Asset Price Declines and Real Estate Market Illiquidity: Evidence from Japanese Land Values

FRB of San Francisco Working Paper No. 2004-16

44 Pages Posted: 15 Dec 2004

See all articles by John Krainer

John Krainer

Board of Governors of the Federal Reserve System

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department

Nobuyoshi Yamori

Kobe University - Research Institute for Economics & Business Administration

Date Written: 2004

Abstract

We examine the pattern of price depreciation in Japanese land values subsequent to the 1990 stock market crash. While all land values fell heavily, the data indicate that Japanese commercial land values fell much more quickly than residential land values. Using an error-correction specification, we confirm that Japanese commercial land price exhibited faster convergence to steady state values than residential land prices. We then develop an overlapping-generations model with two-sided matching and search to explain this disparity. In the model, old agents own real estate and are matched each period with a young agent endowed with an unverifiable idiosyncratic service value for the old agent's real estate. When fundamentals decline, the old agents optimally fish for high service flow young agents by pricing above average valuation levels. This leads to higher illiquidity and default in times of price decline, as well as price persistence which is increasing in the variance of average service flows. As we would posit that the variance of service flows would be higher for residential real estate than for the commercial real estate market, this model matches the Japanese experience.

Keywords: Debt overhang, illiquidity, price persistence, Japan, real estate

JEL Classification: G12, R31, R33

Suggested Citation

Krainer, John and Spiegel, Mark M. and Yamori, Nobuyoshi, Asset Price Declines and Real Estate Market Illiquidity: Evidence from Japanese Land Values (2004). FRB of San Francisco Working Paper No. 2004-16, Available at SSRN: https://ssrn.com/abstract=631821 or http://dx.doi.org/10.2139/ssrn.631821

John Krainer (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3184 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economics/economists/mspiegel.html

Nobuyoshi Yamori

Kobe University - Research Institute for Economics & Business Administration ( email )

2-1, Rokkodai cho
Nada-ku
Kobe, 657-8501
Japan

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