Homebuyers in Japan threatened by floating rate loan rush

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Homebuyers are piling up in adjustable rate mortgages, sparking debate over their complacency as the Bank of Japan’s stimulus reignites inflation.

The proportion of adjustable-rate home loans climbed to 42.8% of new loans in February, the highest since December, according to data from the Japan Housing Finance Agency (JHFA).

The lowest variable mortgage rate of the three largest banks was 0.775%, compared to a 10-year fixed rate of 1.3%.

Home loans outstanding rose to 113.7 trillion yen at the end of June, the highest since 1974, as the monthly purchase of sovereign bonds by BOJ Governor Haruhiko Kuroda aimed at ending the deflation made financing a real estate purchase cheaper than ever.

Borrowers like retail worker Eriko Brown, 30, who chose a flexible-rate mortgage to buy a home this year, bet rates won’t rise significantly, even as global policymakers worry of the way out of the easing.

“The market has become risk-complacent as monetary easing continues,” said Satoshi Okumoto, managing director and chairman of Fukoku Capital Management Inc., which oversees approximately 1.84 trillion yen. “Homeowners don’t worry about the risk of rising yields, even if they borrow in the form of variable rate mortgages. They might be caught off guard.

The BOJ last week kept its promise to increase the monetary base to 270 trillion yen by the end of the year by buying about 7 trillion yen of sovereign debt per month. All 34 economists in a Bloomberg poll do not expect any decline until the first half of 2016, with half saying the end of stimulus measures is unpredictable.

The 10-year Japanese government bond returned 0.51% on Wednesday, down 22.5 basis points this year and the world’s lowest after Switzerland.

“Yields may go up, but I don’t expect them to go up that much over the next decade,” Brown said of the house she bought with her husband in Yokohama. “I thought all the debt could be paid off by then.”

This is also what Yusuke Kawano, a 31-year-old employee in the financial sector, is counting on. He took out a 35-year variable-rate mortgage in late 2012 to buy an apartment in Tokyo and plans to pay it off within five to ten years.

According to Takeo Okuhara, senior fund manager at Daiwa SB Investments Ltd.

The proportion of adjustable rate home loans has exceeded that of fixed rate mortgages since at least November 2012, when the JHFA began compiling bi-monthly data. Variable rate mortgages accounted for 38% of new lending from Japan in the two months ended June, up from 40.5% in March and April, versus 31.4% for fixed rate mortgages, revealed Wednesday. a JHFA report.

According to credit market indicators, higher prices are unlikely to force BOJ policymakers to cut stimulus anytime soon. The 10-year breakeven point, resulting from the difference between the yields on conventional and indexed bonds, stands at 1.2 percentage points. Kuroda is targeting 2% inflation.

The Abe administration plans to raise the consumption tax to 10% in 2015. The 3 percentage point hike in April led to a 6.8% annualized decline in gross domestic product in the second quarter, the largest contraction in more than three years, according to preliminary data released Wednesday.

“The low mortgage rate will continue for some time as the BOJ continues to flood the market with liquidity,” said Akito Fukunaga, director and chief rate strategist for Japan research at Barclays Plc. “As we move towards the second tax increase, we may see housing demand increase somewhat.”

The average 35-year fixed-rate mortgage fell to 1.69% in August, the lowest on record since 2004, according to the latest JHFA report. The cost of the US 30-year mortgage was 4.14% last week, according to data from Freddie Mac.

“When we think about a five to ten year horizon, yields and inflation will be higher than we are now,” said Takahiro Niimi, a researcher at the NLI Research Institute, a subsidiary of Nippon Life Insurance Co., Japan’s largest life insurer. “Consumers will switch to fixed rate mortgages once they expect yields to rise at some point.”

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