January 28, 2017 1:00 pm JST

Japan rental housing starts likely hit 8-year high

Boom sparked by inheritance tax hike fuels bubble worries

Vacancy rates for apartments in the greater Tokyo area have climbed sharply since the summer of 2015.

TOKYO -- Rental housing starts in Japan likely exceeded 400,000 for the first time in eight years in 2016 amid a nationwide surge in apartment construction to save on inheritance taxes.

Full-year data due out this month from the Ministry of Land, Infrastructure, Transport and Tourism is certain to show housing starts up for a second straight year. Much of this was driven by rental housing starts, which likely rose 10% to 420,000, making up more than 40% of the total.

The trend owes to an inheritance tax hike that took effect in 2015. Constructing rental housing, which lowers the assessed value of the land it is built on, has become increasingly popular as a way to reduce the tax paid on the property when the owner dies.

With commercial lending stagnant, megabanks, regional banks and credit associations are focusing on low-interest loans for apartment construction, giving further impetus to the trend. New loans to landlords over the January-September period climbed 17% on the year to roughly 3.5 trillion yen ($30.8 billion), Bank of Japan data shows.

The rental boom extends beyond urban centers. Rental housing starts in outlying areas rose 11.7% for the January-November period, faster than in the three major metropolitan areas of Tokyo, Osaka and Nagoya. Growth hit double digits in 28 out of 47 prefectures and topped 30% in seven, including Nagano, Tottori and Shimane.

The surge in supply is creating market distortions. The vacancy rate for apartments in the Tokyo metropolitan area has been soaring since around the summer of 2015, according to data from real estate research firm TAS. Vacancy rates have climbed to around 35% in Tokyo's 23 wards and nearby Kanagawa and Chiba prefectures. Problems related to subletting agreements have spurred the land ministry to take steps to ensure that such arrangements are explained thoroughly before contracts are signed.

The BOJ's Regional Economic Report for January included a survey of businesses on the topic, pointing to the inheritance tax and a search for investment options in a time of low yields as factors behind the boom. Some respondents reported rising vacancy rates and falling rents, mainly among less-attractive properties. Pessimism over the market outlook is gradually spreading amid mounting concerns about a supply glut, the central bank wrote.

Japan now has 4.3 million vacant units of rental housing -- a figure likely to grow with the number of households set to decline in the near future.

"It's hard to believe that rental housing construction out of keeping with real demand will continue indefinitely," said Keisuke Oka of the NLI Research Institute. "It may have peaked already."

(Nikkei)

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