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2019 | OriginalPaper | Chapter

3. Housing Market Imperfections and Distortions Resulting from Criteria Based on House Floor Space

Author : Miki Seko

Published in: Housing Markets and Household Behavior in Japan

Publisher: Springer Singapore

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Abstract

This is the first study to apply to Japanese housing data the econometric analysis of piecewise-linear budget constraints arising from space-linked subsidized interest rates. The floor-space demand model employed is the classical Hausman-type with random preferences and optimization errors. We estimate that if the Government Housing Loan Corporation (GHLC) loan system operated like a private lending institution, it would eliminate the current excess burden per household of approximately 9% of the average GHLC credit subsidy of a home. That is, existing housing finance that adopts criteria based on the floor space of houses creates incentives for people to live in even smaller houses.

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previous chapter House-Price Dynamics and Effects on the Macro Economy

next chapter Housing and Housing Finance Markets

Seko (1993) analyzed the same aspects in a more descriptive way.

Olmstead et al. (2007) estimate the price elasticity of water demand, structurally modelling the piecewise-linear budget constraints imposed by increasing block pricing.

See Appendix A of Seko (2002) for the derivation of (3.9).

We obtain (3.9) because \(1/(1 + s) \approx 1 - s\) (a first-order Taylor approximation). Deaton and Muellbauer (1980) adopted a similar approach to derive the user cost of capital.

There are two subsamples. One is the subsample that consists of only GHLC fund recipients. The other is the subsample that consists of only non-GHLC fund recipients.

Substituting and simplifying, the first term of Eq. (3.23) becomes

\(\begin{array}{*{20}l} {\frac{{\phi [(F - a_{0} - a_{1} UC(I)_{[k]} - \mu_{\beta } Y_{[k]} - a_{3} \times {{Demo}})/\sqrt {(\sigma_{\varepsilon }^{2} + Y_{[k]}^{2} \sigma_{\beta }^{2} )} ] \times [\Phi (R_{\beta ku} ) -\Phi (R_{\beta kl} )]}}{{\sqrt {(\sigma_{\varepsilon }^{2} + Y_{[k]}^{2} \sigma_{\beta }^{2} )} \times [\varPhi (\mu_{\beta } /\sigma_{\beta } )]}}} \hfill \\ {{{where}}\;R_{\beta ku} = \frac{{(\beta_{ku} - \mu_{\beta } )D - [\sigma_{\beta }^{2} Y_{[k]} (F - a_{0} - a_{1} UC(I)_{[k]} - \mu_{\beta } Y_{[k]} - a_{3} \times {{Demo}})]/D}}{{\sigma_{\varepsilon } \sigma_{\beta } }}} \hfill \\ \end{array} .\) Here \({\text{D}} = \sqrt {\sigma_{\varepsilon }^{2} + Y_{[k]}^{2} \sigma_{\beta }^{2} }\). In this chapter, because I assume \(R_{\beta kl} > 0\), the denominator of the first term has the form, \(\Phi ( \cdot )\), the cumulative distribution function associated with the standard normal.

Imposing this constraint may produce higher values of the compensated substitution effects.

Therefore, it is not clear whether MaCurdy’s (1992) critique is applied to these results.

Seko (1993) analyzed the tradeoff between quality and quantity of living space demanded under the GHLC system.

In the floor demand model (3) in Table 3.3, we evaluated the analytical conditional expectation for floor demand by integrating the distribution of \(\beta\) but setting \(\varepsilon_{F}\) to zero. For DWL calculation, we set \(\bar{\beta } = \mu_{\beta } + \sigma_{\beta } \left[ {\phi (\mu_{\beta } /\sigma_{\beta } )/\Phi (\mu_{\beta } /\sigma_{\beta } )} \right]\), and find \(F^{*i} (\beta )\) by setting \(\varepsilon_{F}\) to zero [see Hausman (1983)].

See Hoyt and Rosenthal (1992) for details about calculating DWL at the kink.

In April 2007, the successor organization of the GHLC, the Japan Housing Finance Agency (JHF) was established. The already issued loans by GHLC are managed by JHF. Basically, commercial banks became the primary lender of mortgage loans after the abolishment of GHLC. See Chap. 4 (Sect. 4.2.3).

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Title: Housing Market Imperfections and Distortions Resulting from Criteria Based on House Floor Space
Author: Miki Seko
Publisher: Springer Singapore
Book: Housing Markets and Household Behavior in Japan
Print ISBN: 978-981-13-3368-2

Electronic ISBN: 978-981-13-3369-9

Copyright Year: 2019
DOI: https://doi.org/10.1007/978-981-13-3369-9_3

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