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Japanese Housing Tenure Choice and Welfare Implications after the Revision of the Tenant Protection Law

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Abstract

A new mode of housing tenure in Japan, rental housing with fixed rental terms, was introduced in March 2000 with the revision of the Japanese Tenant Protection Law. This paper examines the implications of this new system by analyzing the determinants of the choices by households among the three types of housing tenure in Japan: owned housing, general rental housing, and rental housing with fixed rental terms, and calculates the estimated compensating variation. Our micro-data is based on the three waves of Japanese household longitudinal data (Keio Household Panel Survey, KHPS) covering all of Japan. The difference between general rental housing and rental housing with fixed rental terms is reflected in the length of the contract term and the level of rent. We carefully eliminate potential sample selection bias introduced to the conditional logit housing tenure choice model through the estimation of the hedonic price regression of each housing tenure alternative. We find that households with a smaller number of family members, those who moved from outside the local housing market, those headed by an unmarried household head, and those with plans to own a house in the near future tend to select rental housing with fixed rental terms. The estimated mean compensating variation by introducing rental housing with fixed rental terms for all households selecting that tenure is 1,205 JPY per month or 1.96% of their monthly rent. Moreover, younger and/or lower income households derived the greatest benefit from the revised law in the form of lower rents.

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Notes

  1. A similar contract system was introduced to the land market in 1992 when the Land and Housing Lease law was enacted to permit owned housing with a fixed-term lease for the land.

  2. The average floor space of owned housing in 1968 was 85.36 m2, while that of rented housing was 35.46 m2. The corresponding floor space increased to 101.29 and 39.36 m2 in 1978, 112.08 and 43.08 m2 in 1988, and 121.67 and 45.59 m2 in 2003 (Source: Japanese Census of Housing).

  3. Also, see a similar related theoretical study by Seshimo (2003).

  4. See, for example, Abe et al. (1998).

  5. Seko and Sumita (2007) examined this court-arbitrated rent control system on Japanese renters’ mobility.

  6. To make a distinction, rental housing without a fixed rental term is referred to as general rental housing.

  7. See Survey of Housing Market Tendency of 2005 by the Ministry of Land, Infrastructure and Transport.

  8. The KPHS data set was different from their data set. Our data set was more general than theirs because their data was limited to the Tokyo metropolitan area and new contract-basis asking rents. Our data set covered all of Japan and included not only newly contracted rents, but also the lower rents for non-contract rentals. In addition, our rents were market rents, which were actually contracted between landlords and tenants. Their rents were the asking and advertised rents, not the realized and actually contracted ones.

  9. The space within the house can also be used for the scale variable. But this variable includes many missing observations. Therefore, this was not used to ensure as many observations as possible.

  10. However, an anonymous referee suggested that an upward-sloping relationship between rent and the length of time of contract is only one of the possible patterns. Although Sotodate derived the result based on McConnell and Schallheim (1983), Grenadier (1995) showed that there are three patterns: upward-sloping, single-humped, and downward-sloping patterns.

  11. Although the ownership rate decreases after age 40, it may be because the KHPS sample covers only those respondents aged between 20 to 69 as of January 2004.

  12. Cho (1997) analyzed four tenure choices.

  13. An anonymous referee suggested this derivation.

  14. Gu and Colwell (1997) suggest that rent levels are affected by the characteristics of renters.

  15. See Dolton et al. (1989) for the application to labor economics.

  16. White’s (1980) heteroskedasticity consistent standard errors are estimated because the variance of the error term of the regression models is heteroskedastic (Bourguignon et al. 2004).

  17. We calculated the fitted values of these hedonic models using Duan’s (1983) “smearing” method.

  18. These estimated results are available from the authors upon request.

  19. See Greene (1997), pp. 486–487.

  20. In this test, we calculated the number of observations times R-squared. We obtained R-squared by regressing the squares of residuals on the squares of fitted values. The statistic has χ 2(1) under the null hypothesis of homoskedasticity.

  21. We estimated a regression model with an augmented term of the square value of the fitted values and tested the null hypothesis of the coefficient of the augmented term equal to zero.

  22. It is important to know that the revised JTPL does not permit the conversion of general rental housing into fixed-term contracts while existing tenants reside in the dwelling.

  23. See, Train (1998, 2003) for the compensating variation of the logit model.

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Acknowledgments

We presented previous versions of this paper at the 2005 Applied Regional Conference at Meikai University, the Urban Economics Workshop of Tokyo University, and the 2006 HKU-NUS Symposium on Real Estate Research at the University of Hong Kong. The authors would like to thank the participants of those meetings for their valuable comments, especially those of Abdullah Yavas, Shinichiro Iwata, John Quigley, and an anonymous referee.

Author information

Authors and Affiliations

  1. Faculty of Economics, Keio University, 2-15-45 Mita, Minato-ku, Tokyo, 108-8345, Japan

    Miki Seko

  2. Department of Economics, Kanazawa Seiryo University, Kanazawa-shi, Ishikawa, 920-8620, Japan

    Kazuto Sumita

Authors
  1. Miki Seko
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  2. Kazuto Sumita
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Corresponding author

Correspondence to Miki Seko.

Appendices

Appendix A

Derivation of Eq. 6

From 4 and 5, the full maximization problem is:

$$ \begin{array}{*{20}l} {{{\mathop {\max }\limits_{x,c_{k} } }{\left\{ {\left. {V{\left( {H_{j} {\left( {c_{j} } \right)},X,S_{i} } \right)}} \right|Y_{i} = X + r_{j} {\left( {c_{j} } \right)}H_{j} {\left( {c_{j} } \right)}} \right\}}} \hfill} \\ {{ = {\mathop {\max }\limits_{c_{k} } }V{\left( {H_{j} {\left( {c_{j} } \right)},Y_{i} - r_{j} {\left( {c_{j} } \right)}H_{j} {\left( {c_{j} } \right)},S_{i} } \right)}} \hfill} \\ \end{array} $$

The first order conditions were:

$$ \frac{{{\left( {V^{*}_{1} - V^{*}_{2} } \right)}}} {{V^{*}_{2} }}\frac{{H^{*}_{{jk}} }} {{H^{*}_{j} }} = r^{*}_{{jk}} $$

which (locally) gave \(c^{*}_{{jk}} {\left( {Y_{i} ,r^{*}_{{j1}} , \ldots ,r^{*}_{{jK}} ,S_{i} } \right)}\) and the (local) conditional indirect utility function \(U{\left( {Y_{i} ,r^{*}_{{j1}} , \ldots ,r^{*}_{{jK}} ,S_{i} } \right)} = {\mathop V\limits^ \approx }{\left( {Y_{i} ,c^{*}_{j} ,S_{i} } \right)}\).

Appendix B

Estimation results of permanent income model

Table 9 Estimation results of permanent income model
Full size table

Appendix C

Estimation results of the reduced form multinomial logit model

Table 10 Estimation results of the reduced form logit model
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Seko, M., Sumita, K. Japanese Housing Tenure Choice and Welfare Implications after the Revision of the Tenant Protection Law. J Real Estate Finan Econ 35, 357–383 (2007). https://doi.org/10.1007/s11146-007-9040-z

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