Land Tax and Urban Land Supply

The land prices in Japan are abnormally high by international standards. Their adverse effects are intensely reflected in the inferior housing conditions in large cities. Especially in the large metropolitan regions, people are forced to live in small houses, which have been compared to "rabbit hutches," or else must endure exceedingly long commuting hours. Obviously, the high land prices in Japan are due to the scarcity of residential land supply relative to the demand for houses. The basic cause must be that the excessive population concentration in the Tokyo Metropolitan Region boosts the demand for residential land and that the deficiency in the social overhead investment depresses the supply of residential land. Another important factor, however, is the distortion created by the land tax system that inflates the land value in Japan. In other words, because the land is too advantageous as an asset because of the tax system, the low-intensity-use lands, such as farm land or parking lots, are not converted into residential housing use, thus holding down the supply of residential land. A typical manifestation of this is the existence of much land that is used for such purposes as chestnut fields despite the extensive social overhead investment and the need for development of residential land.