Housing markets in the United States and Japan

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Housing Markets in the
United States and Japan


A National Bureau
of Economic Research
Conference Report


~~~~

Housing Markets in
the United States
and Japan

Editedby

Noguchi and
James M. Poterba
YUkiO

The University of Chicago Press
Chicago and London


YUKIONOGUCHIis professor of economics at Hitotsubashi University.
JAMES M. POTERBA

is professor of economics at the Massachusetts
Institute of Technology and director of the Public Economics Research
Program at the National Bureau of Economic Research.

The University of Chicago Press, Chicago 60637
The University of Chicago Press, Ltd., London
0 1994 by the National Bureau of Economic Research
All rights reserved. Published 1994
Printed in the United States of America
03 02 01 00 99 98 97 96 95 94 1 2 3 4 5
ISBN: 0-226-59015-1 (Cloth)

Library of Congress Cataloging-in Publication Data
Housing markets in the United States and Japan / edited by Yukio
Noguchi and James M. Poterba.
cm. - (A National Bureau of Economic Research conference
p.
report)
“The research papers collected in this volume were presented at a
joint Japan Center for Economic Research (JCER)-National Bureau of
Economic Research (NBER) conference in January 1991”Acknowledgments.
Includes bibliographical references and indexes.
I . Housing-United States-Congresses.
2. Housing-JapanCongresses. I. Noguchi, Yukio, 1940-. II. Poterba, James M. 111.
Series: Conference report (National Bureau of Economic Research)
HD7293.H68 1994
381 ’.4569’080952-d~20
93-48441
CIP

8 The paper used in this publication meets the minimum requirements of
the American National Standard for Information Sciences-Permanence
of Paper for Printed Library Materials, ANSI 239.48-1984.


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Contents

Acknowledgments

Introduction
Yukio Noguchi and James M. Poterba

ix
1

1.

Land Prices and House Prices in Japan
Yukio Noguchi

11

2.

Land Prices and House Prices in the United States
Karl E. Case

29

3.

Housing Finance in Japan
Miki Seko

49

4.

Housing Finance in the United States
Patric H. Hendershott

65

5.

Housing and the Journey to Work in the Tokyo
Metropolitan Area
Tatsuo Hatta and Toru Ohkawara

87

6.

Housing and the Journey to Work in U.S. Cities
Michelle J. White

133

7.

Housing and Saving in Japan
Toshiaki Tachibanaki

161

8.

Housing and Saving in the United States
Jonathan Skinner

191

9.

Public Policy and Housing in Japan
Takatoshi Ito

215


viii

10.

Contents

Public Policy and Housing in the United States
James M. Poterba

239

Contributors

257

Author Index

259

Subject Index

263


Acknowledgments

The research papers collected in this volume were presented at a joint Japan
Center for Economic Research (JCER)-National Bureau of Economic Research (NBER) conference in January 1991. We are grateful to Yutaka Kosai,
president of JCER, and Martin Feldstein, president of NBER, for laying the
groundwork for such joint meetings. They also provided important guidance
in shaping the agenda for this conference.
Organizing a conference with participants from two continents is not a

simple task, and the staff at JCER and NBER provided outstanding logistical
support for our meeting. We are particularly grateful to Ilana Hardesty of
NBER, who attended the conference and served as conference coordinator,
and to Hiromichi Mutoh and Professor Seiritsu Ogura of JCER for very able
assistance. We also wish to thank Kirsten Davis, director of the NBER Conference Department, for ongoing help in planning and organizing the meeting.
After a conference, the real work of publishing the proceedings begins. We
wish to thank Deborah Kiernan and Jane Konkel of the NBER and Kumiko
Mizutani of the JCER for their help in preparing this volume for publication.

ix


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Introduction
Yukio Noguchi and James M. Poterba

The economics literature is replete with comparisons between various aspects
of the Japanese and U.S. economies. Previous studies have analyzed their saving rates, their industrial structures, and their productivity growth rates. Until
very recently, however, the housing markets in the two nations have escaped
systematic comparison or contrast, perhaps reflecting a naive view that the
housing market does not affect international trade or manufacturing productivity growth. Recent emphasis on the differences in personal saving between the
two nations, however, has drawn attention to the role of the housing market in
affecting wealth accumulation and the flow of saving available for corporate
investment. The comparison between house price to income ratios in Japan
and the United States is sometimes invoked as a key factor explaining the
higher saving rate among young Japanese than among young U.S. households.
More generally, because investment in housing capital comes at least in part at
the expense of investment in other physical assets, such as plant and equipment, there is a growing realization that incentives for housing consumption

and investment may be central factors in determining business investment and
productivity growth.
Housing markets in both Japan and the United States have also attracted
more attention, independently, in the five years. The rapid rise in Japanese land
and housing prices in the late 1980s was an important factor in explaining the
increase in share prices. The decline in real estate values, along with falling
stock prices, in the early 1990s has led to concern over the fragility of some
Japanese financial institutions. In the United States, the decline in nominal
house prices in some major cities in the late 1980s triggered concern about the
Yukio Noguchi is professor of economics at Hitotsubashi University. James M. Poterba is professor of economics at the Massachusetts Institute of Technology and director of the Public Economics Research Program at the National Bureau of Economic Research.

1


2

Yukio Noguchi and James M. Poterba

possibility of a long-run house price collapse. Recent financial innovations
such as the rise of home equity loans have made housing wealth more liquid,
and are often cited as contributory factors in the decline of the U.S. personal
saving rate.
Housing also plays a key role in comparisons between living standards in
the United States and Japan. Since housing is a large component of the consumption bundle in both the United States and Japan, real wage comparisons
using a price index of imported goods suggest that Japanese workers receive
higher wages than their U.S. counterparts. When the comparison uses comparable consumption baskets including nontraded goods, however, the real wage
of U.S. workers is higher because the cost of housing services is significantly
lower in the United States than in Japan.
This volume brings together ten studies of the housing markets in Japan and
the United States. There are two papers, one by a Japanese author and one by

an American, on each of five major issues-house prices, the link between
financial markets and housing markets, housing and the journey to work, housing and saving, and public policies toward housing. The papers provide a
wealth of statistical information about the similarities and differences in housing markets in the two countries.
This brief introduction has three parts. The first provides an overview of the
housing markets in Japan and the United States. It presents summary statistics
comparing housing conditions, and the role of housing in the economy, for
both nations. The second section summarizes the topic papers that make up
the remainder of the volume. A brief conclusion suggests further directions
for research.

Overview: Housing in Japan and the United States
Housing conditions are systematically better in the United States than in
Japan. Table 1 reports several measures of housing quality for Japan, the
United States, and three other developed nations. It shows that the average
number of persons per room is substantially larger (0.71) in Japan than in the
United States (OSO), and that the average living space in U.S. houses is more
than 50 percent greater than in Japanese houses. Many Japanese homes still
lack basic amenities. While only 2.4 percent of U S . housing units lack access
to a flush toilet, 41.8 percent of Japanese units lack such plumbing.' The 1988
Survey on the Demand for Housing, conducted by the Japanese Ministry of
Construction, finds that 5 1.5 percent of households are dissatisfied with their
housing conditions. More than one-third of homeowners want to enlarge or
improve their current homes, and another third wish to switch to another house.
Current Japanese housing conditions are the results of a decades-long shortage of housing. Much of the urban housing stock was destroyed during World
1. Japanese Ministry of Construction, Nihon no Juta ku Jijo, rev. (Tokyo:Gyosei), 1993.


3

Introduction

~~~

~~

Table 1

~~

International Comparison of Housing Conditions

Rooms per house
Persons per room
Area per house (mZ)
Home-ownership rate
(%)

Average new house
pricelaverage
household income

Japan

United
States

Germany

France

4.7

.7 1
81

5.1
SO
135

4.5
.60
94

3.7
.75
85

5.0
SO
N.A.

40

51

63

N.A.

4.4

62

7.4

65

3.4

4.6

United
Kingdom

Source: Chochiku Keizai Kenkyu Center, Yearbook of Individual Financing (1989) for all entries
except last row, which is from Housing Industry Newspaper Company, Housing Economy
Databook.

War 11, and the shortage was compounded by rapid migration from rural to
urban areas in the 1950s and 1960s. Industrial development was a national
priority during this period, and housing investment was discouraged. Housing
loans were not available from private financial institutions. As a result, the
number of households sometimes exceed the number of houses in Japan.* In
part because Japan has less housing per person or as a share in GNP than
does the United States, the ratio of residential investment to GNP has been
substantially higher in Japan than in the United States for most of the last
two decades.
The United States has not experienced comparable periods of housing shortage. The volume of new housing built in a given year is subject to substantial
variation, and a doubling in the level of new construction between a trough
and a peak of the construction cycle is not unusual. Nevertheless the overall
level of construction has been adequate to provide more than enough housing
units for the stock of households. In the U.S. rental market in the late 1980s,

the vacancy rate for housing units was sometimes above 10 percent.
Housing conditions in both the United States and Japan have improved over
time. In Japan, the total floor space per dwelling rose 22 percent between 1968
and 1988, and the area per person rose even more quickly, by 7 1 p e r ~ e n tThis
.~
reflects a reduction in the number of individuals per housing unit, as well as
an increase in housing unit size. In the United States, the median dwelling
increased from 5.0 rooms in 1970 to 5.3 rooms in 1990. For new homes, the
increase in apparent quality is even more dramatic. The average new singlefamily home completed in the United States in 1970 contained 1,500 square
2. The household-to-housing unit ratio was 0.96 in 1958, 1.01 in 1968, 1.08 in 1978, and 1.11
in 1988 (Japanese Statistics Bureau, Housing Survey of Japan, various issues).
3. b i d .


4

Yukio Noguchi and James M. Poterba

Table 2

Home ownership Rates, Japan and the United States, 196&!30 (%)

Year

Japan

United States

1950
1960

1970
1980
1990

N.A.

55.0
61.9
62.9
65.6
64.1

68.4
59.6
61.2
61.4"

Sources: Japan: Statistics Bureau, Housing Survey of Japan. Entries are interpolated as necessary
from surveys conducted in years ending in 8 and 3. United States: 1950-70 from U.S. Bureau of
the Census as reported in U.S. League of Savings Associations, Savings a n d h a n Fact Book 1979.
More recent entries from Harvard University Joint Center for Housing Studies, The State of the
Nation's Housing 1991.
"From 1988 survey

feet of living area; this increased to 2,080 square feet by 1990. In 1970, 32
percent of all units completed had one bathroom, while only 48 percent had
two or more. By 1990,87 percent of new houses had two or more baths.4
Although the characteristics of housing units differ between the United
States and Japan, the tenure mix-the fraction of households who own their
own homes-is similar in the two nations. The current home-ownership rate

is near 65 percent in both countries, although this reflects the convergence of
two quite different trends. Table 2 presents time series on home-ownership
rates in the two countries. In the United States, the home-ownership rate rose
between the end of World War I1 and the mid-1980s. It has been stable, or
possibly declined, since then. The Japanese home-ownership rate, however,
declined in the two decades after World War 11. This reflects the population
migration from rural areas, where home-ownership rates are high, to urban
areas, where renting is more common. The Japanese home-ownership rate has
not changed substantially since 1970.

Overview of Subsequent Studies
The comparison of housing markets in Japan and the United States is an
enormous undertaking. To structure and limit the subsequent analysis, we
chose to focus on five issues that are central to understanding the housing markets in both countries. Our choice of topics necessarily excludes some that are
of great importance in one nation but not in the other, such as the decay of
central city housing in the United States or the policy-induced distortion between agricultural and residential land use in Japan. The remainder of this
section presents a brief overview of the issues considered in the subsequent
chapters, and introduces their research findings.
4. U.S. Bureau of the Census, Construction Reports C-25: Characteristics of New Housing
(various issues).


5

Introduction

Land and House Prices
Both the United States and Japan have experienced rising real house prices
during the last twenty years. In Japan the most rapid price increase took place
in the late 1980s, and it was attributable largely to rising land prices. In the

months since our conference was held, land prices have stabilized, and in many
areas, they have declined. For the nation as a whole, prices fell just over 5
percent between 1991 and early 1992, while in Tokyo and some other urban
areas, the price decline was more than 15 p e r ~ e n t In
. ~ the United States, the
1970s were the period of most rapid price appreciation, and the 1980s were a
period of stable real house prices. The U S . real price increase of the 1970s
was much smaller, however, than the Japanese price increase of the late 1980s.
Table 3 presents summary information on real house prices in both countries. It shows the 30 percent real price increase in the United States during the
1970s, and the 45 percent increase in Japan a decade later. The table also reports the ratio of the price of an average house to average household annual
income. This ratio is higher in Japan, often by a factor of two, than in the
United States for the entire sample period. In addition, this crude measure of
housing affordability shows that housing became less affordable in Japan during the mid- and late 1980s. At the end of the 1980s, an average house in
the greater Tokyo metropolitan area cost 7.4 times the average worker’s pretax
income. As the data in table 1 suggest, this ratio is higher than that of any other
major developed country.
The principal source of rising house prices in Japan was rising land prices.
The Japanese paper on house prices, by Yukio Noguchi, is therefore directed
toward understanding the causes and consequences of the recent price run-up.
The paper argues that it is difficult to reconcile the time series on Japanese
land prices in the 1980s with an “efficient markets” view in which land price
changes are driven by fundamentals involving the supply of or demand for
land. Rather, the paper concludes that the land price appreciation was due in
part to a “speculative bubble.” The paper also considers the long-term differences between house prices in Japan and other nations. It concludes that high
prices in Japan are largely the result of government policies that distort land
use, rather than an absolute land shortage.
The companion paper, on house prices in the United States, is by Karl E.
Case. He summarizes the available time-series data on real house price movements in the United States. The paper focuses on the period since 1960, although it also provides some longer-term historical data. Case emphasizes the
important differences in the house price experiences in different regions of the
United States, and notes that one area may experience rapidly rising house

prices while another region faces falling prices. This paper also addresses the
5. Report of the National Land Agency as summarized in the New York Times, 28 March
1992, 31.


6

Yukio Noguchi and James M. Poterba
House Prices and Annual Household Income

Table 3

Average House Price/
Average Annual Income

Index of Real House Prices
Year

Japan

United States

Japan

United States

1970
1975
1980
1985

1989

2101
305 1
3537
5371

101.4
109.2
132.9
123.1
125.0

5.4
6.4
6.2
5.6
7.4

2.6
3.0
3.5
3.2
3.2

Sources: Japan: 1970 entry is from Takatoshi Ito, The Japanese Economy (Cambridge: MIT Press,
1991), 412. Subsequent data are from Housing Industry Newspaper Company, Housing Economy
Databook. Real house price is the ratio of the nominal price of new units divided by the consumer
price index, deflated to 1987 prices. United States: House price index is the price of a constantquality house (1987 quality, thousands of dollars) divided by the personal consumption deflator.
The ratio of house price to income is constructed as the median price of an existing home sold in

a given year, divided by median household income. Both data series are drawn from the Statisticul
Abstract of the United States.

extent to which house prices should be viewed as set in a rational asset market.
Case observes that there is downward nominal rigidity in changing prices to
meet market conditions.

Housing and Financial Markets
Financial policies and credit market conditions can exert profound influences on the level of new construction and the demand for housing. In the
United States, housing investment has historically been subsidized through a
variety of credit market institutions, such as savings and loans. Policy has been
quite different in Japan, with strict limits on the availability of housing finance
and consequent restriction on the supply of new homes.
The paper on housing finance in Japan, by Miki Seko, provides detailed
information on the structure of financial arrangements that are used by home
buyers in Japan. The paper explores the role of the Japan Housing Loan Corporation, which is responsible for one-third of the mortgage originations in Japan,
in affecting housing demand. It provides important information on typical
mortgage loan characteristics, such as the down-payment ratio of approximately 30 percent. The paper closes with a discussion of options for increasing
the flow of financial capital to the Japanese housing market.
The companion paper by Patric Hendershott tracks the rapid changes in the
links between credit markets and housing markets during the 1980s. In the
three decades after World War 11, most mortgage loans were originated by
savings institutions, such as thrifts and savings and loans. These institutions
attracted a large inflow of saving deposits in part because they were legally
sheltered from competition from commercial banks and other financial intermediaries. The thrift institutions were also covered by various government de-


7

Introduction

posit insurance programs. The prominence of these institutions in housing finance resulted in occasional “credit crunches” when deposit inflow was
inadequate to cover the demand for new home purchases, but on balance provided a subsidy to housing.
Beginning in the late 1970s, mortgage markets in the United States became
better integrated with other credit markets, The market for mortgage-backed
securities, bundles of individual home mortgages that were traded as financial
commodities, became one of the largest fixed-income security markets, and
the inflow of funds to thrift institutions ceased to be an important factor in
housing finance. The increasing sophistication of investors in mortgage securities, however, led to a wave of increasingly complicated mortgage products,
such as adjustable-rate mortgages and insured mortgages. Hendershott explains how these changes have affected the cost of borrowing for house purchase, and what effects they will have on housing markets in the future.

Housing Markets and the Journey to Work
The third pair of papers tackles an issue that is central to understanding the
local structure and housing markets and metropolitan areas. How do housing
market conditions interact with commuting decisions? The Japanese paper,
prepared by Tatsuo Hatta and Toru Ohkawara, begins by describing the lengthy
commutes faced by many Japanese workers. They focus on the Tokyo metropolitan area and argue that, because Tokyo is the largest metropolitan area in
the world and housing is scarce in the central city, workers have little alternative but to commute long distances.
The HattdOhkawara paper begins with a careful comparison of Tokyo and
New York, as a means to provide insight on the structure of large cities in
Japan and the United States. The paper then considers two public policies that
affect commuting distances in Japan. The first is the income tax provision
allowing employers to deduct their costs of reimbursing employees’ commuting expenses. The authors demonstrate that this provision raises land prices
near Tokyo, because it reduces the amount commuters must pay to reach the
center city. The second policy concerns land use. The paper shows that the
provisions that encourage agriculture relatively close to large cities and inhibit
skyscrapers in downtown Tokyo lead to less concentrated employment in
Tokyo than in New York. The paper concludes that these policies have distorted the allocation of jobs and the length of journeys to work and that removing these distortions would result in efficiency gains.
The companion paper by Michelle White highlights the differences between
journeys to work in the United States and Japan. White presents descriptive

information on commuting patterns and shows that most commuting in the
United States involves trips in private cars rather than the use of public transit,
as in Japan. White also argues that the traditional focus on a central business
district where jobs are located and a periphery of residential suburbs is an
increasingly inaccurate description of urban structure in the United States.


8

Yukio Noguchi and James M. Poterba

The ongoing shift of jobs to sectors that do not require access to harbors, rail
lines, or other features of central cities has resulted in job migration to the
perimeter of many urban areas. This has led to shorter commuting times for
many workers, but also has induced a set of long-range problems for U.S.
cities, which are faced with shrinking employment bases, declining housing
stocks, and rising tax burdens.

Housing and Saving
One of the key factors inducing recent interest in the housing markets of
Japan and the United States is the possibility that differential rates of saving
for house purchase explain part of the disparity in personal saving rates in the
two countries. The paper by Toshiaki Tachibanaki provides a wealth of valuable information on the interaction between housing market conditions and
household saving. It documents the striking decline over time in the fraction
of Japanese households who claim their saving is primarily for house purchase,
and argues that this is primarily due to renter households in Tokyo and other
metropolitan areas giving up on the hope of ever being able to afford a home.
The rapid rise in land and house prices in the 1980s has apparently led to a
group of “discouraged renters” who are not saving to purchase a house as they
might have two decades ago. In spite of this trend, saving for housing is still

an important factor in Japanese personal saving. The study documents the key
role of forced saving through mortgage principal repayment and notes that its
importance has increased through time. Finally, Tachibanaki observes that intergenerational wealth transfers play a key role in housing acquisition. Nearly
one-third of Japanese homeowners obtained their house as a result of bequest
or inheritance.
Jonathan Skinner presents a companion paper on housing and saving in the
United States. After describing the important role of housing in the net worth
of U.S. households and pointing out that for many low- and middle-income
households their home is their principal asset, his paper focuses on the effect
of rising house prices on household saving. The 30 percent increase in real
house prices during the 1970s could affect the household saving rate in various
ways. It could lead to increased spending by current homeowners, who receive
a windfall when their house price rises. It could lead to increased saving by
current renters, who plan to purchase a home in the future. It could also lead
to reduced saving by some renters, if the “discouraged renter” model that applies to some Japanese households applies in the United States. Skinner notes
that the existing empirical evidence suggests that some homeowners increased
their spending as a result of the house price increase, while there is not much
evidence for the “discouraged renter” view.

Public Policies toward Housing Markets
The final two papers examine the impact of public policies on housing markets in the United States and Japan. This is a very broad topic, and each paper


9

Introduction

narrows the subject area in various ways. Takatoshi Ito describes the Japanese
policy environment, focusing primarily on tax policies. While credit policies
are another important public policy instrument affecting housing markets in

Japan, this subject was examined in an earlier chapter. Ito argues that several
tax policies have dramatic effects on the structure of Japanese housing markets.
First, the relatively light property tax burden on land in agricultural uses distorts land use patterns and precludes converting agricultural land near cities to
housing or commercial development that would be more profitable in the absence of tax incentives for farming. Second, the favorable bequest tax treatment of real estate induces “lock-in’’ effects, with elderly households choosing
not to sell their homes and move to alternative accommodations, because they
would forgo substantial tax benefits by doing so. Finally, the paper outlines a
range of tax incentives for company-provided and government-provided housing that arguably reduce the quality of housing in the owner-occupied and
rental housing markets.
The last paper, a companion paper on public policy and housing in the
United States by James Poterba, also focuses on tax policy issues. In the United
States, tax subsidies to both owner-occupied and rental housing are substantial.
The magnitude of these subsidies has varied over time, and while historically
there were credit market subsidies to housing investment, these subsidies have
largely vanished. Poterba describes the changes through time in the level of
housing market subsidy, explaining the very substantial tax incentives for home
ownership in the late 1970s, when high inflation rates combined with high
marginal tax rates and interest deductibility to result in very low user costs of
owner-occupied housing. The paper also explains the important changes in the
tax treatment of rental housing in both the 1981 and 1986 tax reforms. The
1981 reform substantially expanded tax subsidies to rental properties, while
the 1986 reform countermanded this policy and eliminated these incentives.
The paper provides an overview of the various other public policies that affect
housing in the United States, including a range of instruments designed to
encourage the provision of housing for low-income families.

Future Directions
The papers in this volume only begin the vast task of comparing the housing
markets in Japan and the United States. They highlight the institutional differences between the two nations and suggest the need for further empirical research to quantify their effects. The issues they raise are of interest both for
understanding how the efficiency of the domestic economy might be improved
and for considering the link between housing markets and international economic linkages.

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1

Land Prices and House Prices
in Japan
Yukio Noguchi

1.1 Introduction
Japan has had a serious housing problem throughout most of the postwar
period. Although the problem of absolute scarcity of dwellings no longer exists, housing conditions remain extremely unsatisfactory today although Japan
has become one of the world’s largest economic powers. Spaces are narrow,
locations are inconvenient, and related social infrastructures are insufficient.
Above all, houses are extremely expensive.
One may propose a number of reasons why the housing problem remains
serious in Japan. But no one would deny that the single most important reason
is land prices, which are significantly higher than in other countries and have
continued to rise almost every year during the postwar period. The sharp rise
in land prices during the latter half of the 1980s has aggravated the problem.
It is widely recognized that the land price problem is not only the heart of the
housing problem but also one of the most serious social and economic problems of present-day Japan.
In this paper, I discuss major issues related to the land problem in Japan,
focusing on the land price issue. In section 1.2, I present several facts and data.
I point out that the housing problem in large cities in Japan is almost synonymous with the land price problem, because most of the housing cost consists
of land purchase cost. I also point out that the extraordinary land price inflation
during the 1980s in the Tokyo and Osaka areas has considerably lowered the
house-purchasing power of wage income. Section 1.3 is the discussion of the

cause of the recent land price inflation. The focus of the discussion is bubble
versus fundamentals. My conclusion is that the land price inflation during the
1980s cannot be explained unless the bubble element is introduced. This is
Yukio Noguchi is professor of economics at Hitotsubashi University.

11


12

Yukio Noguchi

demonstrated in two ways: first, by showing a difference between present discounted value of rents and the actual land price, and second, by showing the
deviation of the actual price from the price obtained from a land price equation.
Section 1.4 is an examination of structural factors underlying the chronically
high land price in Japan. I argue that the essential cause for high land prices is
not the absolute shortage of land but various social and economic factors that
enhance the value of land as a type of marketable asset. Particularly important
are distortions brought about by the tax system and the Land Lease Law. Finally, in section 1.5, I review recent trends in government land policies and
discuss their implications.

1.2 The Housing Problem and the Land Price Problem
1.2.1 Share of Land Purchase Cost in Housing Cost
In order to evaluate the relative weight of the land price problem in the housing problem, I calculate the share of land purchase cost in housing cost for
model cases in several Japanese cities.’ The figures shown in table I . 1 indicate
a large regional difference in the nature of the problem. In local cities, the
share is less than one-half. In small local cities, it is somewhere around 30-40
percent. This ratio is about the same as that in other countries. Thus, in these
cities, the land problem is not the major obstacle to improving housing conditions.
The situation is considerably different in large cities, however, where the

land purchase cost is over 60 percent of housing costs. In the Tokyo and Osaka
areas, it is nearly 90 percent even in suburban sites. The ratio becomes as high
as 98.5 percent in the central district of Tokyo. In these regions, therefore, the
housing problem is almost synonymous with the land problem or land price
problem.
At this point, one may wonder why Japanese people stick to buying a house
with land rather than renting a house or buying a house with leased land. One
reason is the supply-side condition. As discussed in section 1.4,the new supply
of leased land is virtually nil due to the excessive protection of the lessee’s
right provided by the Land Lease Law. It is true that there are new supplies of
rented houses, but most of them are for students, single persons, or couples
without children who will not occupy the house for a very long period. This is
due to the protection of tenants provided by the Building Lease Law. It follows
that one is forced to buy land at a certain stage of one’s life cycle if one wishes
to live in a decent house. This is true not only for a detached house but also
for a condominium, because land purchase cost is included in the condomin1 . In this calculation, a detached house of a standard size (site 167 square meters, house 89
square meters) is assumed. The land price used in this calculation is local government benchmark
price (Kijun Chika, July 1989).


13

Land Prices and House Prices in Japan

Table 1.1

Share of Land Cost in Housing Cost for Model Cases
Land Price
per Square
Meter"

Land
cost
(a)

Construction
cost
(b)

Total
cost
(C)

Ratio
(dc)

580
106
39

138,371
25,289
9,304

2,047
2,047
2,047

140.418
27,336

11,351

0.985
0.925
0.820

60
26
17
14

10,020
4,342
2,839
2,338

1,469
1,469
1,469
1,469

1 1,489
5,811
4,308
3,807

0.872
0.747
0.659
0.614

Otaru

4

Akita
Toyama
Kurashiki
Miyazaki

5
8

668
835
1,336
1,002

1,469
1,469
1,469
1,469
1,469

2,137
2,304
2,805
2,471
2,47 1

0.313
0.362
0.476
0.406
0.406

Tokyo
Minato
Suginami
Machida
Other big cities
Osaka
Nagoya
Hiroshima
Fukuoka
Local cities

6
6

1,002

Nores: Prices are 10,OOO yen. Assumptions are: (1) site, 167 square meters; house, 89 square
meters. (2) Housing construction cost per square meter: 230,000 yen in Tokyo, and 165,000 yen
in other cities.
"Land price is local government benchmark price (Kijun Chika), National Land Agency (July
1989).

ium price. The demand-side reason is that people regard a house as an asset
that produces capital gain. In fact, it is said that people buy a house in order to

own rather than to live.
It follows that, as far as the housing problem in large cities is concerned, the
land price problem is the most important element. I will therefore confine my
argument in this paper to the land price issue.
1.2.2 Level of Land Price
As is well known, land prices in Japan are extremely high compared to those
in other countries. Since systematic data are difficult to obtain in other countries, a comparison is made here only with U.K. data.* Residential sites that
command the highest prices in the United Kingdom are located in the inner
city of London, and the price of land was about &4 million per hectare, or
&100,000 per square meter, in 1986. According to table 1.2, which shows the
government benchmark prices (Koji Chika) of residential sites in Japan, one
square meter of land at locations in Tokyo comparable to the above site in
London costs &4 million, or forty times that in L ~ n d o nNeedless
.~
to say, inter2. Valuation Office, Property Market Report no. 46, Autumn 1986. Comparison with the United
Kingdom is meaningful because its natural conditions are similar to that of Japan.
3. There are several land price indices: (I) government benchmark price (GBMP, Koji Chika):
about 70 percent of market price; (2) local government benchmark price (Kijun Chika): same level