Beyond the Bubble: Empirical Evidence on Asset Pricing under Persistent Low Interest Rates

Chihiro Shimizu

No e227, Working Papers from Tokyo Center for Economic Research

Abstract: When the real interest rate falls below expected asset returns, the Bubble Necessity Theorem (Hirano and Toda, 2025) implies that high valuations are structurally necessary rather than speculative. We provide the first empirical test. Following Shiller—who built price indices to test excess-volatility theory—we construct synchronized quality-adjusted price and rent indices from 11 million listings across 40 years in Tokyo: the city of the twentieth century's largest housing bubble and the world's longest near-zero-rate episode. A cointegrated VECM yields an expectation-to-rate elasticity of 2.92 across five proxies. The post-2013 Necessary Regime transfers JPY 1.96 million per year from buyers to owners; raising the property tax from 1.4% to 3.0% would have prevented it.

Pages: 100 pages
Date: 2026-03
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