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Alternative Approaches to Housing Services and Japanese CPI: -Bias from Nominal Rigidity of Rents-

Author

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  • Shimizu, Chihiro
  • Imai, Satoshi
  • Diewert, Erwin

Abstract

Despite the significant decrease in housing prices during the collapse of the Japanese bubble in the first half of the 1990s, housing rents hardly changed at all. Why is it that housing rents do not change? Why are housing prices and housing rents not linked? In this paper, in order to address these questions, we conducted an alternative indicators for housing services in CPI. First, we found that the annual proportion of residential units whose rent changed was no more than about 5%. This is extremely low, representing 1/20 of the figure for the U.S. and 1/6 of the figure for Germany. The underlying reason for this high degree of rigidity is the specific circumstances of the Japanese housing market, where opportunities to change rents are inherently limited due to the fact that tenant turnover is low while the duration of rental contracts is two years. Even more important, however, is the fact that rents are not changed even when opportunities to change them arise such as tenant turnover or contract renewals, thereby significantly lowering the probability of rents changing. Based on analysis using the adjustment hazard function technique proposed by Caballero and Engel (2007)[3], we found that whether or not a given unit's rent was adjusted mostly did not depend on how much its current rent diverged from the market conditions. In addition, it has been pointed out that the high depreciation rate characteristic of the Japanese market is a problem. Addressing this problem is extremely important when it comes to estimating housing rent indexes.

Suggested Citation

  • Shimizu, Chihiro & Imai, Satoshi & Diewert, Erwin, 2016. "Alternative Approaches to Housing Services and Japanese CPI: -Bias from Nominal Rigidity of Rents-," HIT-REFINED Working Paper Series 35, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:remfce:35
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27718/1/wp035.pdf
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    References listed on IDEAS

    as
    1. Caballero, Ricardo J. & Engel, Eduardo M. R. A., 1993. "Microeconomic rigidities and aggregate price dynamics," European Economic Review, Elsevier, vol. 37(4), pages 697-711, May.
    2. W. Erwin Diewert & Kevin J. Fox & Chihiro Shimizu, 2016. "Commercial Property Price Indexes And The System Of National Accounts," Journal of Economic Surveys, Wiley Blackwell, vol. 30(5), pages 913-943, December.
    3. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    4. Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 100-121, September.
    5. Diewert, Erwin & Shimizu, Chihiro, 2015. "Residential Property Price Indices For Tokyo," Macroeconomic Dynamics, Cambridge University Press, vol. 19(08), pages 1659-1714, December.
    6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    7. Diewert, Erwin, 2007. "The Paris OECD-IMF Workshop on Real Estate Price Indexes: Conclusions and Future Directions," Economics working papers diewert-07-01-03-08-12-12, Vancouver School of Economics, revised 31 Jan 2007.
    8. Robert J. Gordon & Todd vanGoethem, 2005. "A Century of Housing Shelter Prices: Is There a Downward Bias in the CPI?," NBER Working Papers 11776, National Bureau of Economic Research, Inc.
    9. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages 335-356, June.
    10. C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
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    More about this item

    Keywords

    housing rent; price rigidity; time-dependent model; state-dependent model; adjustment hazard function; user cost; opptunuty cost;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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