ESRI Discussion Paper Series No.356 The Impact of the Rise and Collapse of Japan's Housing Price Bubble on Households' Lifetime Utility

This study estimates the impact of the dramatic changes in housing prices during Japan's bubble from the late 1980s to the 1990s on households' asset accumulation and utility over the life-cycle. We construct a life-cycle model explaining households' consumption/saving and housing decisions under collateral and borrowing constraints. We estimate this model using data from the Family Income and Expenditure Survey (FIES), which includes data on households' housing wealth estimated from objective information. Using the estimated model, we then conduct a counter-factual simulation in which we assume that housing price remained constant during the bubble period. Doing so allows us to quantify the gains/losses of lifetime utility due to the housing price boom and bust. We find that 38.6% of households experienced an increase in lifetime utility, which averaged 3.3%, while 61.4% experienced a decrease in lifetime utility, which averaged 2.4%. On average, Japan's housing price boom and bust caused a 0.2% loss in lifetime utility, which is equivalent to 1.3% of lifetime income.