ppose that the annual growth in real income in Japan is expected to be between 2

Question

ppose that the annual growth in real income in Japan is expected to be between 2 and 3 percent and that income elasticity of demand for housing in Tokyo is estimated to be between 0.8 and 1.0 for rental units and between 0.7 and 1.5 for owner-occupied housing.

Questions:

What will be the growth in demand for rental units over the next 10 years?

What will be the growth in demand for owner-occupied units over the next 10 years?

Note: The two annual growth rates in real income (and two corresponding income elasticities) should be considered separately (rather than taking an average). Doing so would allow you to have four different growth-in-demand scenarios for each question to consider and compare in terms of different growth rates associated with different income elasticities. Also, the compounded growth in real income over the next 10 years should be used in your analysis.

Explanation / Answer

= (% change in demand of rental houses) / (% change in income)

Now, the % change in income= annual growth rate = 2-3%

Elasticity = 0.8-1

Thus the range for growth in rental house demand can be calculated by assuming:

First, elasticity=0.8 and growth of gdp= 2%. Thus, growth in rental house demand = 0.8*2 =1.6%

Second, elasticity=1 and growth of gdp= 3%. Thus, growth in rental house demand = 1*3= 3%

Thus the range for the growth in rental house demand = (1.6, 3%)

Assuming that on an average, elasticity =0.9, growth in gdp=2.5%. Thus, growth in rental house demand = 0.9*2.5 = 2.25%

2. Elasticity of demand of owner occupied houses

= (% change in demand of owner occupied houses) / (% change in income)

Now, the % change in income= annual growth rate = 2-3%

Elasticity = 0.7-1.5

Thus the range for growth in owner occupied house demand can be calculated by assuming:

First, elasticity=0.7 and growth of gdp= 2%. Thus, growth in owner occupied house demand = 0.7*2 =1.4%

Second, elasticity=1.5 and growth of gdp= 3%. Thus, growth in owner occupied house demand = 1.5*3= 4.5%

Thus the range for the growth in rental house demand = (1.4, 4.5%)

Assuming that on an average, elasticity =1.1, growth in gdp=2.5%. Thus, growth in rental house demand = 1.1*2.5 = 2.75%

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