Biases in appraisal land price information: the case of Japan
| Pages | 150-175 |
| Published date | 01 March 2006 |
| DOI | https://doi.org/10.1108/14635780610655102 |
| Date | 01 March 2006 |
| Author | Chihiro Shimizu,Kiyohiko Nishimura |
| Subject Matter | Property management & built environment |
Biases in appraisal land price
information: the case of Japan
Chihiro Shimizu
The International Economics and Business Department, Reitaku-University,
Kashiwa City, Japan, and
Kiyohiko G. Nishimura
Bank of Japan, Tokyo, Japan
Abstract
Purpose – This paper seeks to investigate the nature and magnitude of the distortion in appraisal
land price information according to change in the market, with a special focus on the Government’s
Published Land Prices.
Design/methodology/approach – In Japan, there is an item of land price information, so-called
Koji-Chika (PLPS: Published Land Price Information System), that is a survey of fair market value by
the qualified appraisers. The valuation error of this land price information was analyzed using the
following method. First, hedonic price indices were constructed based on both actual transaction prices
and the Published Land Prices, they were then compared to detect possible distortions in the
governmental price information. Also the possibility of structural change in the Japanese real estate
markets was studied and its effect on price indices was considered. Analysis of the Tokyo
metropolitan area in Japan took place between 1975 and 1999
Findings – Large and systematic discrepancies between actual transaction prices and the Published
Land Prices were identified, which might suggest that there are serious problems in the governmental
information system. It is believed that it is necessary to consider this issue in the context of the entire
real estate appraisal system in Japan.
Research limitations/implications – Limitations stem from the nature of Japanese data. Future
research will seek to look at values on an IPD index.
Originality/value – The land market in Tokyo experienced a so-called Bubble economy, and the
rapid rise and fall of the land price were generated for this period.
Keywords Real estate, Smoothingmethods, Market value, Japan
Paper type Research paper
Introduction
The Japanese property market has often been criticized as lacking reliable information
and transparency. Both domestic and foreign investors regard this as an obstruction to
development in this area, in spite of a recent surge of the securitized real estate and
Japanese real estate investment trust (J-REIT) markets. Improvements in land price
information are considered necessary to avoid confusion and raise market awareness.
However, at the same time, more and more real estate price information is now
becoming available. Consequently, the real estate market itself now appears somewhat
confused because market participants cannot fully evaluate the quality of the
enormous volume of information now available.
One requirement for fully functioning real estate markets is the ability to measure
risk, especially the risk related to price. It is critical for public bodies to make efforts
towards enabling information disclosure so that risk measures can be calculated. In
The current issue and full text archive of this journal is available at
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JPIF
24,2
150
Received May 2005
Accepted September 2005
Journal of Property Investment &
Finance
Vol. 24 No. 2, 2006
pp. 150-175
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780610655102
this regard, it is essential to understand the errors in the information made available,
particularly in the government’s Published Land Prices based on appraisal (which we
will describe below). Because it is unlikely that full transaction information will
become available in the near future, the government’s Published Land Prices will
remain important. Accordingly, the problem of errors in the available market
information such as the Published Land Prices remains serious.
This problem, commonly known as “valuation error”, has been studied extensively
in Japan and elsewhere. Cole et al. (1986) and Jefferies (1997), for example, checked the
statistical difference between transaction prices and appraisal values. Likewise,
Crosby (2000) presented an international comparative study of the impact on valuation
accuracy by different social structures across different countries, and Geltner et al.
(1994), Geltner (1997, 1998), Bowles et al. (2001) dealt with the impact of appraisal error
on real estate indices and identified a time-lag structure in appraisal-based indices.
In Japan, investigations are concentrated on the government’s Published Land
Prices, which are based the Published Land Price Survey (PLPS) conducted by the
Ministry of Land, Infrastructure and Transport (MLIT). The Published Land Prices are
based on appraisals made by qualified appraisers throughout Japan. The coverage of
the PLPS is very wide and unparalleled anywhere elsewhere in the world. Hidano
(2003) revealed time lags in the index based on the Published Land Price (PLP ).
As well as the technical aspects of appraisal practices, the independence of
appraisers is also a serious concern. For instance, Gallimore and Wolverton (199 7),
Kinnard et al. (1997) and Wolverton (2000) identified the bias possibly caused by the
client and fee structures based on appraisal values.
The purpose of this paper is to investigate valuation error in the Japanese property
market. In the next section, we summarize the different types and characteristics of the
land price information available in Japan and explain their statistical meanings. This is
followed by a comparison of a transaction price based index with an appraisal-based
index. The appraisal-based index is based on the Published Land Prices. After
comparing the historical price changes, we investigate the magnitude of valuation
error with a transaction price based hedonic model.
Types and characteristics of land price information in Japan
There are several types of information available on land prices. It is therefore
necessary to make it clear what “land price” means, what kind of information is
available and the characteristics of the information.
Transaction price and comparables
In general, and in most economic activities, “price” infers the “transaction price”.
However, we must bear in mind that there is often a gap between the “asking price”
and the “contract price” in the real estate market. This is because each transaction price
is finally decided through individual negotiation. This is problematic in that it is very
difficult to collect transaction price information in Japan compared with Western
economies. However, a limited amount of transaction price information is made
available from “transaction comparables” (or Torihiki Jirei ). These sales comparables
are a basic form of information for real estate appraisal and are collected by qualified
appraisers for the PLPS or for their own business use. The process of collecting those
comparables depends on local practice and the purpose of collection. A typ ical case is
described below.
Appraisal land
price information
151
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