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Japanese homebuyers seen at risk on ARM rush

TOKYO -- Japanese homebuyers are piling into floating-rate mortgages, stirring debate over whether they are too complacent as Bank of Japan stimulus revives inflation.

The proportion of home loans with adjustable rate mortgages (ARMs) climbed to 42.8 percent of Japan’s new lending in February, the highest since December, according to the latest data from Japan Housing Finance Agency (JHFA).

The lowest variable mortgage rate at Japan’s three biggest banks was at 0.775 percent, compared with a 10-year fixed rate of 1.3 percent.

Outstanding housing loans to individuals expanded to 113.7 trillion yen ($1.1 trillion), the most since at least 1974 in June as Bank of Japan (BOJ) Governor Haruhiko Kuroda’s monthly sovereign bond buying aimed at ending deflation made it cheaper than ever to finance a home purchase.

Borrowers like 30-year-old retail employee Eriko Brown, who chose a flexible-rate mortgage to buy a house this year, are betting rates won't rise significantly, even as global policy makers fret over how to exit from easing.

“The market has become complacent about risks as monetary easing continues,” said Satoshi Okumoto, chief executive officer and president in Tokyo at Fukoku Capital Management Inc., which oversees the equivalent of $18 billion.

“Homeowners aren’t worried about the risk of yields rising even if they borrow in floating-rate mortgages. They could be caught off guard.”

Tapering unforeseeable

The BOJ last week maintained its pledge to increase the monetary base to 270 trillion yen by the end of the year by buying about 7 trillion yen in sovereign debt a month.

“Yields may rise, but I don’t expect them to climb so much in the next decade or so,” Brown said of the house she purchased with her husband in Yokohama, south of Tokyo. “I figured all of the debt could be paid down by then.”

That’s what Yusuke Kawano, a 31-year-old financial industry employee, is counting on too. He took out a 35-year variable rate mortgage in late 2012 to buy an apartment in Tokyo and plans to repay it within five to 10 years.

Inflation expectations

Home loans that are fixed for two to three years before changing to a variable rate are the most popular now, according to Takeo Okuhara, a senior fund manager in Tokyo at Daiwa SB Investments Ltd.

Flat-rate mortgages accounted for 23.5 percent of Japan’s new lending in February, the least since October, JHFA data show.

Rising prices are unlikely to force BOJ policymakers to taper stimulus any time soon, according to credit market indicators.

The 10-year breakeven rate, derived from the difference between yields on conventional and index-linked bonds, was at 1.2 percentage point. Kuroda is targeting 2 percent inflation.

The government is considering whether to raise the sales tax to 10 percent in 2015. A three percentage point hike in April caused gross domestic product to shrink an annualized 7 percent in the second quarter, the sharpest contraction in five years.

“The low mortgage rate will continue for some time as the BOJ continues to flood the market with cash,” said Akito Fukunaga, director and chief rates strategist for Japan research at Barclays Plc.

“As we head toward the second increase in the levy, we could see housing demand pick up somewhat.”

Record low

The average 35-year fixed-rate mortgage dropped to 1.69 percent in August, the lowest on record going back to 2004, according to the latest report from government-affiliated JHFA.

The 30-year U.S. mortgage cost was at 4.14 percent last week, Freddie Mac data show.

“When we think of a five- to 10-year time horizon, both yields and inflation will be higher than where we are now,” said Takahiro Niimi, a researcher in Tokyo at NLI Research Institute, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer.

“Consumers will switch to fixed-rate mortgages once they foresee a rise in yields at some point.”

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