On the Evolution of the House Price Distribution

Abstract

Is the cross-sectional distribution of house prices close to a (log)normal distribution, as is often assumed in empirical studies on house price indexes? How does the distribution evolve over time? To address these questions, we investigate the cross-sectional distribution of house prices in the Greater Tokyo Area. We nd that house prices ( Pi) are distributed with much fatter tails than a lognormal distribution and that the tail is quite close to that of a power-law distribution. We also nd that house sizes ( Si) follow an exponential distribution. These ndings imply that size-adjusted house prices, dened by ln Pi aSi, should be normally distributed. We nd that this is indeed the case for most of the sample period, but not the bubble era, during which the price distribution has a fat upper tail even after adjusting for size. The bubble was concentrated in particular areas in Tokyo, and this is the source of the fat upper tail.