Housing rent rigidity under downward pressure: Unit-level longitudinal evidence from Tokyo
Introduction
Housing rent rigidity has been observed in an environment where the nominal market rent has been rising over time (Aysoy et al., 2014; Genesove, 2003; Hoffmann and Kurz-Kim, 2006; Gallin and Verbrugge, 2019). On the contrary, this paper documents “downward rent rigidity,” which means a long-term renter suffers from paying a rent that is far above the market rent level. The landlord “offers” a tenure surcharge (not a tenure discount) that is typically only reduced but not eliminated upon contract renegotiation. The long-staying tenants bear higher rental costs than the short-term tenants, if we ignore the moving costs for tenants.
This poses a challenge to conventional theories developed to explain upward rent rigidity. First, the rent rigidity found here is inconsistent with claims that it is due to physical or economic depreciation, which means the tenant pays a lower real rent for the lower flow of services. Second, we see a big rent decrease after a vacancy, so the “unobserved renovation” (to explain a big rent increase after a vacancy) does not apply. Third, we see rent rigidity leading to a tenure surcharge, and we obviously cannot rationalize this as a way to keep a good tenant, even though Japanese landlords presumably care about retaining good tenants.
This paper documents housing rent rigidity under downward pressure, using a monthly household/room-level movement of housing rents through tenancies and vacancies in Tokyo during the period 2000Q1–2017Q2. We provide evidence that rents have strong rigidity over time, owing to both extensive and intensive rigidity. Because contracts lock in a rent, there is a chance for rent adjustment only at contract renewal or tenant turnover times. However, even at the contract renewal stage, only a small proportion of units change their rents. Thus, rents systematically depart from “marginal” rents (and increasingly over time, as a unit experiences contract renewals), that is, the purely market-determined rents that are set after vacancies. Thus, we typically see a large (downward) rent adjustment when a unit experiences a vacancy.
We observe rent rigidity leading to a “tenure surcharge,” that is, sitting tenants pay higher rent than the market rent level because the alternative—high moving costs for tenants—is less attractive. The downward rent rigidity obviously cannot rationalize the conventional explanation for upward rent rigidity in an inflationary context, such as depreciation (or unobserved renovation) and/or tenure discount. We show, however, that landlords care about retaining good long-term tenants by offering a small discount during the tenancy, in addition to a small degree of time/state-dependent adjustments.
The rest of the paper is organized as follows. Section 2 reviews the previous literature and discusses the implications for downward rent rigidity. Section 3 describes the datasets. Section 4 presents the rent-setting context in Japan. Section 5 provides an overview of the extensive and intensive rent-adjustment margins. Section 6 tracks the rent lifecycle over the periods of tenancy and vacancy. Section 7 investigates the full rent adjustment mechanism at contract renewal and tenant turnover times. Section 8 provides the conclusions.
Section snippets
Potential timing of rent adjustments
Housing rents exhibit relatively strong rigidity (Aysoy et al., 2014; Genesove, 2003; Hoffmann and Kurz-Kim, 2006; Shimizu et al., 2010a; Gallin and Verbrugge, 2019). Yearly rigidity ranges from 29% in the United States (Genesove, 2003) to 89% in Japan (Shimizu et al., 2010a), although most of the observations have been of upward rent rigidity in an inflationary context.
The literature documents the fact that rents are more likely to be adjusted at tenant turnover (vacancy) times when they are
Overview
We use the longitudinal datasets for rental contracts provided by the Starts Corporation Inc., a major brokerage and management company for rental houses in the Tokyo metropolitan area.6
Downward pressure
Most of the literature has investigated environments in which rents should increase over time because of high inflation rates and the slow depreciation of buildings (Aysoy et al., 2014; Genesove, 2003; Hoffmann and Kurz-Kim, 2006; Gallin and Verbrugge, 2019). An unchanged nominal rent means a decreasing real rent. Such a strategy benefits owners by avoiding vacancies, since it provides an incentive for the current tenant to stay in the unit longer, and helps attract new tenants.14
Extensive/intensive margins of rent adjustments
We first do a simple decomposition of the probability of rent adjustment into the “extensive” margin (when the landlords have the opportunity to change rent) and the “intensive” margin (when the landlords actually change the rent at the rent-changing opportunities).
Table 3 displays this decomposition.17 In addition to the entire sample, we subdivide by period to show the
Rent gap from market level
Given the rapid depreciation of residential properties (and low inflation rate) in Japan, the rigid sitting rent exceeds its market level by a greater amount as the tenant stays longer. Fig. 5(a) shows the median rent gap in the x-th contract renewal stage, specifically, for “all units in the x-th contract renewal stage” on the solid line and for “units that experienced rent adjustments in the x-th contract renewal stage” on the dashed line. More specifically, the latter shows the median rent
The full rent adjustment mechanism
This section investigates the determinants of the rent adjustment at the tenant turnover time, and the rent adjustment at the contract renewal time, . The tenant turnover event determines the probabilities that contract renewal and a new contract will occur, and , thus contributing to the overall nominal rigidity of housing rents.
As in the previous section, periods of tenancy and vacancy are clearly distinguished. This suggests a direction
Conclusion
This paper documents housing rent rigidity under downward pressure, using the monthly household/room-level movement of housing rents through tenancies and vacancies in Tokyo during the period 2000Q1–2017Q2. The consistent overall rent rigidity exists because of the small extensive margin (limited adjustment opportunity) and small intensive margin (rare adjustments in the contract renewal stage). We observe rent rigidity leading to a “tenure surcharge,” that is, sitting tenants pay higher rents
Funding
This work gratefully acknowledges the support received from JSPS KAKENHI Grant Numbers 16J03877, 17H00988, 17K18919, 20H00082, and 20K14896 as well as the Nomura Foundation.
CRediT authorship contribution statement
Masatomo Suzuki: Conceptualization, Methodology, Software, Data curation, Visualization, Investigation, Writing - original draft. Yasushi Asami: Supervision, Writing - review & editing. Chihiro Shimizu: Supervision, Writing - review & editing.
Acknowledgment
We would like to thank the editor (Paul Carrillo), two anonymous referees, Naohito Abe, Erwin Diewert, Robert Hill, Miriam Steurer, Miwa Matsuo, Tomoya Mori, Se-il Mun, Michio Naoi, Kiyohiko Nishimura, Norbert Pfeifer, Prasada Rao, Timothy Riddiough, Etsuro Shioji, Takaaki Takahashi, Iichiro Uesugi, Tsutomu Watanabe, and the participants at the Society for Economic Measurement 2019 Conference, the American Real Estate and Urban Economics Association International Conference, 15th International
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