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

20 Pages Posted: 4 Dec 2004

See all articles by Winston T.H. Koh

Winston T.H. Koh

Singapore Management University - School of Social Sciences

Roberto S. Mariano

Singapore Management University

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Sock Yong Phang

Singapore Management University - School of Economics

Augustine H.H. Tan

Singapore Management University - School of Social Sciences

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: November 2004

Abstract

This paper investigates the Asian real estate price run-up and collapse in the 1990s. We identify financial intermediaries' underpricing of the put option imbedded in non-recourse mortgage loans as a potential cause for the observed price behavior. This underpricing is due to behavioral causes (lender optimism and disaster myopia) and/or rational response of lenders to market incentives (agency conflicts, deposit insurance, or limited liability of bank shareholders). The empirical evidence suggests that underpricing occurred in Thailand, Malaysia, and Indonesia. Consequently, these countries experienced a more severe market crash than Hong Kong and Singapore, where underpricing was kept under control by strong government intervention and/or more appropriate incentive mechanisms.

Keywords: Real estate bubble, lender optimism, disaster myopia, Asian financial crisis

JEL Classification: F3, G1, L7

Suggested Citation

Koh, Winston T.H. and Mariano, Roberto S. and Pavlov, Andrey D. and Phang, Sock Yong and Tan, Augustine H.H. and Wachter, Susan M., Bank Lending and Real Estate in Asia: Market Optimism and Asset Bubbles (November 2004). Available at SSRN: https://ssrn.com/abstract=626323 or http://dx.doi.org/10.2139/ssrn.626323

Winston T.H. Koh (Contact Author)

Singapore Management University - School of Social Sciences ( email )

469 Bukit Timah Road
Federal Building #02-08
Singapore, 259756
Singapore
+65 6822 0853 (Phone)
+65 6822 0833 (Fax)

Roberto S. Mariano

Singapore Management University ( email )

50 Stamford Rd.
Singapore 912409, 178899
Singapore

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

Sock Yong Phang

Singapore Management University - School of Economics ( email )

90 Stamford Road
178903
Singapore

Augustine H.H. Tan

Singapore Management University - School of Social Sciences ( email )

Tanglin P.O. Box 257
Singapore 912409
Singapore
+65 6822 0379 (Phone)
+65 6822 0101 (Fax)

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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