The Land/ Housing Problem in Japan: A Macroeconomic Approach

This paper presents an overlapping generation model for the framework of analyzing the long-run trend in land prices, with the following propositions: First, it is possible to define a steady state in which land price measured in terms of the commodity price is rising. The land price increase in this case is due to "fundamentals". In the model, there is no room for deterministic bubbles. Second, when there are two countries, one with a land supply constraint and another without it, the real exchange rate of the land-constrained country appreciates. When a combination of a tax on residential use and a subsidy for productive (non-housing) activity is introduced to this economy, the ratio of residential use will decrease. Moreover, the size of current account imbalance will increase by the tax-subsidy program. The Japanes and U.S. data were examined for the implication of the model, namely the land value and GNP would increase at the same rate. Data for the U.S. data and Japan before the mid 1970s look consistent with the theoretical prediction. Since the mid-1970s, a large fluctuation and an increasing trend are prominent in the Japanese land value/GNP ratio. Several possible reasons for this phenomnenon were discussed without pinpointing to the cause.