Preface

This book offers the first genuine comparative study of the dynamic interactions between the housing sector and the wider economies of six East Asian countries: China, Japan, South Korea, Hong Kong, Singapore and Taiwan. These economies currently account for more than 30% of global housing assets and share important physical, cultural and institutional features that distinguish them as a group from other countries and create a unity of analysis. A comparative study of East Asia would also contribute to redressing the conspicuous imbalance between the overwhelming flow of academic research about the USA and a few other Western real estate markets on one side, and the rest of the world on the other.

Our comparative analysis has three complementary dimensions. First, an analysis of the institutional origins of these six housing system explains commonalities in their origins, their significant structural differences, and how these systems work at the present time. Second, the econometric analysis of housing price volatility and price cycles provides quantitative evidence of the significant differences across the six East Asian housing systems, and between East Asian and Western housing markets as well. Third, we present an analysis of the incentives and behavior of six key players (or participating groups) that are always present in housing cycles, but which have not been investigated jointly in previous studies of these cycles.

There have been twists and turns on the road toward the completion of this book. The idea for a comparative study of housing in East Asia goes back to an international real estate seminar at the Weimer School in Florida, several years after the outbreak of the 1997 Asia Financial Crisis (AFC). While there, two of us discussed the merits of a comparative study of East Asian housing that would go well beyond a 2000 book, on real estate during the AFC, in which we had cooperated. We agreed that the Asian Financial Crisis had suggested that East Asian housing markets behave differently from Western markets.

During the decade of the 2000s, East Asian real estate research was growing rapidly in scope, depth and quality, which provided further motivation as well as technical support for our interest in a comparative study. A major step forward was made for our comparative study at a conference on global housing held in Cambridge, UK, in 2010, in the aftermath of the Global Financial Crisis. During that conference, Kyung-Hwan met Senior Commissioning Editor Madeleine Metcalfe and discussed with her his research ideas, as well as a course on real estate and financial cycles that he had developed at the Singapore Management University during his sabbatical leave from Sogang University. She asked if he would be interested in doing a book for the Wiley-Blackwell Series in Real Estate. We responded by submitting a joint proposal, expecting that the partnership of three economists with complementary research interests and significantly different policy experiences should produce a better book than any one of us could do individually.

The global financial crisis (GFC) of 2007-2008, and the associated Great Recession of 2009, have drastically changed the views of macroeconomists about the central place of housing in the dynamics of advanced economies. For us, the GFC provided another impetus to our interest in the comparative dynamics of housing in East Asia during this new crisis, a decade after the 1997 Asia Financial Crisis. This time, again, housing volatility in East Asia had been visibly different from Western economies, and that of the US in particular. In fact, seen from East Asia, the GFC was really a broad and deep Western financial crisis, triggered by the crash of the seemingly minor US housing subprime sector.

A growing flow of comparative research on the dynamic interactions between price volatility in real estate markets, and the stability of national economies and their financial systems in high income economies, has been coming from leading international institutions such as the Bank for International Settlements in Basel, the Organization for Economic Cooperation Development (OECD) in Paris, the International Monetary Fund in Washington and the European Central Bank in Frankfurt. Of particular interest to us was IMF research on the differences among housing cycles, credit cycles and business cycles, and the interactions between these three types of cycles in (mostly) Western economies. Associated with this research was the global debate on desirable responses to housing price volatility and appropriate macro-prudential policies. This new comparative research reinforced our view that the macroeconomic dimensions of housing volatility in East Asia is a much-needed complement to the academic research on microeconomic analyses of housing and the real estate sector. We also felt that a better understanding of the channels of interactions between housing and the macroeconomy, and the mechanisms of causation, would be necessary.

A critical milestone in the genesis of the book has been the joint policy research report led by Man for the Korea Development Institute on Real Estate Real Estate Volatility and Economic Stability: An East Asian Perspective (2013). Two important components of the present book took shape during the preparation of this KDI monograph. First, we adopted the conceptual framework needed to organize our thinking about the interactions between housing, the national economy and the global economy, in the six open economies of East Asia. This framework is graphically presented in Figure 7.9. Second, the quantitative findings on housing price behavior and price cycles across East Asia, compared with Western economies of the KDI report, have become Part III, on the drivers of East Asian housing cycles. We thank KDI for the financial support and permission to publish some parts of our research monograph in this book.

Markets are embedded in specific institutions. To explain the drivers behind the quantitative findings of our KDI research report, it was clear that detailed attention had to be given to both the institutional origins of each of these six housing systems and their respective housing price and output dynamics today. The context of our quantitative findings needed to be probed, because there is no unique, universal economic model applicable everywhere and at all times; the context should dictate the selection of the appropriate economic model (Rodrik, 2015).

Also, without an understanding of the origins of today's East Asian housing systems, how could we hope to address questions such as:

• Why is Taiwan the only East Asian economy to have experienced several market-driven housing cycles since the 1970s?
• Why are the distributive impacts resulting from the performance of housing systems of Singapore and Hong Kong almost diametrically opposite?
• What are the historical and institutional reasons behind why the Korean government is intervening so constantly in housing markets, even now?
• Why was Japan the only East Asian country to experience a very damaging multiple asset price bubble in the 1980s with its impact drawn out over decades?
• How are the institutional legacies of the pre-1978 central planning era shaping the present dynamics of China's housing?

Housing institutions are remarkably path-dependent over the long term in any country, and major breaks with past institutional arrangements are rare. The biggest breaks typically occur during the growth take-off decades when a modern housing system is emerging. Being an East Asian latecomer to economic development, China's massive privatization of housing in 1998-2003 stands out due to its magnitude and its far-reaching impacts. In fact, China's housing privatization should be acknowledged as one of the two major reforms that have changed the course of economic development in China. The other institutional reform of fundamental historical significance for China has been the implementation of the agricultural "household responsibility system" that occurred in the early 1980s, when China was still predominantly a rural economy and its level of urbanization was about 20%.

Identifying critical moments in the development of East Asian housing institutions has led us to re-evaluate research findings on East Asian urban development since World War II. Understanding the development of the six housing systems, and the mechanisms of causation between housing sector behavior and macroeconomic performance, has to bring together the findings of real estate studies, macroeconomic analyses, and of the political economy of development in these systems. Bertrand took the lead on this dimension of the project, as he was the most experienced with the institutional details in different countries.

One attractive benefit of the analytical organizing framework already adopted for our KDI policy research report is that this research review had to integrate widely spread academic research that was becoming both deeper and increasingly more focused over time. Space constraints have prevented detailed reporting of the quantitative and institutional evidence gathered. By necessity, the chapters presenting each country's analysis are more intuitive than quantitatively formal. As a partial remedy, the long list of references documents the extensive research that has been carried out. We hope that this information will be of value to readers who want to deepen their own understanding of individual country cases, and might also wish to expand further the present comparative analysis.

During the...