"Distortion in Land Price Information---Mechanism in Sales Comparables and Appraisal Value Relation---"

This paper investigates the nature and magnitude of distortion in land price information publicly available in Japan, especially in the Published Land Price of the Japanese Government. After examining characteristics of various land price information in Japan, we construct hedonic price indexes based on both actual transaction prices and Published Land Prices, and compare them to find possible distortion in the governmental price information. We find a large and systematic discrepancy between actual transaction prices and Published Land Prices, suggesting serious problems in the governmental information system. We also consider possibility of structural change in the Japanese real estate markets, and examine its effect on price indexes.

Office Investment Market Becoming More Selective -Selection of the Winning Market in Tokyo\u27s 23 Wards

Following the collapse of the economic bubble in 1991, Japan’s economic growth has slowed down. In particular, with respect to the office market, it has suffered high vacancy rates and there have been many cases where office buildings have had to be rebuilt. This trend is predicted to further increase in the midst of a precipitous decline in the size of the working-age population. When undertaking an office investment under such circumstances, it will be essential to select an investment property and the area (in which such property is located) carefully. The purposes of this paper were to extract the signals used to determine the market selection with respect to an office investment, and to make apparent areas that will, going forward, continue to maintain strong fundamentals (potential value) in the office investment market. In regards to area selection, this paper focused on the phenomenon where, following the collapse of the economic bubble, many office buildings had to be put to different uses out of necessity.This paper also focused on the changes in real estate investment returns and building use by area. Specifically, factors affecting changes in building use were extracted by applying a panel random probit model on the 3,134 areas surveyed under the national census from 1991, when the collapse of the real estate bubble began and onward. Further, based on the factors that were extracted per the above, areas that have strong survival rates as office markets were selected. As a result of estimating the panel random probit model, which focused on the changes in building use, it has been found that the conversion from office use to residential use has been largely brought about by the index which measures the extent of excess in rents when a building is converted to residential use as opposed to using it as an office building. This finding conformed to the result that was indicated in a series of analyses that began with Wheaton (1982) as follows: “return differentials effect land use conversions.” Moreover, 303 areas predicted to have strong fundamentals for office investments have been extracted using the ratio of office rents to residential rents. These analyses have been conducted with respect to Tokyo, which is a region that has extremely weak land use regulations. As such, there are limitations to applying these analyses to cities that have stricter land use regulations that make it difficult to commence construction or rebuild in such cities. Nonetheless, as analyses of the Tokyo office market, where population decline and aging are progressing at the fastest rate, are being conducted ahead of other major developed countries, it is thought that such analyses will serve as an important guide for many cities, starting with European cities, that will be facing similar situations going forward

Econometric Approach of Residential Rents Rigidity -Micro Structure and Macro Consequences-

Why was the Japanese consumer price index for rents so stable even during the period of housing bubble in the 1980s? In addressing this question, we start from the analysis of microeconomic rigidity and then investigate its implications about aggregate price dynamics. We find that ninety percent of the units in our dataset had no change in rents per year, indicating that rent stickiness is three times as high as in the US. We also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level, suggesting that rent adjustments are not state dependent but time dependent. These two results indicate that both intensive and extensive margins of rent adjustments are very small, thus yielding a slow response of the CPI to aggregate shocks. We show that the CPI inflation rate would have been higher by one percentage point during the bubble period and lower by more than one percentage point during the period of bubble bursting, if the Japanese housing rents were as flexible as in the US

Will green buildings be appropriately valued by the market?

As interest grows in environmentally friendly buildings, or “green buildings,” the real estate industry is expected to　play an increasingly active role in the realization of a low-carbon society. Various efforts toward such society are　now being promoted vigorously within an international framework.To supply a socially desirable level of green building via the market mechanism, the economic value of green　buildings (as measured by the marketplace) must be commensurate with the required investment. Many remain　skeptical, however, about the true economic value of green buildings. A thorough analysis has yet to be conducted to　evaluate whether green buildings realize income increases commensurate with the enormous initial investments　required, although it is clear that cost savings do result from lower energy consumption. The issue becomes even　more complex when we consider whether net income increases over short and medium-to-long investment periods,　given that future repair costs are proportional to the initial investment. Another question is how these buildings will　be valued in the market once they are offered for sale.This paper shows, through a series of analyses, that in order for green buildings to produce economic value, accurate　information about the buildings must be disseminated throughout the marketplace, market participants’ behavior must　be transformed by such information, and public regulations must be in place to effect this behavioral transformation.　Based on a demonstration analysis of the housing market, the author shows that new condominiums with “green”　labels command a premium of approximately 5 percent. Through these analyses, the author suggests that in the real　estate investment market, the longer the investment period, the more important it is to plan for environmental risks

Investment Characteristics of Housing Market -Focusing on the stickiness of housing rent-

The turmoil in the international financial market since the subprime loan crisis has had a　significant effect on the real-estate investment market in Japan, particularly the Japan real-estate　investment trust (J-REIT) market. This suggests that the real-estate investment market is becoming　part of the financial market. It is necessary to precisely understand the mechanism of risk　generation and cash flow in the real-estate market to understand the characteristics of the real-estate　investment market.The purpose of this study is to statistically clarify the characteristics of the five problems that　have been recently pointed out as risk factors in the real-estate investment market for housing.　Specifically, we have attempted to clarify the following five intrinsic problems, which are　considered to be characteristics of the housing market: 1) the return problem, 2) the small-scale　investment problem, 3) the risk associated with the adjustment of rent, 4) the key tenant problem,　and 5) the inflation problem, all of which have been pointed out to be problems in the housing and　retail markets.Regarding the risk associated with the adjustment of rent, we investigated the actual situation in　the housing market by considering the decrease in housing rent with the age of the building and the　adjustment of housing rent when a new contract is concluded between a landlord and a new tenant.　The results indicated that the yearly rate of decrease in housing rent for nontimbered houses is as　high as approximately 6% over the first five years after construction, but decreases to 2.6% over the　5th to 10th years and 2.5% over the 10th to 20th years, indicating that the long-term rate of decrease　in housing rent is small. The probability of no change in rent was converted to a yearly value of　0.6585, which means that the revenue from the housing rent of 65% of leasehold properties does not　change. This result revealed that housing rent in the Japanese market is extremely sticky compared　with that in the US. Regarding the risk associated with the adjustment of rent, the probability of　downward adjustment of the housing rent should be considered; however, in most cases, the housing　rent is left unchanged. Even when the housing rent is adjusted downward, decreases of more than　10% comprised only 11.2% of all the adjustments. Also note that the occurrence of rent adjustment　is random with respect to time; the housing rent market is not strongly affected by the economic　environment, in contrast to the market for office buildings; a turnover of residents occurs because of　events such as marriage, childbirth, and relocation, regardless of the economic cycle, causing the　housing rent to change

"Measuring the Cost of Imperfect Information in the Tokyo Housing Market"

The cost of imperfect information is estimated in the real estate market of resale condominiums in central Tokyo by using a new, comprehensive data set of resale condominium transactions. The results suggest a substantial cost. Specifically, if information were perfectly available and marketing time is null, sellers would get benefits of 10.58% based on average interest rate, 31.28% on gross rent and 22.59% on net rent, against imputed rent of their property. Buyers spend 1,042,000 Yen on search activities for one transaction, which would be saved if information were prefect. This cost amounts to be equivalent to 13.2% of buyers' average annual income.

The impact of apartment vacancies on nearby housing rents over multiple time periods: application of smart meter data

[Purpose] This study aims to explore the spatial externalities of apartment vacancy rates on housing rent by considering multiple vacancy durations. [Design/methodology/approach] This research uses smart meter data to measure unobservable vacant houses. This study made a significant contribution by applying building-level smart meter data to housing market analysis. It examined whether vacancy duration significantly affected apartment rent and whether the relationship between apartment rent and vacancy rate differed depending on the level of housing rent. [Findings] The primary finding indicates that there is a significant negative correlation between apartment rent and vacancy duration. Considering the spatial externalities of apartment vacancy rates, the apartment vacancy rates of surrounding buildings did not show any statistical significance. Moreover, quantile regression results indicate that although the bottom 10% of apartment rent levels showed a negative correlation with all vacancy durations, the top 10% showed no statistical significance related to vacancies. [Practical implications] This study measures the extent of spatial externalities that can differentiate taxation based on housing vacancies. [Originality/value] The findings indicate that landlords have asymmetric information about their buildings compared with the surrounding buildings, and the extent to which price adjusts for long-term vacancies differs depending on the level of apartment rent

Supply Management of Rental Housing Facilities: Effect of Changes in the Quality of Housing Equipment in the Tokyo Housing Rental Market

The Tokyo housing market is considered to be one of the fastest evolving markets in the world. In recent years, functions such as TV intercoms, bathroom dryers, system kitchens, and toilets with washlets, which are not often seen in European and US houses, have spread and become common in Japanese houses. Under such circumstances, the importance of various equipment ancillary to housing, together with the location and quality of the building, is increasingly a factor for determining the value of housing in Tokyo. This is because when a new product appears, the old product is ordered to be withdrawn from the market, or its commodity value is greatly depreciated. This study measured the economic value of improving the quality of housing with new equipment in the Tokyo rental housing market and clarified the extent of economic depreciation that is occurring due to obsolescence. According to the obtained results, new functions are being added sequentially to the Japanese rental housing according to the age of the building, and these functions are non-negligible in the determination of housing rent, even when compared with location and building structure. The effect of obsolescence due to the addition of new functions was roughly—5%

POWER LAWS IN REAL ESTATE PRICES DURING BUBBLE PERIODS

How can we detect real estate bubbles? In this paper, we propose making use of information on the cross-sectional dispersion of real estate prices. During bubble periods, prices tend to go up considerably for some properties, but less so for others, so that price inequality across properties increases. In other words, a key characteristic of real estate bubbles is not the rapid price hike itself but a rise in price dispersion. Given this, the purpose of this paper is to examine whether developments in the dispersion in real estate prices can be used to detect bubbles in property markets as they arise, using data from Japan and the U.S. First, we show that the land price distribution in Tokyo had a power-law tail during the bubble period in the late 1980s, while it was very close to a lognormal before and after the bubble period. Second, in the U.S. data we find that the tail of the house price distribution tends to be heavier in those states which experienced a housing bubble. We also provide evidence suggesting that the power-law tail observed during bubble periods arises due to the lack of price arbitrage across regions.