The Current Situation of Japan's Housing Market, and Policy Implications of the Projected Population Decrease

Tatsuya Ishikawa

Introduction

The projected decrease in Japan's population over the next 50 years will fundamentally alter Japan's economy and society. This paper examines the implications for residential life and the housing market， and proposes ways to improve housing quality and develop the housing market.

The quality of daily life rests upon the foundation of our family and residential life. Most people derive satisfaction and happiness in life from family interactions as well as private time spent alone. According to the Cabinet Office's Opinion Survey on National Life (2002)， people derive the greatest sense of fulfillment in life from family interactions (44.7%) and time spent in relaxation (39.5%). Moreover， such rest and relaxation at home with the family is crucial to powering our work life as well.

Spending time at home， and living in a house， are essentially economic activities. This is true not only in the obvious sense that we consume goods and services at home in daily activities such as eating meals， and engaging in educational or recreational activities at home. By living at home， we are actually consuming housing services provided by the housing and land stock. The cost of such housing services is most apparent in rental housing， in the form of rent.

But the same concept applies to owner-occupied housing if we imagine that the owner is actually renting from himself. Home ownership not only incurs maintenance costs， but also the foregone dividend and interest income from financial assets that could otherwise be held. Thus homeowners， who bear direct and indirect costs of owning their home， must pay themselves rent to compensate these costs. In national account statistics， the rent that homeowners pay themselves is called imputed rent， and explicitly accounted for in household consumption.

Thus the consumption of housing services， whether in the form of rental housing or owner-occupied housing， is subject to income and budget constraints. Moreover， housing services are produced from the stock of housing and land. Thus in terms of both income and stock， housing consumption is affected by changes in society， especially as the population decreases and ages.

We first discuss the present problems of Japan's housing market based on international comparisons. Specifically， rental housing units tend to be much smaller than owner-occupied housing， so that the supply of housing services for renter families is insufficient， while the undeveloped condition of the existing-home market hinders effective use of housing wealth by elderly households. We also note that despite high expectations， reverse mortgages are still uncommon in the U.S. and U.K.， and people are instead decumulating housing wealth by moving to less expensive homes.

Next， we show that while the population decrease and aging may cause housing demand to peak out in number of units， demand for higher quality housing will continue to grow. Furthermore， there is a growing emphasis on the goal of efficient utilization rather than ownership.

Finally， in addressing the projected population decrease， we propose improving Japan's housing market by using existing stock more effectively， promoting the spread of land leaseholds， encouraging fixed-term home leasing to convert vacant owned housing into rental housing， invigorating the existing-home market， and facilitating moving activity as a viable way of decumulating housing wealth for elderly households.