Bank Lending and Real Estate in Asia: Market Optimism and Asset Bubbles

Winston T.H. Koh, Roberto S. Mariano, Andrey D. Pavlov, Sock Yong Phang, Augustine H.H. Tan, Susan M. Wachter
2004 Social Science Research Network  
This paper investigates the Asian real estate price run-up and collapse in the 1990s. We identify two sets of potential causes for the observed price behavior: fundamental shifts in demand and underpricing of the put option imbedded in nonrecourse mortgage loans. This underpricing is due to behavioral causes (herding or disaster myopia) and/or rational response of lenders to market incentives (agency conflicts, deposit insurance, or limited liability of bank shareholders). The empirical
more » ... strongly suggests that underpricing was widespread in Thailand, Malaysia, and Indonesia. Consequently, these countries experienced a far more severe market crash then Hong Kong and Singapore, where underpricing was kept under control by strong government intervention and/or more appropriate incentive mechanisms.
doi:10.2139/ssrn.626323 fatcat:ymugs7it3ncf7ozjjzjq4lqgdy