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Research Seminars & Workshops @ IRES

(I) Aging, Inflation and Property Prices
(II) Aging and Property Prices: Theory of a very long run and prediction of Japanese Municipalities in the 2040s

Professor Kiyohiko Nishimura
University of Tokyo

Date: 25 October (Tuesday)
Time: 3.30pm - 5.00pm
Venue: RMI Executive Seminar Room
Chair: Prof Deng Yongheng


How will the declining birth rate and aging of society affect the goods and services market and asset markets? When we estimated various models using panel data from 23 major developed nations, including leading Asian countries, we found that the young age dependency ratio had a positive and statistically significant impact on both inflation and housing prices, while the old-age dependency ratio had a negative and statistically significant impact. In other words, this shows that as the number of children in society as a whole increases, it will drive up current housing prices due to the increased future expectations for the housing market, and it will drive greater consumption as well. On the other hand, the further aging of society will drive consumption down from its current level due to increases in social security costs and the like; moreover, since expectations for the future will also be lowered, commodity and housing prices will be driven down as well. This means that in nations where the birth rate is declining and society is aging, these trends will cause asset deflation (decline in housing assets) and promote deflation. This has many implications from a policy perspective. Going forward, the birth rate will continue to decline at the same time as society is aging in Japan, South Korea, and various Western countries. Even in countries such as China and Thailand where the population continues to grow, it is expected that there will be a sudden aging of society in future. In light of this, understanding what effect these trends will have on the economies of different countries will offer various useful clues with regard to economic policy.

Many economies in the world will soon be or have already been aging rapidly. This paper investigates the effect of aging population on property prices, especially their land component. Specifically, we focus on the characteristics of land as a non-depreciable asset enabling transfer of purchasing power from the present to a distant future, say, one generation away. Thus, the demand for properties (in particular, their land component) and their prices are determined by people’s choice of their very long run portfolio for retirement. In this very long run portfolio choice, there is another non-depreciable asset, which is money. Although money was clearly rate-dominated by other assets in the past high inflation periods so that it was virtually excluded from the very long run portfolio, the recent price stability makes money become an important asset class in the their very long run portfolio for retirement, of which the importance is amply demonstrated in rapidly aging Japan.
In the first half of this paper, we develop a theory of very long run portfolio choices between these two non-depreciable assets: one is real (land) and the other is nominal (money), in an economy in transition from young and growing too rapidly aging population. It is shown that aging has profound effects on real property prices, and that the monetary regime is a key factor influencing (very long run) real property prices. In particular, real property prices in the population bonus phase are lower in an inflation-targeting monetary regime than a constant-monetary-quantity regime such as gold standards.
In the second half or this paper, we apply this theory to estimate a long-run model of property price inflation in Japanese municipal markets (with appropriate consideration of short-run factors such as property bubbles) and attempt to predict municipal real property prices (land prices) in a very long run, specifically, in a quarter-century from now. Ad valorem property taxes based on property prices are the most important municipal tax revenue source in many economies, especially in developed countries like Japan.
The results are stunning. The simulation results in which income factors are assumed to be fixed at the 2005-2010 growth level suggest that the average residential property price (land price) in the Japanese municipalities may decrease as much as 19% from the present to 2020, 24% to 2030, and 32% to 2040. Moreover, there is a significant variation among municipalities: the property value of three Tokyo wards is expected to be doubled in 25 years, while a remote island, mountainous township and city, and the only remaining village in a prefecture would see their property prices to fall by more than 70%. The importance of income factors is clear: in another simulation which compares a hypothetical 1% across-all-municipalities increase in the income factor with a 0% increase, we find that the average expected decline in property prices is reduced to 10% in the 1% case from whopping 38% in the 0% case.

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