Housing finance imperfections, taxation, and private saving: A comparative simulation analysis of the United States and Japan

Abstract

This paper presents a life-cycle simulation analysis of the interaction among savings decisions, housing purchase decisions, and the tax system in the United States and Japan. To investigate this issue, we first document the stylized fact that the typical Japanese household purchases a house later in the life cycle with a higher down-payment ratio than its U.S. counterpart. Second, a life-cycle simulation model that includes the housing purchase decision is constructed and used to compare the behavior of typical U.S. and Japanese households. The Japanese household is induced to save more early in the life cycle in order to meet the higher down-payment requirement. However, the contribution of the induced early saving due to the down-payment requirement seems to be too small to explain a large differential in the saving rates of the two countries. The high economic growth of the late 19509 and 19609 in Japan is instrumental in explaining its high saving rate. Finally, tax reform concerning the tax deductibility of mortgage interest payments or the tax-exempt status of interest income is shown to have a small impact on the aggregate saving rate in either country. For example, the introduction of tax-exempt saving in the United States would increase the saving rate by only 1.5%.