Sticky Housing Rents: Term Structure on Duration of Residence and Rent Index Implication

Abstract

In the rental housing market, housing rents for new tenants are determined from the fact that adjusting rents is quite difficult while tenants occupy the units even at the time of contract renewal. Using the unique unit-level monthly panel of rental apartments in Tokyo through 1996–2017, we find the downward-sloping term structure reflecting rapid structure depreciation: the longer expected tenancy duration of the unit leads to the lower premium of the new rents compared to the market level. The degree of downward slopes reflects the expectation of future rent flows: the degree is remarkable during 2012–2014, especially in the rental units for singles. We also find that, when we do not control for the duration of tenants’ residence, the index for newly contracted rents may exhibit downward bias corresponding to the degree of the downward term structure and contain time lags when the market bottoms out.