Bank lending and real estate in Asia: market optimism and asset bubbles |
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| Authors: | Winston TH Koh Roberto S Mariano Andrey Pavlov Sock Yong Phang Augustine HH Tan Susan M Wachter |
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| Institution: | aSchool of Economics and Social Sciences, Singapore Management University, 469 Bukit Timah Road, 02-08 Federal Building, Singapore 256976, Singapore;bFaculty of Business Administration, Simon Fraser University, 8888 University Dr., Burnaby, Canada BC V5A 1S6;cDepartment of Finance, The Wharton School, University of Pennsylvania, 2300 Steinberg-Dietrich Hall, Philadelphia, PA 19104, USA |
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| 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. |
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| Keywords: | Real estate bubble Lender optimism Disaster myopia Asian financial crisis |
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