Research On Determinants Of House Prices Asia-Pacific Economies

Introduction and Context

The paper addresses the question of what are the Determinants Of House Prices in several Asia-Pacific economies, focusing on nine countries: Australia, China, Hong Kong SAR, Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand. Bank for International Settlements+2ijcb.org+2
The authors emphasise that understanding the Determinants Of House Prices is important for policymakers, since housing is often households’ largest investment and shifts in house prices can have systemic consequences (through credit, banks, macroprudential issues). Bank for International Settlements
They also distinguish between long-term fundamentals in house pricing and short-term deviations (cycles or bubbles). Thus the research addresses both the underlying Determinants Of House Prices and the dynamics of house price movements. IDEAS/RePEc+1

Determinants Of House Prices

The process of determination of house prices in Asia-Pacific countries. This paper is a joint research project of the Bank for International Settlements, Bangko Sentral ng Pilipinas, the Bank of Thailand and the Hong Kong Monetary Authority under the auspices of the Asian Research Program of the Bank for International Settlements. The authors would like to thank Claudio Borio, Jacob Gyntelberg, Charles Leung, Frank Leung, Chu-Chia Lin, Patrick McGuire, Dubravko Mihaljek, Pichit Patrawimolpon, Marc Oliver Rieger, Niloka Tarashev, Kostas Tsatsaronis, Goetz von Peter and workshop participants at HKIMR, BSP, BOT, BIS, the 2008 Asian Finance Association annual meeting and the 2008 Asian Real Estate Society annual conference for helpful comments. Gert Schnabel provides valuable support for data compilation. The views expressed herein are those of the authors and do not necessarily reflect those of the authors’ affiliated institutions. There are good reasons why the public and policymakers should monitor house price developments closely. In most countries, housing is generally households’ single largest investment and hence house price risk may be considered to be the major financial risk they face. Fluctuations in residential property prices tend to have a bigger wealth effect than those of financial assets.6 In addition, there are strong linkages between the residential property cycle and the credit cycle, and by extension the banking sector and the macroeconomy. This is because the purchase of a house is predominantly funded by mortgage loans originated by financial institutions, and real estate property is widely used as a major collateral asset for bank loans.7 Reflecting these insights, the Financial Sector Assessment Program (FSAP), which was introduced by the IMF and the World Bank in 1999, advocates the inclusion of real estate prices in the recommended set of financial soundness indicators (FSIs). House price risk has attracted much attention in recent years. A number of industrialized economies, including those of the United States, the United Kingdom and Spain, have witnessed a recent, protracted period of significant increases in house prices. The perceived lower risk has encouraged laxity in mortgage market lending criteria, which lie at the heart of the ongoing subprime crisis. By comparison, housing markets in most Asian economies have been relatively tranquil during the same period. However, the situation has started to change in the past several years. China, Hong Kong SAR and Korea have witnessed very strong.

Literature on the Determinants of House Prices

The authors review prior work on the Determinants Of House Prices, noting that in industrialized economies many studies find key macroeconomic variables (income, interest rates, credit growth, asset prices) play major roles. Bank for International Settlements+1
They note that less is known about how institutional factors and supply constraints affect the Determinants Of House Prices in Asia-Pacific economies, which may have different market structures, regulatory contexts and housing finance systems. ijcb.org+1
Thus the contribution of the paper is to extend the analysis of the Determinants Of House Prices into a set of Asia-Pacific economies, and to examine both demand‐side, supply‐side and institutional factors, and their interaction. Bank for International Settlements

Empirical Framework: How the Determinants of House Prices Are Modelled

The authors describe their methodology for identifying the Determinants Of House Prices. They define the log of the real fundamental value of house prices in country i at time t as a function of explanatory variables: essentially

ln⁡(Pit∗)=f(Xit)\ln(P_{it}^\ast) = f(X_{it})

where the XitX_{it} are variables capturing key potential Determinants Of House Prices. Bank for International Settlements+1
The explanatory variables are divided into blocks:

Key Findings: What Are the Determinants of House Prices?

The empirical results show that many of the proposed variables matter as Determinants Of House Prices in the Asia‐Pacific economies studied. Some highlights:

Thus, the study confirms that the Determinants Of House Prices include the usual macroeconomic demand and rate factors, supply elasticity, and institutional context—but shows that their relative strength and interactions differ across Asia-Pacific economies.

Short-Run Dynamics: How the Determinants of House Prices Influence Cycles

Beyond long-run fundamentals, the authors examine how the Determinants Of House Prices affect the short-run behaviour of house prices (persistence, mean‐reversion). They find:

These findings show that the Determinants Of House Prices are not only about the level of fundamentals, but also about the market structure and institutional environment that determine how quickly prices adjust and how large cycles become.

Evidence on Overvaluation / Bubbles: Role of the Determinants of House Prices

A secondary focus of the paper is to ask: given the Determinants Of House Prices, is there evidence that house price growth is justifiable by fundamentals, or are there bubbles? The authors use the predicted fundamental house price (based on the Determinants Of House Prices) and then measure deviations to assess overvaluation and bubble potential. Bank for International Settlements

Their main conclusion is that at a national level in the sample economies, the house price run-up observed up to the mid-2000s was largely consistent with improved fundamentals (i.e., driven by the Determinants Of House Prices) rather than widespread bubbles. For example, only in Hong Kong did observed house prices exceed predicted fundamentals by roughly 10 % in 2005; other economies showed smaller deviations. Bank for International Settlements

However, they also note that at sub-national/city/market‐segment level (especially high-end/luxury segments), deviations are larger, i.e., the Determinants Of House Prices that apply generally may not capture all niche effects and thus bubble risk may be more pronounced in those segments. Bank for International Settlements

Thus the Determinants Of House Prices framework helps separate fundamental-driven price growth from possible speculative excess.

Heterogeneity Across Economies: Variation in the Determinants of House Prices

The authors emphasize that while many of the same variables appear as Determinants Of House Prices, the relative importance and magnitude differ significantly across the nine economies studied. IDEAS/RePEc

For example:

Therefore, the authors caution that the Determinants Of House Prices framework should not be applied mechanically across countries without considering local market structure, institutional context and data peculiarities.

Policy Implications: Leveraging the Determinants of House Prices

Given their findings, the authors draw several policy messages centered on the Determinants Of House Prices:

Limitations and Further Research: On the Determinants of House Prices

The authors note several caveats regarding their study of the Determinants Of House Prices:

Summary of Key Take-aways

Conclusion

In conclusion, the paper “Determinants of House Prices in Nine Asia-Pacific Economies” provides a comprehensive analysis of the long-run and short-run Determinants Of House Prices in a set of key Asia-Pacific markets. By integrating demand, supply, institutional and financial factors, the authors show that house price behavior is complex and heterogeneous across economies. For stakeholders interested in housing market developments, banking stability or macro-policy, a clear takeaway is that the Determinants Of House Prices cannot be boiled down to one variable (e.g., interest rates or credit alone) — a multi-factor framework is required, and its application must take account of local market structure and institutional context.

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