<h3><strong>The price decline of &#8220;quasi-center&#8221; properties that began in the shadow of &#8220;Harumi Flag&#8217;s&#8221; highest multiplier of 266 times, and monetary policy that is worrisome&#8230;</strong></h3>
<p><strong> The Bank of Japan&#8217;s new administration, led by Governor Kazuo Ueda, got off to an uneventful start with no surprises. However, amid global inflationary pressures, the yen continues to weaken in currency markets, and speculation continues to smolder that the BOJ will revise its monetary policy before the end of the year. And if interest rates were to rise, even modestly, &#8220;the real estate market would be hit hard,&#8221; said housing journalist Junji Sakaki. We asked him for more details.</strong><strong> </strong></p>
<figure id="attachment_306628" aria-describedby="caption-attachment-306628" style="width: 3539px" class="wp-caption alignnone"><a href="#" data-ident_hash="c4cf0a30"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/04/1_aflo_211558901.jpg" alt=""></a><figcaption id="caption-attachment-306628" class="wp-caption-text"> The Bank of Japan&#8217;s new administration, led by Governor Kazuo Ueda, got off to a safe start with no surprises (PHOTO: AFLO)</figcaption></figure>
<h3><strong> There are already signs of modulation in the real estate market&#8230;</strong></h3>
<p> The average price of new condominiums in the Tokyo metropolitan area exceeded the bubble period of the Heisei era in &#8217;21, and reached 62.88 million in &#8217;22, reaching a high for two consecutive years. In 2011, the real estate market is still going strong at first glance, with the highest multiple for the final sales period of &#8220;Harumi Flag,&#8221; a condominium for sale in Chuo Ward, the site of the former Tokyo Olympics athletes&#8217; village, reaching an unprecedented 266 times.</p>
<p> However, the real estate market is already showing signs of modulation. <strong>Prices of single-building apartments and condominiums in what is called the &#8220;semi-center&#8221; area, which is about five stations away from each station on the Yamanote Line, have begun to fall,&#8221; said Sakaki</strong>. Single-unit apartments and condominiums have been actively traded as investment targets for rental property owners, but transactions have been slowing down since the second half of last year, according to Mr. Sakaki.</p>
<p><strong> Looking at transactions since the beginning of this year, property prices have fallen by about 10% compared to last year.&#8221;</strong></p>
<h3><strong> What is &#8220;hidden delinquency&#8221; in mortgage loans?</strong><strong> </strong></h3>
<p> The change is not limited to investment properties. The number of &#8220;hidden delinquencies&#8221; on home loans for home purchases is on the rise. Households whose incomes have declined as a result of the COVID-19 crisis, including those who have been forced to cut back on overtime work and layoffs of temporary workers, are finding it difficult to make loan repayments.</p>
<p><strong> As part of its economic stimulus measures in response to the COVID-19 crisis, the government appears to be instructing financial institutions to give priority to households that are having difficulty making loan repayments, for example, to maintain the continuity of their loans by only paying the interest portion of the loan.</strong><strong> </strong></p>
<p><strong> Since data on the number of delinquencies is rarely made public, this has not been seen as a problem until now, but since May, the coronavirus has been reassessed as a category 5 infectious disease, the same as influenza, and banks cannot afford to accept hidden delinquencies indefinitely.</strong><strong> </strong></p>
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<h3><strong>The Impact of a 0.25% Rate Hike</strong></h3>
<p> Under these circumstances, <strong>&#8220;even if the Bank of Japan raises its policy rate by just 0.25%, it will have a significant impact on the real estate market,&#8221;</strong> Sakaki points out. The reason for this is that the overwhelming majority of mortgage borrowers are borrowing at variable interest rates.</p>
<p> According to the &#8220;Survey of Consumer Trends in the Real Estate Distribution Industry,&#8221; conducted annually by the Real Estate Information Management Association, the number of variable-rate mortgages used by homebuyers has consistently increased since reaching 60% of the total in FY 2006, and will rise to 83.4% in FY 2022. This figure is expected to rise to 83.4% by FY2022. For investment properties for rental management, almost 100% of the loans are taken out at variable interest rates. Moreover, they are basically full loans with no down payment.</p>
<p> When the policy rate is raised by 0.25%, variable interest rates are expected to increase by 0.3-0.5%, although there are differences among banks. If a borrower currently has a 50 million yen mortgage loan with a 30-year repayment period and a variable interest rate of 0.35%, the monthly repayment would be 146,328 yen (equal repayment of principal and interest, no bonus payment). If the loan interest rate is raised by 0.45% to 0.8% with a 0.25% interest rate increase, the monthly repayment amount would increase by approximately ¥10,000 to 156,267 yen. The annual payment would increase by approximately 120,000 yen and the total payment by approximately 3.6 million yen.</p>
<figure id="attachment_306629" aria-describedby="caption-attachment-306629" style="width: 631px" class="wp-caption alignnone"><a href="#" data-ident_hash="501ceab0"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/04/2_sub1.jpg" alt=""></a><figcaption id="caption-attachment-306629" class="wp-caption-text"> The highest multiple for the final sales period of &#8220;Harumi Flag&#8221; was an unprecedented 266 times. The image shows the new urban block &#8220;SUN VILLAGE&#8221; (from a press release by the HARUMI FLAG Public Relations Office).</figcaption></figure>
<figure id="attachment_306630" aria-describedby="caption-attachment-306630" style="width: 509px" class="wp-caption alignnone"><a href="#" data-ident_hash="818b058f"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/04/3_sub8.png" alt=""></a><figcaption id="caption-attachment-306630" class="wp-caption-text"> Floor plan of one of the &#8220;SUN VILLAGE&#8221; sales plans (13.1 million yen to 13.3 million yen range). One of the &#8220;SUN VILLAGE&#8221; sales plans (in the ¥13.1 million to ¥13.3 million range) is described as &#8220;a corner unit plan with a panoramic window in the living/dining room overlooking the Rainbow Bridge&#8221; (from the press release by the HARUMI FLAG PR Office).</figcaption></figure>
<h3><strong> The U.S. real estate market was one of the first to go into a &#8220;freeze state.</strong></h3>
<p><strong> More residential mortgages will become delinquent, and there will be more cases of voluntary sales of properties. Power couples&#8221; with annual household incomes in excess of 10 million yen who purchase tower condominiums often have repayment plans that are just barely in line with their incomes, and are approaching the danger zone.</strong><strong> </strong></p>
<p><strong> Even with a 0.25% increase in interest rates, a single apartment or condominium building in a semi-center area, where prices have already begun to collapse, could fall another 10% or so.</strong></p>
<p> Already in the U.S., where a series of interest rate hikes have been implemented, mortgage rates have soared to 7-9%. As a result, the U.S. real estate market <strong>has entered a &#8220;freeze&#8221; period in which transactions have come to a halt</strong>. In the past, this freeze has occurred before the real estate market collapsed.</p>
<div data-friday-nextpage-lead=" Those who are thinking of buying a condominium..."></div>
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<h3><strong>Repayment plan based on interest rate hikes is essential</strong></h3>
<p> Mr. Sakaki expects BOJ Governor Ueda to raise interest rates twice this year by 0.25%. Inflation in major Western countries may have peaked, but it remains high, and central banks in the U.S. and Europe are likely to continue raising interest rates for the foreseeable future. The resumption of a rise in the price of oil, which had been falling, is also adding to inflationary pressures. In such an environment, Japan alone will face limitations in continuing to maintain negative interest rates. He says <strong>, &#8220;Since food price hikes are hitting people&#8217;s lives hard, a rate hike that eases the situation will be easily understood by the public.</strong></p>
<p><strong> If the policy rate is raised by 0.5% from the current level, the aforementioned monthly mortgage payment will increase by approximately 20,000 yen. This is an increase of approximately 240,000 yen per year, or a total repayment of approximately 7.2 million yen. The variable interest rate would rise from 0.35% to around 1.2%, which is higher than the current initial fixed 10-year mortgage rate.</strong></p>
<p> Sakaki&#8217;s forecast is based on the assumption that policy rates will be raised, but regardless of the timing, it would be overly optimistic to assume that ultra-low interest rates will continue over the medium to long term. Those who are thinking of purchasing a home should first consider a fixed-rate mortgage, and if they find it hard to repay the loan at a fixed rate, it is important to hold off on the purchase. For those who already have a mortgage loan, it would be wise to simulate the loan once in preparation for the interest rate hike.</p>
<p><strong>Atsushi Sakaki</strong> has been involved in condominium advertising and sales strategy planning for more than 30 years since the late 1980s. Drawing on this experience, he holds home-buying seminars for the general public, regularly contributes articles to newspapers and magazines, and explains the inside story of the real estate industry in his blog and e-mail newsletters. He is the author of &#8220;Do Condominiums Make Japanese People Happy?&#8221; (Shueisha Shinsho), &#8220;All Condominiums Become Ruins&#8221; (East Shinsho), &#8220;Marginal Tower Condominiums&#8221; (Shueisha Shinsho), and others.</p>


 After working as a money writer, financial planner, and market analyst for a securities company, Kenji Matsuoka became independent in 1996. He writes articles on finance and asset management mainly for business and economic magazines. Author of "A Textbook for the First Year of Robo-Advisor Investing" and "Understanding with Rich Illustrations! The Book of Absolute Benefit from Cashless Payments".

 Kenji Matsuoka

 The new BOJ administration led by Governor Ueda got off to a rocky start with no surprises. However, there are already signs of modulation in the real estate market. In the U.S., where a series of interest rate hikes have been implemented, trading has come to a halt and a "freeze" has set in.

What will happen to condo prices with the new BOJ governor… Should you buy now or wait?

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