builders pack up.

'We had sold only half the 249 blocks that went on sale last year,' said Mikiko Yoshida of developer Nippon Steel City Produce Inc. 'We have cut the prices by around 20 per cent to boost sales.'

The central bank, which has already dropped its interest rate tightening bias in the face of the global credit crunch and economic slowdown, has also become sceptical about the health of the Japanese housing sector. It said issues such as a rising inventory of unsold condominiums and stalling investment in rental homes by real estate funds facing a less favourable financial environment would allow only a modest recovery.

Analysts expect a slightly positive contribution from housing investment to first quarter economic growth, seen at 0.6 per cent, but some have cut their longer-term outlooks.

Morgan Stanley last week cut its forecast for housing investment to a fall of 0.5 per cent for the year to March 2009, from a previous prediction of 3 per cent growth.

'The impact of the change that has caused delays in work on new buildings may run its course,' said Takehiro Sato, chief economist at Morgan Stanley. 'But lack of consumer demand will weigh on housing investment.'

Today's weakness contrasts with a period a few years ago when rising interest rates and higher home prices in Tokyo had real estate agents pushing people to buy while they could.

For developers, the squeeze is likely to get worse before it gets better as higher costs of oil, steel and other raw materials, and rising land prices in urban areas make it harder to cut prices aggressively and clear out inventories. But industry officials say consumers are unlikely to budge and will hold out for substantial price cuts, delaying a much-anticipated recovery. -- Reuters

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