November 31 and December 1, 1998
Co-organized by the World Bank and
the Overseas Economic Cooperation Fund (OECF) of Japan
Abstracts of Papers Presented
Real Estate and Housing Cycles
John M. Quigley
The association between the difficulties in real estate markets and the East Asian crisis is addressed in Professor John Quigleyâ€™s paper. It shows how a poorly functioning real estate market in the largest metropolitan area of a developing country could contribute in an important way to undermine macroeconomic stability and to derail reforms. Weaknesses of rules governing real estate lending can lead to property market bubbles, with negative knock-on effects for economic growth, political stability as well as social conditions. Furthermore, globalization can bring hidden problems to the surface. Professor Quigley presents evidence of real estate prices and vacancies in several East Asian economies, showing how the bubbles were financed by domestic and foreign credits during the years immediately preceding the crisis. However, the evidence of impending problems was apparently ignored by investors and lenders in Kuala Lumpur, Bangkok, Jakarta, Singapore, and Hong Kong. Professor Quigley concludes his paper with recommendations on how to cope with the excessive amount of existing bad debt and non-performing property loans in the region. First, the definition of non-performing assets must not be relaxed to make financial institutions appear more solvent. Second, the non-performing loans should be isolated from the rest of the banking system. Third, the development of a secondary market for mortgage paper could increase the competition in financial markets.