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Housing Markets and Household Behavior in Japan pp 123–154Cite as

The Term Premium of Cancellable Lease Rates

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Part of the book series: Advances in Japanese Business and Economics ((AJBE,volume 19))

Abstract

The rent term premium for leases that can be cancelled by the lessee is analyzed. A model for the lessor’s trade-off between leasing costs and the cost of cancellation options based on the recognition that many leases are cancellable by lessees and that lease markets involve significant transaction costs is developed. It is shown that, regardless of the expected future rents , the rent term structure is upward-sloping when there is no leasing cost but U-shaped when the lessor faces moderate leasing costs. Residential leases in Japan, which are all cancellable by tenants, exhibit a term structure consistent with our calibrated model. This result provides a new insight into the lessor’s optimal choice of rents and the equilibrium rent term premium .

This chapter is adapted from Yoshida et al. (2016), Springer Nature.

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Notes

  1. 1.

    The Real Estate Roundtable, 2011 Annual Report. Available at http://www.rer.org, accessed October 24, 2012.

  2. 2.

    The Equipment Leasing and Finance Foundation, Economic Impacts of the Proposed Changes to Lease Accounting Standards, December 12, 2011. Available at http://www.leasefoundation.org, accessed October 24, 2012.

  3. 3.

    This type of lease contract was prevalent before 1941 but was eliminated to prevent landlords from evicting incumbent tenants and circumventing rent control during World War II (Survey of New Form of Residence Associated with Fixed-Term Lease Contracts, Housing Research and Advancement Foundation of Japan, March 2015).

  4. 4.

    This requirement is specified by Article 28 of the Tenure Law, known as Shakuchi-Shakka-Hou in Japan.

  5. 5.

    See Iwata (2002) and Seko and Sumita (2007) for a discussion of the asymmetric nature of lease restrictions and the effects of the role of these asymmetries as a form of rent control.

  6. 6.

    Ministry of Land, Infrastructure, Transport, and Tourism, 2013FY Housing Market Survey (Jutaku Shijo Doko Chosa).

  7. 7.

    The stochastic discount factor is derived from the first-order condition for the lessor’s utility maximization problem given the lessor’s wealth portfolio and consumption stream.

  8. 8.

    Source: Recruit Residential Price Index, January 14, 2013, accessed October 31, 2014. Available at http://www.jresearch.net/house/jresearch/rrpi/index.html.

  9. 9.

    Rotten structures are excluded in this calculation.

  10. 10.

    We use lease contracts that are shorter than or equal to 5 years because the number of leases longer than 5 years is small and their tenant characteristics differ significantly from the average characteristics.

  11. 11.

    This empirical strategy is equivalent to pooling both types of leases and including interaction terms with a fixed-lease dummy by treating ordinary leases as a reference group.

  12. 12.

    The average of the 2003 and 2008 national vacancy rates for rental housing is 19%.

  13. 13.

    The estimated term structures exhibit the same shapes based on Models (b), (c), or (d).

  14. 14.

    The mean values are 16.4 and 15.1 years for building age and 9.5 and 9.8 min for the time to the nearest station in low- and high-vacancy areas, respectively.

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Author information

Authors and Affiliations

  1. Faculty of Economics, Musashino University, Koto-ku, Tokyo, Japan

    Miki Seko

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  1. Miki Seko
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Correspondence to Miki Seko .

Appendix: Relative Rent Regression by the Least Absolute Deviation Method

Appendix: Relative Rent Regression by the Least Absolute Deviation Method

Table 7.7 presents an estimation result of the relative rent of a fixed-term lease rate relative to a comparable ordinary lease rate by the least absolute deviation method.

Table 7.7 Relative rent regressions by the least absolute deviation method
Full size table

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Seko, M. (2019). The Term Premium of Cancellable Lease Rates. In: Housing Markets and Household Behavior in Japan. Advances in Japanese Business and Economics, vol 19. Springer, Singapore. https://doi.org/10.1007/978-981-13-3369-9_7

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