Buy now to beat the consumption tax increase … or don’t
The term kakekomi kounyu means rushing to buy something at the last minute after hesitating for a long time. The implication is that there is some time limit involved. It’s being used a lot now in the media with reference to the consumption tax, which is scheduled to rise from 5 to 8 percent in April 2014, and then again to 10 percent in October 2015. It’s assumed that many consumers will try to buy big-ticket items before the increase goes into effect in order to save money, and that a good portion will wait until the last minute.
Some economists are advising people to not wait too long, especially if they’re thinking about buying a new home. Recent articles in both the Asahi Shimbun and the weekly magazine Shukan Post say pretty much the same thing on the subject: If you’re thinking about buying a home or a car, you should start planning right now. The Asahi uses the example of a ¥30 million condominium. You can figure that about a third of this is the price of the land, and since land sales are exempt from consumption tax it means you’ll pay tax on ¥20 million.
At present, the tax will come to ¥1 million, but after April 2014 it will go up to ¥1.6 million, and then 18 months later to ¥2 million. If you want to take advantage of this savings, experts say you should move now, because the tax is levied not when you sign the contract for the new home, but when occupancy of the property is “transferred over” (hikiwatashi) into your name, and in most cases the average time between the point when a particular unit goes on sale and the point when the buyer takes possession of it is one year.
So if you want to beat the consumption tax raise you have to start looking now. That’s why so many real estate flyers for new homes stress that “now is the chance.” They really do mean “now,” as in “today.” Moreover, realtors and developers are saying that since there will be a rush to beat the tax, demand will be high and so the longer you wait the less likely it will be that you can find what you want. Prices may even be higher the closer you get to April 2014.
On the surface, this scenario sounds logical, but the Asahi asks if it is really the case that beating the tax raise will save you money on a home in the long run, so they went back to 1997 to see what happened when the consumption tax was raised from 3 to 5 percent. According to one real estate research company, demand peaked in 1996 and then dropped considerably after April 1997 by as much as 19 percent compared to the previous year. More significantly, the average price of a new home dropped in the same period by 5 percent, thus canceling out the 2 percent savings that buyers enjoyed by beating the consumption tax increase. In other words, if the same people had waited a year, they could have, on balance, saved three percent on the price of their purchase, or more since the tax only applies to the structure and not the land.
One housing journalist told the newspaper that after the increase goes into effect in 2014 it is assumed that housing prices will drop, and probably by a greater margin than they did in 1997 since demand right now is depressed due to the shrinking population. There’s no need to be in a hurry at all. Some analysts think that even the pre-2014 kakekomi demand won’t be as great as it was in 1996, meaning that a lot of developers may be stuck with homes they can’t sell and thus will have to move them at a discount later. Even the housing industry itself is concerned about this and according to Asahi has already asked the government to pass some sort of extra tax deduction/exemption for new home buyers to help move stock after 2014. So much for the unfettered free market. Also, it should be noted that consumption tax is only collected by individuals or companies with revenues of more than ¥10 million a year, so the majority of used home sales — meaning those involving private, individual sellers — don’t involve consumption tax, though the realtor’s fee does.
But what about automobiles, since something similar happened in 1997? Before the tax increase went into effect, there was an 8 percent rise in car sales compared to a year earlier, and after the increase there was a 15 percent drop in sales. That would seem to indicate that it won’t make a difference either, especially given the general belief that during the kakekomi period dealers will be less likely to bargain down prices, and after the increase goes into effect makers will again pressure the government for help in the form of rebates and tax breaks. But the research division of the auto resale company Gulliver predicts that the tax increase will probably convince some people who are thinking of buying a new car to move up the time of their purchase, especially if their present car is scheduled to receive a (costly) vehicle inspection (shaken) in 2014.