A Theory of Housing Prices and the Homeownership Rate: Evidence from the Housing Markets in Japan and the U.S.

This paper attempts to account for similarities and differences in housing markets in the last two decades in Japan and in the last decade in the United States by examining the role of interest rates, the growth rate of total factor productivity (TFP), and the change in downpayment requirements. The similarities that existed were huge fluctuations in housing prices and the housing price-to-rent ratio in both countries. The difference

is that in the U.S. the increase in the homeownership rate coincided with the housing price increase, while the opposite was true in Japan. To investigate this issue, a general equilibrium overlapping generation model is constructed where housing prices and rents are determined endogenously. The model is carefully calibrated and estimated to the data so that it captures some economic features as well as the differences in housing market

characteristics in both countries. I find three results. First, the model shows that the decrease in the interest rates and the increase in the TFP growth rate account for most of the increase in housing prices and the housing price-to-rent ratio in the late 80’s in Japan and in the last decade in the U.S. Second, the model also predicts the subsequent decrease in housing prices and the housing price-to-rent ratio in the 90’s in Japan. This result implies that in the 90’s in Japan, the negative effect of the decline in the TFP growth rate on housing prices and the housing price-to-rent ratio exceeded the positive effect of

the further interest rate decline. Third, I find that while the change in downpayment requirements has little effect on housing prices and the housing price-to-rent ratio, the

difference in the homeownership rate change between Japan and the U.S. is likely to be accounted for by the downpayment requirement change.

For more information, contact Harold Cole.