Japan Housing Starts Fell to Lowest in Four Decades

Japan’s housing starts slumped to the lowest in four decades in September as stricter rules for obtaining building permits threaten to slow economic growth.

Annualized starts tumbled 44 percent from a year earlier to 720,000 in September after falling 43.3 percent in August. The median estimate of 32 economists surveyed by Bloomberg News was for a 31.2 percent decline.

The Bank of Japan today cut its growth forecast for this year, in part because of the drop in construction activity. The Land Ministry yesterday said it would relax regulations after industry criticism that they were too onerous.

“Japan is in a construction recession,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo. “The plunge in housing will have more negative effects than the BOJ expects as it will spread to capital spending, factory output and the unemployment rate.”

The economy will expand 1.8 percent this year, the Bank of Japan said today in its semiannual outlook, slower than the 2.1 percent predicted six months ago. The bank left its benchmark interest rate unchanged earlier today.

Credit Suisse Group and Macquarie Securities Ltd. cut forecasts for economic growth earlier this month, citing the drop in housing starts.

“Housing starts have seen the worst quarter on record after regulatory change caused blockages to the approval process,” said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. “A policy response is starting to emerge, which brings promise of a sharp rebound.”

Unemployment

Should the downturn persist for six months, the jobless rate may rise 1 percentage point, Shirakawa said on October 17.

Japan altered the building code on June 20 after an architect fabricated earthquake-resistance data in 2005. Builders complained that the new system was introduced too fast, they didn’t have time to adapt to the requirements and that it was difficult to get approvals for any plan changes.

The rules require an engineer to resubmit an entire construction plan even to change a peg, according to Ikuhide Shibata, an engineer at the Tokyo branch of Arup, a structural engineering and design company that helped build the Kansai International Airport near Osaka. The requirement “adds 20 percent more time, energy and cost.”

Process Relaxed

Builders may modify blueprints that have already been submitted for checks, so long as the changes don’t degrade the function and safety of the buildings, the Ministry of Land, Infrastructure and Transport said yesterday in a statement. The changes are expected to take place in mid-November, said a ministry official who declined to be named.

“That’s a small but positive step,” Shibata said. “We are a bit relieved.”

The drop in housing starts was led by a 74.8 percent plunge in apartment building starts, the ministry said.

“We haven’t seen any evidence of a housing-starts recovery and can’t say when it will pick up,” said Juntaro Tsuru, an official at the Land Ministry. Last month, Tsuru said he expected the drop would recover by the end of year.

People charged with approving plans “are too scared to examine construction plans and builders are too scared to submit applications,” Tsuru said. “We are deeply sorry.”

Funding for Builders

The Land Ministry on October 16 asked the Financial Services Agency to ensure commercial lenders won’t cut off funding to the builders. Sales for cement, a key material for building, dropped 11.5 percent in September, the second monthly decline, the Japan Cement Association reported on October 25.

Publication of the modifications to the rules on the ministry’s Web site prompted a surge in construction-related shares, sending the Topix Construction Index 6.7 percent higher yesterday. The index fell 1 percent today.

Japan’s Housing Starts Slump to a Four-Decade Low
By Toru Fujioka | Bloomberg News