Miki Seko

Effects of subsidized home loans on housing decisions and efficiency in Japan: Tradeoff between quality and quantity

First, we will present a microeconomic model of Japanese housing demand based on the Japanese home financing system. The focus of the model will be on the tradeoff between housing quality and quantity. We will derive the owner-occupied housing user cost of capital for several different subsamples. The unique feature of the model is the use of nonlinear budget constraints. Next, we will try reduced form estimation based on a composite housing demand model and a characteristic housing demand model. Estimation results indicate that those who do not receive funds from the JHCL are more price-elastic and more income-elastic for composite housing demand and floor demand. Recipients of JHLC funds have more price-elastic demand for quality as they compensate for institutional constraints on their selection of floor space. Finally, we will estimate the effect on housing demand if JHLC loan interest rates are not classified by the size of a house but are adjusted to the private loan rate and if the JHLC lends funds based on the market value of the house. We will also calculate the excess burden for each household created by the present JHLC home financing policy. Households distort their housing consumption by overconsuming quantity and underconsuming quality.

Nonlinear budget constraints and estimation: effects of subsidized home loans on floor space decisions in Japan

This is the first study to apply to Japanese housing data the econometric analysis of piecewise-linear budget constraints arising from space-linked interest rates. Two models of housing demand are discussed: The first is a Hausman-type model for floor space with random preferences and optimization errors. The second considers joint demand of floor space and other housing quality.

Earthquake Risk in Japan: Consumers' Risk Mitigation Responses After the Great East Japan Earthquake

The destructive impact of the Great East Japan Earthquake and subsequent tsunami on March 11, 2011 has enhanced consumers earthquake preparedness even in unaffected areas. This paper uses unique survey data collected after the earthquake to study how consumers reacted to this catastrophic event. We find that self-reported, perceived preparedness for natural disasters has significantly improved even among low-income households after March 11, but that post-quake intentions for more specific risk mitigation activities were systematically associated with household income and wealth levels. Our results indicate that the recent events might have widened the gap in disaster preparedness between rich and poor.

Earthquakes and the Quality of Life in Japan

Japan is famous for its earthquakes. How do households and firms respond to this potentially devastating risk? How does earthquake risk affect housing costs and wages? To answer these questions, we construct a Quality of Life Index (QOLI) and estimate the social cost of earthquake risk among cities/counties in Japan. The regional QOLI is obtained through estimating the hedonic wage and housing rent regressions using household longitudinal data covering all Japan. From the estimated results, we find that earthquake risk has a significant impact on the overall quality of life in Japanese prefectures, and that there are large city/county differences in terms of the social cost of earthquake risk. Finally, we argue that the large regional variation in the social cost of earthquakes arises from earthquake insurance market imperfections – crude and rough geographical risk rating – and propose a possible remedy for enhancing earthquake insurance risk assessment.

Housing in a Wealth-Based Economy

The disparities in wealth that exist among different households in Japan have been recently discussed in many places as a problem of a wealth-based economy. For example, a look at recent white papers (e.g., White Paper on the Japanese Economy, White Paper on the National Life, Construction White Paper, etc.) reveals various indices of disparities in financial assets and land assets that are calculated on the basis of various premises. While these indices show macrotrends as they are calculated on the basis of aggregated data, most of them do not really take into sufficient consideration the disparities among individual households. This article analyzes the role that household assets (financial assets such as savings and physical assets such as land) play in acquiring a home based on microdata on home purchasers from 1984 to 1985. It also touches on issues concerning housing financing in search of a solution.

The Rent Term Premium for Cancellable Leases

This study analyzes the rent term premium for leases that can be cancelled by the lessee. We model the lessor’s trade-off between leasing costs and the cost of cancellation options based on the recognition that many leases are cancellable by lessees, and lease markets involve significant transaction costs. We demonstrate that, regardless of the expected future rents, the rent term structure is upward-sloping when there is no leasing cost but U-shaped when the lessor faces moderate leasing costs. Residential leases in Japan, which are all cancellable by tenants, exhibit the term structure that is consistent with our calibrated model.A model of the term structure of lease rates in a frictionless economy is developed and its predictions are compared with data on residential leases in Japan. The model shows that the initial lease rate for a cancellable lease must be set higher than that for a non-cancellable lease because the former rate will be repeatedly adjusted downward when the market rent decreases. More importantly, the term structure of lease rates is always upward-sloping for cancellable leases. Empirical findings show a sharp contrast with the theory. Fixed-term lease rates are often higher than open-ended long-term lease rates. Moreover, in the fixed-term lease sample, the term structure of lease rates is downward-sloping. The term structure is also heterogeneous by tenant’s income.

Mortgage Market, Character and Trends: Japan

This article overviews the housing and housing finance markets in Japan, assesses current restructuring initiatives in these markets, and suggests directions for future policy reforms such as switching from recourse to nonrecourse loans and the creation of reverse mortgages structured like nonrecourse loans. While deregulation remains crucial, the subprime loan problem highlights the need for caution in terms of securitisation of mortgages. Even as Japan reels from the current economic crisis, it is important to recognise the potential benefits of market-oriented reforms, and the need to proceed cautiously with deregulation while sustaining momentum in the process of financial deepening as a way of hedging risk.