JEI's Spin on the News

Banks Hike Mortgage Rates While Tokyo Holds Them Down

Friday, January 1, 1999

Bank of Tokyo-Mitsubishi, Dai-Ichi Kangyo Bank, Sumitomo Bank, Fuji Bank and Sanwa Bank followed the lead of Sakura Bank Tuesday by raising the rate of interest they charge on home loans by 0.75 to 0.8 percentage point. These top nationwide commercial banks now are asking potential home-buyers to pay 3.8 percent to 4.05 percent on 10-year notes, and other banks likely will follow suit. Some observers credit the rate boost in the midst of a recession to banks' efforts to generate greater profits in order to write off nonperforming loans, which are crippling their balance sheets.

Whether these rate hikes will last also is being debated. The Japanese government recently has taken several steps to make it easier for people to buy homes, such as ordering the Housing Loan Corp. to extend repayment by up to 10 years and to waive interest for up to three years. Revitalizing the depressed real estate market is a priority since it could help banks with bad loans collateralized by property. Boosting home sales also will help the economy in general since new home owners often need new furniture, appliances and other items.

But the moves by private banks to raise their home loan rates is troubling, since it could dampen home-buying sentiment at a time when consumer spending is fragile at best. Government officials also worry that private lenders will toughen their loan terms in other ways in order to wring greater profits from home buyers.

More grim still, the increase in private mortgage rates may signal greater concern about the direction of interest rates in general. Tokyo has announced it will nearly double new issues of bonds in the coming fiscal year. Combined with a warning by the government Trust Fund Bureau that it would limit its purchases of government bonds in FY 1999, the surge in new issues has raised concerns that Tokyo will have to pay much higher interest to sell them. The mortgage rate hike may thus presage higher rates in general, something that neither Tokyo nor consumers may welcome.

"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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