Chapter

III. Housing Prices in Asia: Cause for Concern?

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
April 2007
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In the past several years, authorities in a number of Asian countries have implemented, or are considering implementing, policies to deal with rising housing prices and attendant risks. In India and Korea, the focus has been on tightening prudential regulations on real-estate-related finance. In Australia and New Zealand, monetary policy is shaped in part by concerns that rising housing prices could lead to domestic demand overheating and overall inflationary pressures. And in several countries, there is growing emphasis on increasing the public supply of housing or attempting to influence housing markets via tax and other structural measures.

Despite the widespread interest in the housing sector in Asia, there seems to have been little systematic analysis for the region as a whole of price trends or potential policy responses. This chapter seeks to fill part of that void. First, we examine housing price data in the region and find that while housing prices have risen somewhat faster than inflation in recent years, and while there are pockets of rapidly rising housing prices, there is no evidence that prices are grossly out of line with fundamentals for the region as a whole.24 Second, we focus on those countries where housing does in fact look to be a potential problem and try to understand the sources of price dynamics. Third, we look at the role that financial sector development is playing in stimulating housing demand, and the financial and macroeconomic risks that may arise as a consequence. Finally, we examine a range of policies that countries in the region have followed to influence housing prices and manage associated risks.

The Facts: Are Prices Rising “Too Fast”?

A key issue for policy—but a difficult one to address—is whether housing prices in a given country are rising faster than fundamentals would predict. Unfortunately, such judgments are fraught with difficulties, and are made more problematic by data inadequacies. In such a situation, the most prudent approach is to examine a range of indicators—all imperfect—to reach a judgment as to whether the level of housing prices should be of concern.

While housing prices have been rising more rapidly than inflation, most countries in Asia are not experiencing unusually rapid housing price hikes. For the 12 economies for which data are available, real housing price increases averaged 4.5 percent during 2002–06, but the median was substantially lower, at just over 3 percent. Only three countries—China, India, and New Zealand—experienced real annual price rises of more than 8 percent over the same period.25 In several cases—Hong Kong SAR, Taiwan Province of China, and Thailand—recent increases follow on the heels of extended declines in the real price of housing. In such cases, it is plausible that any rise in housing prices may be a welcome signal for increased investment in the sector.

Figure 3.1.Real House Prices

(Annual percentage change)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; HDFC India; and IMF staff calculations.

Japan house prices proxied by Tokyo Metropolitan Area.

Another way to gauge whether housing prices may be “too high” is to look at housing prices relative to rents.26 If housing asset prices are rising significantly faster than the price of housing services, there may be potential concerns that housing assets are overvalued. In fact, housing prices have risen somewhat more rapidly than rents, most notably in Australia and New Zealand. However, in a number of cases—such as Korea, China, and Hong Kong SAR—the price increases again represent a recovery following an extended period of decline.

Figure 3.2.House Price-Rent Ratio

(Annual percentage change)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; and IMF staff calculations.

1 Japan house prices proxied by Tokyo Metropolitan Area.

Housing prices have been relatively tame when compared with other asset prices. In particular, with the exceptions of Australia and New Zealand, annual housing price hikes have been dwarfed by domestic stock market gains during the period 1999–2006. Of course, this alone does not prove that housing price gains are not problematic, since many equity markets have been quite buoyant.

Figure 3.3.Real House Prices and Real Stocks 1999-2006

(Average annual percentage growth)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; HDFC India; and IMF staff calculations.

1 Japan house prices proxied by Tokyo Metropolitan Area.

The data do not point to a general deterioration in housing affordability. In general, a rapid rise in the ratio of housing prices to household income may suggest that housing is becoming less affordable and that, therefore, the gains in housing prices may not prove sustainable.27 Housing prices have outstripped income gains in about half the cases, but have done so to a significant degree only in Australia and New Zealand. This being said, these data only compare average nationwide prices and incomes, potentially masking affordability problems for specific segments of the population.28

Figure 3.4.Real House Prices and Real Income 1999-2006

(Average annual percentage growth)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; HDFC India; and IMF staff calculations.

1 Japan house prices proxied by Tokyo Metropolitan Area.

Responsive housing supply may have limited price hikes in a number of countries. Residential development has picked up speed in recent years, even though overall construction investment in the region remains muted. Completed dwellings in Hong Kong SAR, Malaysia, and Taiwan Province of China have grown by more than 10 percent a year every year since 2000, while growth in China and Thailand has been above 15 percent. In contrast, the housing supply in Australia and New Zealand has not grown as much as might be expected, which may have in turn exacerbated pressures on prices.

Figure 3.5.Completed Housing Units 2000-2006

(Average annual percentage growth)

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

1 Proxied by floor space completed.

These aggregate data mask several localized price surges. While prices in China and India may not be growing particularly rapidly on a nationwide basis, a number of large cities in these countries have experienced annual real price increases well in excess of 10 percent over the past five years. Similarly, the high-end Gangnam area of Seoul and the high-end market in Hong Kong SAR have also seen rapid house price inflation, well above the overall market. As we argue below, these localized booms—which have attracted considerable attention in the press and among policymakers—can be in part explained by structural factors.

Figure 3.6.Local Real House Prices 2002-2006

(Average annual percentage growth)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; HDFC India; and IMF staff calculations.

To summarize, housing price data point to potential concerns in some countries, although in other countries price rises are broadly in line with fundamentals such as income gains. Australia and New Zealand are the clearest cases where housing price increases appear large, not just in real terms but also relative to rents or household incomes. In several economies—notably China, Hong Kong SAR, India, and Korea—more localized indicators point to significant price increases. We now examine these cases in more detail.

The Booms

Australia and New Zealand

Australia and New Zealand have unquestionably experienced the strongest and deepest price booms in the region. Price increases by and large started in Melbourne, Sydney, and Auckland, and then spread to other areas. Subsequently, price growth in many areas has outrun that in the main cities.

Figure 3.7.Real House Prices

(March 1999=100)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; and IMF staff calculations.

What explains the price run-up? Several factors appear to have been at play: (i) the decline in long-term interest rates, which has not only been a global phenomenon but has also had a local component, as both countries transitioned to lower levels of inflation and of inflation volatility; (ii) competition in financial markets and ready access to external finance, with morgage rates rising by less than policy interest rates; (iii) large net immigration, which boosted demand for housing; (iv) unresponsive housing supply; and (v) tax changes that lowered the cost of buying and selling property, at least in Australia. Yet as valid as these explanations are, it bears repeating how strong price appreciations in these two countries have been: not only have price-to-rent and price-to-income ratios risen more than in other countries in the region, they have also risen more than in many other OECD countries with housing booms of their own.29 Similarly, mortgage payments as a share of household incomes are higher than in most OECD countries and rising faster, particularly in New Zealand.30

Localized Booms

Some countries that have not experienced generalized housing price booms have, nonetheless, seen prices rise significantly in specific areas or segments of the market. Housing price increases in the Gangnam area of Seoul, Beijing, Shanghai, Bangalore, and Delhi have outstripped nation-wide housing price hikes.31 In Hong Kong SAR, prices of high-end housing have been booming while overall prices have not, and recent reports point to increased demand and rising prices for yet-to-be-completed high-end units in Singapore. In some cases, these market segments account for a significant proportion of the nation’s housing: Gangnam, for example, accounts for more than 10 percent of the overall housing index in Korea.

Concerns regarding localized booms vary across cases. Some recent booms are less impressive when put in historical perspective. In Hong Kong SAR, high-end prices have indeed grown fast in real terms over the last 15 years, albeit with much volatility. But that is not the case of Seoul-Gangnam, where despite recent rapid increases, real prices are still barely above early-1990s levels. Concerns regarding affordability also vary across localized booms. For example, housing prices in Shanghai have barely outrun household incomes in the city since 1999. At the same time, prices in Bangalore, high-end Hong Kong SAR, and Seoul–Gangnam have grown faster over this period than the relevant income deflator—state-wide GDP/capita for Bangalore, and tenth-decile household income in Hong Kong SAR and Korea.32

Figure 3.8.Real House Prices

(March 1990=100)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; and IMF staff calculations.

Figure 3.9.Localized Price-to-Income Ratio

(1999=100)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; HDFC India, and IMF staff calculations.

Besides income growth, other factors have pushed up nonspeculative demand for housing in these cities. In China and India, financial sector development has increased housing affordability, while rapid urbanization is likely to have contributed to housing price increases as supply struggles to keep up with demand. Moreover, given these two countries’ rapidly expanding economies, foreign demand for housing—and commercial space—is likely to have ballooned in recent years, as firms establish a presence in these markets. While there are no a priori reasons for foreign demand to have increased in Gangnam, there are good reasons why domestic demand has: returns to education have risen substantially in Korea over the past ten years, yet restrictive education policies have kept most of the top schools in Gangnam and other pockets of Seoul.

Finally, speculative dynamics cannot be ruled out. In particular, episodes of rapidly accelerating house price inflation as we have seen for example very recently in Korea are hard to explain on the basis on fundamentals alone. Similarly, speculative capital inflows may have played a part in house price inflation in some Chinese and Indian cities, with these inflows either seeking straight capital gains or, in some cases, using housing as a way to capitalize on expected currency gains. But the fact remains that longer-term price trends remain not far out of line with income growth and broadly consistent with rising nonspeculative demand, particularly in China and Korea.

Housing prices in the region have been shaped in part by important developments in housing finance. Financial deepening has increased the availability and range of mortgages, helping to raise housing demand. At the same time, the robust increase in housing lending, while welcome, raises potential concerns that housing price volatility could prove problematic if accompanied by weaknesses in the balance sheets of financial institutions or households. We turn to these issues next.

Housing Finance and Macro-Financial Risks

Mortgage lending has been rising rapidly in the region. The rate of growth in housing credits has generally exceeded those in other lending categories.33 China, in particular, has seen a spectacular take-off from very low levels in the late 1990s, while most other Asian countries have seen the stock of real housing credit double over the same period. Housing credit, while growing rapidly, remains relatively low as a percent of GDP compared with mature markets, where the average is around 50 percent. Yet it should be noted that total financial sector exposure to real estate is higher thansuggested by mortgage-lending data alone, as loans to developers or other players—for which data are scarce—could be large.

Figure 3.10.Housing Loans in Asia

(In percent)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; and IMF staff calculations.

What explains this growth? Besides rising incomes which have pushed up demand for housing services and increased repayment capacity, the region has seen substantial financial innovation in housing lending, with the outright introduction of mortgage products as in China, the creation of longer-dated mortgages, for example in Thailand and Korea, or the introduction of private mortgage insurance in Hong Kong SAR (see Table 3.1). Last but not least, the experience of the 1997–98 financial crisis pushed many corporations in the region to deleverage and seek alternatives to bank finance, forcing banks to find alternative sources of revenue, notably via lending to households, including mortgages.

Table 3.1.Summary Table on Housing Finance
Typical Interest Rate on MortgagesTypical Maturity(in years)Maximum Maturity (in years)Recent InnovationsTypical loan-to-value ratio (in percent)NPL for Housing Loans (in percent)
AustraliaVariable12530Low-documentation, interest-only loans, variable repayments70 on average 80+ common 20.2
ChinaVariable110-1530Fixed-rate mortgages801.5 (four large banks) 3
Hong Kong SARVariable120Mortgage insurance HIBOR as price reference7020.18 (delinquency)
IndiaVariable110-15Development of credit bureau85Below 14
IndonesiaVariable15-1010Nascent market70-8023.6
JapanVariable120-2540 or overFixed-rate mortgages growing80-10020.3-0.6(delinquency)
KoreaVariable13-year bullet30Long-term mortgages, with possibility of fixed rates in the early years60 (50 for non-bank financial institutions)0.7
MalaysiaVariable120-3035Credit Counceling and Debt Management Agency (2006)9528.7
New ZealandVariable125-3030Fixed-rate mortgages growing80-85 average20.2
SingaporeVariable120-303590Below 2
Taiwan Province of ChinaVariable125702
ThailandVariable110-2030National Credit Bureau(2005)7016.3
Sources: IMF staff; CEIC; Monetary Authority of Singapore; India’s Housing Development Finance Corporation (the main housing finance company in India).

Despite progress, limits on the range of mortgage products offered may affect the size and distribution of risks in some countries. Adjustable-rate mortgages dominate in the region, sheltering financial institutions from interest rate risk, but raising the potential exposure of households (see Table 3.1). In some countries, incomplete capital market development has stymied the development of fixed-rate mortgages, as banks lack financial tools to hedge interest rate risk over long periods of time. The prevalence of variable rate mortgages may also be due to the low-level of interest rates in recent years, and perhaps the perception that, going forward, this state of the world is going to last. Regarding the maturity structure of mortgages, countries in the region are increasingly offering mortgages with 20–30 year maturities, but 10–15 year mortgages are much more common. In Korea, 3-year bullet loans remain prevalent. As secondary markets for mortgages remain largely undeveloped, banks face large liquidity risks for loans with long maturities.

Thus far, growing exposure to mortgage lending does not appear to pose a threat to financial sector stability, but challenges may grow. Aggregate data so far do not point to major problems. While housing-related nonperforming loans (NPLs) remain relatively high in the ASEAN-5 countries, particularly Thailand, they have been steadily falling in most cases. An exception is Indonesia, where past hikes in interest rates may have caused problems for borrowers given the prevalence of variable-rate mortgages. In other countries where only aggregate or total consumer loan NPL data are available, problems appear manageable. Yet rapid growth in lending as seen in some countries can present challenges to financial institutions and supervisors, and is often accompanied by a relaxation of lending standards. It is important for financial regulators to ensure that housing lenders have an adequate financial buffer against a reasonable worst case scenario of falling housing prices. Countries in the region with potentially larger price corrections such as New Zealand and, to a lesser degree, Australia, have sound financial systems—in New Zealand, the ratio of impaired assets to total assets is 0.2 percent—as well as advanced internal risk models and financial sector supervision. However, ongoing events in the United States show that financial sector woes triggered by housing can spread faster than expected.

Figure 3.11.Nonperforming Mortgage Loans

(In percent of outstanding housing loans)

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

Growing household indebtedness also suggests potential macroeconomic vulnerabilities in some countries. Household debt has been growing by 15 percent a year on average in recent years, substantially faster than household incomes, and mortgage debt has accounted for some two-thirds of this growth. Household debt ratios remain low in many countries in the region, but in others such as Australia, Korea, and New Zealand they are high by international standards, and rising.34 Households in these countries are thus vulnerable to price, interest rate, or income shocks. In Korea, the prevalence of short-maturity bullet loans is another source of vulnerability.

Figure 3.12.Household Debt and Mortgage Growth 2002-2006

(In percent)

Sources: CEIC Data Company Ltd.; Haver Analytics Inc.; and IMF staff calculations.

Even in countries where household debt ratios are low, housing price declines could lead to lower consumption. In many countries in the region housing has been the traditional vehicle for saving, thereby accounting for a large share of household nonfinancial and total assets.35 A decline in housing prices could therefore affect consumption through wealth effects, even though limited house equity withdrawal in many countries due to the type of mortgages on offer would limit the impact. This could rapidly change with financial innovation in the region.

Housing finance is likely to develop further in Asia. Capital market development will help foster a wider array of mortgages, many more sophisticated and longer-term than currently available, making housing more affordable and contributing to housing market efficiency. The areas for improvement lie not only in the markets per se but also in the supporting infrastructure, such as better credit information on borrowers or better foreclosure systems to facilitate collateral sales. In some cases, financial development will help spread risk more efficiently, but the introduction of sophisticated products can also lead to new risks, which will need to be monitored closely.

Do governments have a potential role to play with regard to housing and housing prices? The answer in general is yes: sharply rising housing prices can compromise overall price stability, as well as macro-financial stability. Housing-related policies are the topic of the last section.

Policy Options

Governments use a wide range of policy instruments to address perceived imbalances in housing markets. These include monetary policy, prudential regulations, tax incentives or disincentives, regulatory measures that expand orrestrict the supply of land and housing, and idiosyncratic measures such as price caps or gardening periods before resale is allowed.

Monetary Policy

There is wide debate over whether monetary policy should target asset prices. Many central banks track housing prices as part of their information set, and react to rising housing prices if and when they believe they could jeopardize overall price stability. But perhaps more controversial is whether central banks should react to asset price appreciations when these are thought to exceed what can be explained by fundamentals, regardless of whether this is feeding or is expected to feed into overall price stability.

Consensus among central banks is that monetary policy should not target asset prices directly.36 This belief rests on three key arguments:

  • It is very hard to determine whether rising prices are fully justified by fundamentals, or whether “irrational exuberance” might be at play.37 In this context, a central bank targeting asset prices runs the risk of tightening more often than it should, and distorting price signals. Moreover, including asset prices can make the central bank’s mandate fuzzier, leaving the institution more vulnerable to outside interference and compromising its independence.

  • Interest rates are a fairly blunt instrument to deal with bubbles, particularly if they are local. Moreover, large hikes in interest rates may be required to cool asset prices, implying a substantial cost to the overall economy.

  • If a speculative bubble bursts, central banks can respond quickly by injecting liquidity and helping to cushion the economy from the shock.

That said, perceptions that the world economy is increasingly susceptible to speculative activities and asset bubbles have led a growing body of academics and policy-makers to advocate a more pro-active approach to asset price targeting.38 Proponents of this approach see various advantages. First, reacting to bubbles only after they have burst does nothing to avoid the excesses and misallocation of resources generated during the run-up. Second, a hands-off approach during asset price run-ups followed by monetary reflation after a bubble bursts may give market participants an implicit put option on asset prices, making bubbles more likely ex ante. Third, monetary reflation may delay the needed corrections to the excesses generated by the bubble, and can ex post replace the old bubble by a new bubble of perhaps even greater magnitude. Fourth, and perhaps most important, the bursting of asset price bubbles can have very serious economic ramifications that monetary policy may not always be able to offset, as demonstrated by the experience of Japan in the 1990s.

Several central banks in Asia have expressed concerns about housing prices in recent periods. In particular, the Reserve Banks of Australia and New Zealand are monitoring housing prices closely, not surprisingly given that housing booms in these two countries have been widespread and very strong by historical standards. This being said, both central banks have explicitly stated that they are not targeting asset prices directly, but are responding to concerns that wealth effects from housing could stoke domestic demand and generate inflationary pressures. Korea—a country where the housing boom is perhaps less obvious—also tightened monetary policy in 2005/06, and monetary policy statements have consistently pointed to housing prices as a key input in the decision-making process of the Bank of Korea. As for other countries with localized housing price booms, there is no indication that the People’s Bank of China has changed interest rates in response to them, and the same has been true in India.39

Prudential Regulations

Authorities have at their disposal a range of prudential measures. These include overall reserve requirements, loan-to-value ratios (LVRs) issued as guidance or as stipulations, risk weights that feed into calculations of capital adequacy ratios, and provisioning requirements to cover nonperforming loans. As a general rule, prudential regulations on housing financing should be tightened in response to a housing boom if the authorities have reason to believe that financial risks on the loans have increased, but they should not be used to target housing prices per se, even if the authorities are concerned about misallocation costs. At the same time, there is wide debate about how early in the price and credit cycles authorities should tighten prudential regulations. In some countries, moral suasion has been used as a first line of defense, while waiting for clear evidence that financial stability is at risk before tightening. In others, a more proactive approach has been taken, in part to avoid procyclicality in financial conditions.

Loan-to-value ratios vary substantially across the region. To start, regulators in some countries impose maximum LVRs, while others such as Japan simply offer them as guidance. There is no single correct value for the ratio, which should depend on, among other factors, the health of the financial sector, its ability to value creditworthiness and collateral, or the ease with which collateral can be collected in case of foreclosure. Average LVRs in the region are in the 70–80 percent range with variation across countries (see Table 3.1), but in some countries 100 percent LVR mortgages have been reported.

Countries with price run-ups have tightened or are considering tightening prudential regulations. For instance, China tightened LVRs in 2005 on concerns that housing credit was growing too fast and that the housing boom in the key cities could spill over to smaller cities. Korea also recently tightened LVRs but did so in a potentially distortive way, with differential LVRs depending on apartment type and location. Financial regulators in Australia, faced with growing financial sector vulnerability to price corrections, plan to adopt a tiering of risk weights for housing loans based on the LVR, to make capital requirements more consistent with the underlying risk of the loan portfolio. New Zealand is considering similar measures in the context of the standardized approach to Basel II, while India has been progressively rising risk weights on housing loans since 2005.

Tax Policy

Tax policy plays an important part in housing dynamics. Stamp duties, property taxes, capital gains taxes, mortgage deductibility provisions, taxes on developers, and even inheritance taxes can all influence housing supply and demand. There is no generalized model for optimal housing tax policy, but such taxes should be as non-distortive as possible, both in themselves and in relation to the rest of the tax code.

Housing tax policies vary greatly across the region. For example, while most economies in the region impose capital gains taxes—with wide regional variation on tax rates—others such as Hong Kong SAR and Singapore do not. In many countries including Australia, Japan, Korea, and Malaysia, tax rates on capital gains fall if the property is sold after a holding period of one to five years, a move designed to discourage rapid turnover and speculation. Korea has taken this route one step further, and now imposes differential rates depending on whether the house is the primary or secondary residence, with rates as high as 60 percent for the latter. Property tax rates also exhibit a wide variation, with many countries choosing not to impose them at all and others such as Singapore levying them only on rental properties. On the supply side, recent measures include China’s decision to impose progressively higher taxes on “excess” profits among real-estate developers, defined as any margin above 20 percent of cost.

Conclusions

Housing markets have come under increased scrutiny in Asia in recent years, and will likely remain on policymakers’ radar screens for some time to come. Housing prices have been rising more rapidly than inflation, and this may continue for some time as regional incomes grow and financial markets deepen. Moreover, as global liquidity remains abundant, the potential for large run-ups in credit and asset prices to affect overall inflation or financial or macroeconomic stability cannot be ignored. At the same time, it is important to distinguish between potentially problematic housing price rises and those that are more localized or can be explained by real supply and demand factors.

Note: The main authors of this chapter are Jacques Miniane and Mehmet Ziya Gorpe.

The economies covered in this chapter include Australia, China, Indonesia, Hong Kong SAR, Japan, Korea, India, Malaysia, New Zealand, Singapore, Taiwan Province of China, and Thailand. As the database incorporates information from a wide range of sources, a number of assumptions have been made in aggregating the data. As such, more than the usual caution should be utilized in interpreting them. Data sources and calculations are available from the authors upon request.

Price data for housing may overstate inflation to the extent that there have been significant quality improvements in the housing stock over time.

Note that price-to-rent ratios may be distorted by rent controls or subsidized rents, which are prevalent in some countries in the region.

Other factors need to be taken into consideration, however. For example, lower interest rates or longer mortgage maturities increase affordability for a given level of income.

More precisely, housing affordability could be declining for poorer households even if it is not for the average or median household. While this is an important issue, it is hard to evaluate quantitatively given the highly aggregate measure of housing price data in most countries. It should also be noted that several countries in the region have instituted price or rent caps, targeted credit policies, and other forms of financial support to make housing more affordable for poorer households. In Hong Kong SAR, public housing accounts for a substantial share of available units, and there are plans in cities like Seoul and Shanghai to increase public housing on concerns that poorer households are being priced out of these cities.

See OECD (2005). Note that, measured in level terms, price-to-income ratios in Australia and New Zealand are high by international standards, comparable to values found in the least affordable counties in the United States (see Demographia, 2007).

Note that the differentiation between nationwide prices and localized prices is harder for India since the nationwide index is computed as the average of seven key city-wide indices.

For Korea, higher incomes are thought to be underreported in the household income survey because of tax considerations. Also, note that prices relative to incomes have fallen substantially in Gangnam since 1990, despite recent increases. In the case of Bangalore, there is no city-level income data for India, but incomes are likely to have grown faster in Bangalore than in the whole state of Karnataka. Note that India’s price-to-income ratio is likely to have risen further in 2006 given rapid house price appreciation, but this cannot yet be confirmed owing to lack of 2006 data on state-level GDP/capita.

Depending on data availability, the definition of housing credit may or may not include credit by publicly owned financial institutions.

In New Zealand, household debt accounts for 160 percent of household income, compared with 140 percent in the United States.

For example, housing accounts for 44 percent, 62 percent, and 77 percent of household wealth in Singapore, Japan, and Korea, respectively, compared with 36 percent in the United States (DSG Asia, 2007, and Korea National Statistical Office, 2007).

See Mishkin (2007) for a summary of this view.

This is particularly true given that asset prices have a forward-looking component to them. Since one is looking at the infinite future path of these variables, small deviations from a given path can aggregate to large changes in present-time valuations. Put differently, it is sometimes easy to justify expensive valuations on the basis of not-so-implausible future paths of relevant variables.

See Cechetti and others (2000) for a detailed exposition of the arguments.

There is, strictly speaking, no monetary policy in Hong Kong SAR, on account of the currency board.

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