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

Question

Suppose 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

The compounded growth of real income over the next 10 years will between (1 + 0.02) ^10 and (1 + 0.03) ^10. Hence the growth rate will be between 22% and 34%.

Now, the income elasticity of rental units is 0.8 to 1.0, hence the growth in demand would be between 15.4% to 34%.

And, the income elasticity of owner occupied housing is 0.7 to 1.5, hence the growth in demand would be between 17.6% to 51%.

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