With a simple model of land use and market arbitrage, this paper investigates the impact of population decline – when existing homeowners compete to attract a small number of new residents – on homeownership and land use. We show that, if a strictly positive cost is required for ownership abandonment, selling used houses is impossible in the periphery, while leasing is possible. We also show that only long-life-quality houses, which require a larger initial investment and sustain greater utility for longer than conventional ones, attract new residents to the periphery. Social welfare may decrease, because the government has to maintain the slowly shrinking, less densely inhabited urban area.

In Japan, tenants are protected in the sense that owners must compensate them for evicting them against their will, while owners cannot foresee the intended tenure length of prospective tenants. If owners cannot specify the term of a lease, social inefficiency emerges: (i) detached houses owned by individual households remain vacant for a certain period; (ii) alternatively, landlords’ newly constructed apartments, which are free from eviction risk, accommodate a large proportion of tenants; and (iii) the apartments are rebuilt frequently even though they remain viable. If a fixed‐term contract is available, only short‐term tenants choose it, and the information asymmetry is dissolved, realizing social efficiency.

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