HIT-REFINED Hitotsubashi Project on Real Estate, Financial Crisis, and Economic Dynamics

Purpose and Plan

Purpose and Background of the Research

Real estate markets have been the epicenter of a number of disastrous financial crises around the world, including Japan, the United States, and Europe. Their relevance for economic growth and business cycles has been underlined by numerous studies, such as Reinhart and Rogoff (2009). This research project, involving economists from different disciplines, primarily focuses on the real estate market in Japan, which has stagnated for the past twenty years, and examines its association with financial crises and economic growth. The project employs unique and massive databases on the real estate market, households, and firms to conduct innovative research with policy implications not only for countries trying to overcome a financial crisis but also for those experiencing market bubbles.

Research Approach

The project consists of four closely-related stages: (1) construction of a unified database and implementation of surveys, (2) investigation of pricing mechanisms, (3) examination of individual hypotheses on the association between real estate markets, financial crises, and economic growth, and (4) evaluation of economic significance of the hypotheses and feedback to economic theory and policy.
For (1), database construction, the project will collect massive data on real estate prices, including appraisal values, transaction prices, and rents. The dataset on prices will be merged with a dataset on household and firm characteristics, which will be supplemented with further information collected through a series of surveys of households, firms, and financial institutions. For (2), investigation of the pricing mechanism, the project aims to find ways to detect bubbles in the development of price distributions. For (3), hypothesis testing, the following five hypotheses will be examined:
*Real estate collateral hypothesis
*Systemic risk hypothesis
*Labor and capital immobility hypothesis
*Wealth effect hypothesis
*Asset meltdown hypothesis
Note that the first two hypotheses focus on the financial aspect of interactions between the real estate market and the entire economy, while the latter three hypotheses are on the real aspects of such interactions. For (4), evaluation of economic significance, the project will seek to quantitatively identify the most relevant transmission channels between the real estate market and the economy.

Expected Research Achievements and Scientific Significance

First, the project plans to develop procedures to detect shocks to real estate prices based on individual transaction information. The procedures are expected to provide an early warning for real estate bubbles. Second, the project is one of the first attempts to provide a unified framework for interactions between real estate markets and economic activities. For this purpose, economists from different disciplines such as macroeconomics, finance, economic geography, real estate economics, and industrial organization will participate in the project and use the unified and unique databases for analysis.

Project Duration and Allocated Budget Amount

143. 9 million yen