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The View | The blessing and curse of Japan’s crazy low mortgage rates
- As negative rates have pushed Japanese borrowers to take out variable-rate mortgages, even a modest increase in rates could come as a shock to them
- However, with languishing residential property prices, at least Japan does not suffer the acute housing affordability problems facing other countries
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The global property boom is starting to unravel. In the United States, house prices in 20 large cities have fallen for three straight months. In Australia, where home values surged 24 per cent on an annual basis last year, prices are down 7 per cent from their peak in April. In a report published in October, the International Monetary Fund warned housing markets could be “at a tipping point”.
The cause of the slowdown is the dramatic rise in interest rates this year. In America, the 30-year fixed-rate mortgage has shot up to 6.5 per cent, its highest level since the 2008 financial crash. In Australia, variable-rate loans have increased to nearly 5.5 per cent, while in Britain – where a loss of confidence in policymaking earlier this year continues to weigh on debt markets – two-year fixed-rate loans are at 6 per cent.
However, one major economy is conspicuously insulated from the rapid rise in borrowing costs. Japan, which has diverged sharply from the rest of the world by maintaining its ultra-loose monetary policy in the hope of banishing the country’s deflationary mindset once and for all, sticks out like a sore thumb.
With the Bank of Japan’s benchmark rate having stood at minus 0.1 per cent since 2016, mortgage rates have been driven down to ridiculously low levels. Floating-rate loans are as cheap as 0.3 per cent while the so-called “Flat 35” – the 35-year fixed-rate mortgage provided by the Japan Housing Finance Agency – can be secured for as little as 1.6 per cent.
Yet, while Japan’s mortgage rates are incomparably lower than those in other advanced economies, they are exacerbating long-standing problems in the country’s housing market.
First, negative rates have pushed borrowers to take out variable-rate mortgages, which now account for more than 70 per cent of outstanding loans, up from just over a third in 2008. With core inflation having hit a 40-year high of 3.6 per cent in October, the BOJ is under mounting pressure to begin normalising policy next year amid signs that wages are finally about to start rising.
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