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Housing starts in Japan fall 27 percent

Japan's housing starts fell for a fifth month last month, indicating that stricter rules for obtaining building permits may remain a drag on economic growth in the first quarter of next year.

Ground broken on new homes and condominiums slid 27 percent from a year earlier after falling 35 percent in October and 44 percent in September, the Land Ministry said in Tokyo yesterday.

Prime Minister Yasuo Fukuda said last week he regretted the slump in housing starts that resulted from building-code changes made in June after an architect fabricated earthquake-resistance data.

The central bank lowered its evaluation of the economy for the first time in three years last week and the government slashed its growth forecast because of the building fiasco.

"Housing investment will probably keep falling through the first quarter, curbing economic growth," said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. "Housing starts are recovering but they still remain at a low level."

The yen traded at 114.20 per US dollar as of 4:24pm in Tokyo from 114.24 before the report was published. The drop in housing starts was in line with the 28.5 percent median estimate of economists.

Since plunging to a four-decade low in September the drop in starts has eased as the government relaxed the regulations. Builders had complained that the new system was introduced too fast and they didn't have time to adapt to the requirements.

"The worst may be over for Japan's housing market," said Masaki Fukui, senior economist at Mizuho Corporate Bank Ltd in Tokyo. "But today's data still showed the Japanese economy is on a soft footing."

Confidence among small and medium-sized businesses fell to 44.5 points this month -- the lowest in more than four years -- a Shoko Chukin Bank survey showed yesterday.

Worsening sentiment at the companies, which employ 70 percent of Japanese workers, dims the prospect that wages will rise and spur consumer spending.

Housing investment wiped more than 1 percentage point from Japan's 1.5 percent annual pace of economic expansion in the third quarter.

The Cabinet Office last week cut its growth forecast for the year ending March to 1.3 percent from 2.1 percent.

The easing of the rules "should have a limited impact as the fundamental problems, including inspection system bottlenecks, have yet to be resolved," said Tetsufumi Yamakawa, chief economist at Goldman Sachs Group in Tokyo.

The Real Estate Economic Research Institute said last week that the condominium supply in Tokyo and the surrounding area will fall to the lowest since 1993 this year and may decline further next year.

The problem is affecting related industries.

Demand for kitchenware, which represents about a quarter of the domestic stainless steel market, will decline from next month, said Yoichi Saji, head of the Japan Stainless Steel Association.

Nippon Steel & Sumikin Stainless Steel Corp, the country's largest maker of the alloy, said on Wednesday it would cut output of nickel-based stainless steel by about 10 percent next month.

The 103-member Topix Construction Index has fallen 12 percent since having the biggest gain in more than eight years on Oct. 30 when the Land Ministry announced it would relax the building rules.

"The chronic lack of experts in structural calculation forms a bottleneck hindering the building certification process for large condominiums," said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo.

"This could prolong the impact of the revised building standards code," Shirakawa said.

Bank of Japan head Toshihiko Fukui said last week the slump in housing investment is temporary.

Home building "has almost stopped decreasing" though it remains at a low level, the government said in its monthly economic report last week, upgrading its view on housing for the first time in a year.

"Japan's economic growth will probably slow in the first half of 2008 because of a US slowdown and this problem," said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. "But growth may regain momentum in the second half, partly supported by pent-up demand for housing construction."

Builders broke ground on 971,000 new homes and condominiums last month at an annual rate, the most since the regulations were introduced in June, yesterday's report showed.

The figure has risen from 720,000 in September, the lowest since the government began keeping records in 1965.

Construction orders fell 3.8 percent last month from a year earlier, the Land Ministry said, improving from October's 22.7 percent drop, which was the sharpest in nine years.
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