Land-use conversion and residential recentralization: Evidence from Japan's real estate bubble in the 1980s

Central cities in metropolitan areas are attractive to both residents and businesses, but there is insufficient space to accommodate both. As a result, residential and commercial properties compete for land. By examining the long-term impact of a real estate bubble on the land-use pattern of Tokyo and Osaka from 1980 to 2017, we find that fluctuations in land prices have influenced demand for commercial land relative to residential land, which in turn has affected residential choices. During the period of rising land prices, land developers favored commercial development over residential purposes, which increased the daytime population in central cities and at the same time reduced the residential population. However, during the economic downturn, with the reduction in demand for commercial space, houses were favored by land developers and there was a recentralization of residents. The causal estimates show that the mechanism we propose can explain approximately 40 percent of the population growth in central Tokyo and Osaka after 1995. In addition, these land-use conversions led to changes in the housing structure in terms of building height and house size. Our evidence provides a new explanation for the recent changes in central neighborhoods observed in many advanced economies