Dynamics of Housing in East Asia - Bertrand Renaud - E-Book

Dynamics of Housing in East Asia E-Book

Bertrand Renaud

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This book is the first to evaluate the organisation, behaviour and performance of six major East Asian real estate markets. It offers a unique analysis of the growth and transformation of the real estate sector across East Asia. The authors examine the interactions between volatility in the sector and the overall stability of the economy, in particular during the Asia financial crisis of 1997-98, and the global financial crisis of 2008-09. * draws on the best available theoretical and empirical literature * applies analytic tools in the context of East Asian institutions and policies * helps understand factors affecting resilience and stability in East Asian real estate markets.

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Table of Contents


Title Page


Part I: Foundations and Emergence of Modern East Asian Housing Systems

1 Introduction

1.1 The first comparative study of housing dynamics across East Asian countries

1.2 Distinguishing features of East Asian economies

1.3 Organization of the book

2 Growth Take-Offs and Emerging EA Housing Systems

2.1 East Asia and the global experience with growth and development

2.2 East Asian growth policies from an urbanization and housing perspective

2.3 East Asia has had the highest tempos of urbanization in the world

2.4 The 50% urban population marker signaled the arrival of the growth transition

2.5 Exceptionally powerful land price increases during East Asian growth take-offs

3 From Vernacular Housing to Organized Housing Systems

3.1 Housing transformation from a Von Thünen to a Krugman urban dynamic

3.2 Stylized facts of organized East Asian urban housing markets

3.3 Four distinct East Asian housing strategies during the period 1950–1980

3.4 Patterns of EA government intervention in housing policies

3.5 Transition from the take-off stage to sustained long-term economic growth

Part II: Current East Asian Housing Systems

4 East Asian Housing Systems Today

4.1 Basic quantitative East Asian comparisons

4.2 Volatility of housing output across East Asia

4.3 The 1997 Asian Financial Crisis triggered important structural reforms

4.4 Limited impact of the 2008 global financial crisis on East Asian housing

4.5 Six economies, six different housing system behaviors

5 Housing Volatility in Japan and Taiwan

5.1 Japan: housing underinvestment followed by multiple asset bubbles

5.2 Taiwan: a housing market with little government intervention

6 Housing Volatility in East Asian City States

6.1 Hong Kong: volatility in an open economy with a dual housing system

6.2 Singapore: where housing is part of macroeconomic policies

Part III: Drivers of East Asian Housing Cycles

7 East Asian Housing Price Cycles

7.1 An overview of East Asian housing cycles

7.2 Country-specific housing price dynamics

7.3 Institutions and regulations shaping East Asian housing cycles

8 Drivers of East Asian Housing Price Cycles

8.1 What makes housing prices cyclical? An analytical overview

8.2 Quantifying the role of market fundamentals in EA price cycles

8.3 Two-way interactions between housing and the macroeconomy

Part IV: The Six Actors of Housing Cycles in China and in Korea

9 Housing During China’s Growth Transition

9.1 Impact of investment-led growth policies on households

9.2 The great housing boom during a unique decade

9.3 Incentives and behavior of the six key players in China’s housing boom

9.4 Channels of interaction between housing and other sectors of the economy

10 Korea

10.1 An overview

10.2 Housing outcomes and housing cycles

10.3 Key issues in housing policy

10.4 Main players in Korean housing cycles and their behavior

10.5 Looking ahead: Korean housing at a crossroads

Part V: Conclusions

11 Overall Findings and Outlook for East Asian Housing

11.1 Distinctive characteristics of East Asian housing systems

11.2 Issues and outlook for East Asian housing systems


Index of Names

General Index

End User License Agreement

List of Tables

Chapter 03

Table 3.1 Public and private provision of housing in East Asia during the 1980s.

Chapter 04

Table 4.1 Comparative country indicators.

Table 4.2 Quality of institutions and governance across East Asia.

Chapter 07

Table 7.1 Basic descriptive statistics of real housing prices in six EA cities.

Table 7.2 Comparison of housing price cycles in Major East Asian cities.

Table 7.3 Key features of mortgage markets in East Asian countries.

Table 7.4 Government interventions in housing markets in East Asia.

Table 7.5 An international survey of real estate property rights and regulatory interventions.

Chapter 08

Table 8.1 Means and volatility of real house price growth rates in the 1990s and 2000s.

Table 8.2 Dispersion of the cyclical components.

Table 8.3 Estimates of the housing price equations with residential investment.

Table 8.4 Estimates of the price-rent ratio equation for two regions of Korea.

Table 8.5 Granger causality test of EA interactions between housing and the macroeconomy.

Table 8.6 Results of co-integration tests without housing price.

Table 8.7 Results of co-integration tests when housing price is included.

Peak-trough duration of housing price cycles.

Chapter 09

Table 9.1 Range of housing price-to-rent ratios observed in China, Korea and the USA.

Table 9.2 China: impact of an increase in user cost on the P/R ratio in selected Chinese cities.

Table 9.3 China: breakdown of real estate industry funding in 2011 (billion CNY).

Chapter 10

Table 10.1 Evolution of the housing stock in Korea: 1970–2010.

Table 10.2 Indicators of housing quality in Korea: 1980–2010.

Table 10.3 Rate of change in housing prices and their volatility by region.

Chapter 11

Table 11.1 Population aging across East Asia, 1970–2014.

Table 11.2 East Asia, financial leverage by sectors (percentage of GDP, 2014Q2).

List of Illustrations

Chapter 01

Figure 1.1 East Asian shares of world GDP, 1980–2015.

Figure 1.2 East Asia: high and rising gross population densities, 1950–2020.

Figure 1.3 Gross population densities in six Western countries, 1950–2020.

Chapter 02

Figure 2.1 East Asia: rapid GDP

per capita

growth 1960–2011, but diverse paths (in constant 2000 US$).

Figure 2.2 Tempos of urbanization 1950–2010 in China, Japan, North Korea, South Korea.

Figure 2.3 Growth take-off and 50% level of urbanization: Japan, Taiwan, South Korea, China, 1950–2010.

Chapter 03

Figure 3.1 From a rural (von Thünen) to an industrial (Krugman) economy.

Figure 3.2 East Asia: financial depth and ratio of bank private credit to GDP, 1960–2010.

Figure 3.3 South Korea’s GDP growth rates, 1953–2010, at 2005 constant prices, percent.

Chapter 04

Figure 4.1 Depth of housing finance systems: MDO/GDP ratios vs. GDP

per capita

, 2009.

Figure 4.2 East Asian annual housing investment as a share of GDP.

Figure 4.3 Impact of the 1997–98 AFC, East Asian GDP growth rates, 1995–2005.

Figure 4.4 Impact of the 2008–2009 GFC, East Asian GDP growth rates, 2005–2012.

Figure 4.5 a. Global housing boom, 2000–2007. Real house prices change in percent. b. Global housing bust, 2007–2009. Real house prices change in percent.

Chapter 05

Figure 5.1 Japan: annual rates of change in land prices, 1956–2013.

Figure 5.2 Japan long-term evolution of land prices by type, 1985–2013.

Figure 5.3 Japan’s housing price boom and bust in international perspective, 1970–2010.

Figure 5.4 Taiwan: housing price cycles versus the rise of incomes, 1972–2010.

Figure 5.5 Taiwan: movement of land, presales and existing housing price indices, 2008–2012.

Chapter 06

Figure 6.1 Hong Kong: Housing prices and trading volumes, 1996–2011.

Figure 6.2 Segmentation of Singapore housing across the HDB and private sectors, 2009.

Figure 6.3 Long-term evolution of Singapore housing prices, 1975–2012.

Chapter 07

Figure 7.1 Housing price dynamics in major East Asian cities.

Figure 7.2 Average annual rates of price increases versus cycle durations, Western and East Asian cities and countries.

Figure 7.3 Seoul, South Korea: housing price dynamics, 1986Q1 to 2010Q1.

Figure 7.4 Taipei, Taiwan: housing price dynamics, 1980Q1 to 2010Q1.

Figure 7.5 Singapore: housing price dynamics, 1980Q1 to 2010Q1.

Figure 7.6 Hong Kong: housing price dynamics, 1993Q1 to 2010Q3.

Figure 7.7 Tokyo metropolitan region: land and housing price dynamics: 1967Q4 to 2008Q2.

Figure 7.8 Beijing: housing price dynamics, 1998Q3 to 2010Q1.

Figure 7.9 Channels of interactions in open economies and key players of housing cycles.

Figure 7.10 Spectrum of housing finance systems: East Asian reliance on ARM loans vs. wholesale funding.

Figure 7.11 Extent of supply regulation and housing supply elasticity for major EA cities.

Chapter 08

Figure 8.1 Cyclical components in the housing price dynamics.

Figure 8.2 User cost of housing ownership.

Figure 8.3 Endogenous interactions between housing and the macroeconomy.

Chapter 09

Figure 9.1 China: Trend in constant quality housing prices in 35 major cities, 2000–2010.

Figure 9.2 China: moral hazard by local governments leading to real estate overinvestment.

Figure 9.3 China: rise of housing prices and residential mortgage loans outstanding, 1997–2010.

Figure 9.4 China: RE industry transition from SOEs and collectives to competitive firms, 2006–2010.

Figure 9.5 China: Dominance of pre-sales and own funds in Chinese real estate firms, 2011.

Chapter 10

Figure 10.1 Distribution of housing tenure in Korea: 1980–2010.

Figure 10.2 Trend of housing construction.

Figure 10.3 Construction investment to GDP ratio in selected countries: 1980–2012.

Figure 10.4 Residential investment to GDP ratio in selected countries: 1980–2012.

Figure 10.5 Housing price indices for the Capital Region and the Non-Capital Region.

Figure 10.6


deposit indices for the Capital Region and the Non-Capital Region.

Figure 10.7 Increase indebtedness of the LH Corporation.

Figure 10.8 MDO to GDP ratio vs. GDP

per capita

in selected countries, 2009.

Figure 10.9 Composition of household wealth in selected countries.

Figure 10.10 User cost of housing (Seoul) and three-year corporate bond rates in Korea.

Figure 10.11 Share of “zombie” companies among listed construction firms, 1992–2012.

Figure 10.12 The base interest rate set by the Bank of Korea.



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Dynamics of Housing in East Asia


Planning Gain


Dynamics of Housing in East Asia



Bertrand Renaud

Fellow of the Weimer Graduate School of Advanced Studiesin Real Estate and Urban Land EconomicsHomer Hoyt InstituteUSA

Kyung-Hwan Kim

Professor of Economics at Sogang University in SeoulVice-Minister, Ministry of Land, Infrastructure and TransportRepublic of Korea

Man Cho

Professor at the KDI School of Public Policy and Management in Seoul Visiting Scholar, Institute of Real Estate StudiesNational University of SingaporeSingapore







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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 econometric analyses of Part III, we were concerned by the limits imposed on the comparative results by the fact that the first consumer-driven (as opposed to state-driven) housing cycle emerged fully in China only after 2003. We decided to turn this constraint into an opportunity, and to deepen our understanding of China’s housing dynamics by analyzing the incentive and behavior of the six key players that drive China’s housing price and output outcomes. These six are:

the central bank that regulates interest rates and is controlling the emergence of the housing finance system;

the central government, with its direct role in fiscal policies and in the regulation of housing and the real estate industry;

local governments, which usually play a key role in the performance of local housing markets of most countries;

households, with their rising incomes, changing expectations and degree of willingness to rely on housing finance credit;

the incentives and ability of banks and other lenders to provide such housing credit;

the national real estate industry with its pervasive oligopolistic behavior at the city level.

As a comparator for the Chinese six-factor analysis, we choose Korea, given our in-depth knowledge of its housing system. To minimize the length of the book, we also decided to combine the analysis for China and Korea with the institutional analysis already done for the other four countries, for which a similar analysis would certainly be doable.

Our comparative study could not have been carried out without the assistance of numerous friends and colleagues. Among many others, our sincere thanks go to Deniz Igan, Seko Miki, Son Jae-yong, Chang Jin-Oh, Chen Ming-Chi, Phang Sock-Yong, Lum Sau Kim, Deng Yongheng, Wu Jing and Liu Hongyu. Kye Sera provided research assistance on econometric analysis. We also thank Pieter Bottelier for his valuable comments on the China chapter. This list is embarrassingly incomplete, and we apologize to the numerous colleagues whose help should have been recognized. We are also grateful to KDI for allowing us to use some of the materials in our KDI monograph for our book.

We would like to thank Madeleine Metcalfe for inviting us to submit our book proposal and managing the entire project. We hold a special debt of gratitude to Harriet Konishi, formerly of Wiley-Blackwell, for encouraging us to persevere at a crucial time when we had misgivings about the wisdom of our project, given its expanding demands and mounting delays. We thank Viktoria Vida for monitoring the day-to-day progress of our manuscript. We also want to recognize the high degree of professionalism and commitment of Saravanan Purushothaman and Revathy Kaliyamoorthy of SPi Global, for their work on a critical stage of production of our book during weeks when their personal and professional lives were so deeply disrupted by the 100-year flood in Chennai, India, whose severity forced their relocation to the city of Pondicherry.

Last, but not least, in an era when the contributions of women to society can only grow and lead to greater fairness and prosperity in every way, we dedicate this book to our respective daughters, Hyun-Jeong Kim and Keunjoo Cho, and grand-daughter Ariana-Sua Adabi.

Part IFoundations and Emergence of Modern East Asian Housing Systems

1Introduction: Motivations of the Study

1.1 The first comparative study of housing dynamics across East Asian countries

The Global Financial Crisis (GFC) of 2007–2009 and its aftermath have demonstrated the large impact that housing volatility can have on the stability of the national economy in highly urbanized, high-income countries, where housing has become the most important class of real assets and is often larger than financial assets. This study explores the two-way interactions between housing and the macroeconomy in six East Asian economies: China, Hong Kong, Japan, South Korea, Singapore and Taiwan. The analysis focuses on the risks that real estate price and output volatility might create for the stability and performance of the national economy.

The study focuses on three main questions. First, how have the growth models followed by East Asian economies shaped the organization and dynamics of the housing sectors that we observe today? Second, has housing volatility in East Asian economies differed from Western experiences in recent decades? And, do sources of risks for the wider economy as well as transmissions channels differ in East Asia?

We draw upon leading current frameworks in development economics, real estate finance, real estate cycles and urban economics to understand the common features that these six economies share. We also identify the factors that make the performance of their housing systems different at times, including during the 1997 Asian Financial Crisis (AFC) and during the Global Financial Crisis (GFC) a decade later. To complement usual econometric analyses of housing cycle analyses, we shall also consider how the structure of the incentives embedded in the institutions of these countries has been shaping the behavior of the six key players who actually drive housing and real estate cycles everywhere, usually in different ways in each case.

What distinguishes this study from previous studies of East Asian real estate is its genuinely comparative nature. Previous international books on national housing systems have presented country-specific information in collections of individual chapters, whose contents and quality are determined by the ability of the book’s editors to recruit leading national experts to write them. These books do not provide readers with a common analytical framework that can deepen their understanding and increase their own analytical independence of judgment about the performance of the countries covered. Usually, the contributors are leading specialists in their own countries, yet the best use we can make of such work is to consult each country’s chapter for its factual content, and for the individual authors’ insights into the dynamics of their national housing markets, usually during the latest decade. Implicit analytical frameworks differ, and so does the internal organization of each case study. One ambition of the present study is to offer its readers the opportunity to develop their own views on the similarities and contrasts between the drivers of these six housing systems.

1.1.1 Why East Asia?

Since the GFC and the Great Recession of 2008–2009, international research and policy discussions have focused intensely on the Western countries that have been highly impacted by the GFC. However, East Asian housing systems are also worth studying on their own merits, because these economies have been among the most dynamic ones in the world for decades, and also they produce a major share of global housing output.

By now, East Asian housing systems represent about one third of the world’s housing output. The East Asian share of global GDP (measured in PPP terms in the IMF’s World Outlook) rose from 12.8% of world GDP in 1980, to 23.8% in 2010, and it was approaching 25% in 2015, as seen in Figure 1.1. In the absence of global estimates of the total value of housing, we can infer from national GDP data that the six East Asian housing systems make up at least 30% of global housing output – probably more. The reason why the East Asian share of global housing is considerably larger than their share of global GDP is because, in highly urbanized countries, the values of annual housing output and of total existing housing assets are much higher than in low-income and middle-income economies, where household incomes are lower by multiples and the housing sector remains a much smaller part of the economy.

Figure 1.1 East Asian shares of world GDP, 1980–2015.

1.1.2 Why focus on housing and not on every type of real estate in the economy?

Real estate is the quintessential non-traded sector of an economy. Providing services to local business and consumers, the sector’s performance in terms of prices, levels of output and volatility is woven into the structure and performance of the overall economy. The real estate industry is composed of different residential and non-residential sectors, each with its own distinct cyclical behavior. We focus on housing because, together with financial assets, housing is one of the two largest asset classes in every high-income economy. Moreover, between these two major classes of assets, housing volatility has had by far the largest and longest lasting impact on macroeconomic stability in high-income economies, due to the leveraged nature of housing investment.

The focus on housing is also motivated by the GFC. During the three decades of the Great Moderation from the early 1980s to 2007, the variability of total output in the US economy fell by more than 50%, and inflation declined by two-thirds (Bernanke, 2004). During that period, many macroeconomists found it convenient to lump together all forms of asset price changes in highly aggregated conceptual models, whether these assets were financial assets, like stock market securities, or tangible assets, such as residential or non-residential real estate assets. The GFC and the Great Recession of 2008–2009 have drastically altered perceptions of the capacity of property markets to influence developments in the macroeconomy, in the banking system, and in labor markets.

The main types of non-residential real estate assets are: offices, retail, warehousing and industrial. Except for warehousing and industrial real estate, these are closely linked to local urban employment. Commercial real estate is the second largest RE asset class after housing, but it is considerably smaller. A rare estimation of the composition of US urban real estate assets in 1989 was that housing represented 79% of all real estate assets, offices 8.5%, retail 7%, and warehousing and industrial 5.5% (Hartzell et al., 1994). In spite of the much greater role that land plays in the value of real estate assets in East Asia than in the US, there is no obvious reason why the composition of urban real estate assets in East Asia would differ greatly from the basic US mix of 80% residential and 15% non-residential offices and retail real estate assets, with 5% going to the rest of real estate.

The various types of real estate assets have different cyclical properties. The volatility of each type depends crucially on the interactions between the rationality of investors’ expectations and the structural characteristics of each real estate type, which are asset durability, investment lags behind shifts in demand and supply, and demand elasticity. Typically, in the US, office cycles and multi-family housing cycles are more volatile, and have shorter peak-to-trough duration than the dominant detached housing sector. Is that also true in East Asia, given that multi-family housing units prevail in high-density EA cities? Should we expect the cyclical characteristics of housing and commercial RE to be behaving more similarly in East Asia than in Western countries? If the supply of housing in East Asia is inelastic for institutional and physical reasons, existing analytical models of real estate cycles lead us to expect more price volatility than in Western economies as a consequence (Wheaton, 1999).

1.2 Distinguishing features of East Asian economies

There is a genuine unity of analysis in focusing on East Asia. The six economies share three important characteristics that justify calling them East Asian (EA) economies, to differentiate them from Western economies or from South-East Asian and South Asian groupings. First, they have very high rural and national population densities, which are multiples of most Western economies.

Second, in spite of significant differences in local cultures, these societies share a deep Sinitic heritage, especially from Confucianism, that has had a lasting impact on the governance of their public and private institutions as well as on prevailing norms of public and private behavior. Vietnam is the only other East Asian society left out of the study, for lack of suitable information.

Third, during the second half of the 20th century, the governments of these societies have successfully pursued development strategies and implemented industrial policies that have resulted in the highest sustained economic growth rates in the world over several decades, together with the fastest rates of urbanization on record. In spite of its detached geographic location at the crossroad of South-East Asia, Singapore belongs to the group of East Asian economies, because of its dominant cultural heritage, institutions and economic performance.1

1.2.1 Impact of high East Asian population densities on economic growth and urbanization

The high population densities of East Asian economies have played a major role in their urbanization. Urbanization is central to economic development, in which it has three basic functions. First, the concentration of population allows an economy to carry out a greater variety of manufacturing and service activities, with more efficient economies of scale.

Second, transportation systems are more efficient within cities and metropolitan regions, compared to the high costs of transportation over longer distances in rural areas. In fact, the economic and spatial size of a city is usefully defined by the size of its internal labor market and the maximum feasible travel distance for the daily journey to work in that city.

Third, many cities play a strategic role in meeting the physical services and institutional requirements of international trade, and the important share of export-oriented industrialization has accentuated the concentration of population in major metropolitan areas during East Asian economic growth take-offs. The modern economic geography of trade developed by Krugman, Fujita, Venables and others has significantly deepened and refined our understanding of these three drivers of urban change (Duranton, 2009).

The evolution of the national population densities in China, Japan, Korea and Taiwan is graphically presented in Figure 1.1. These gross national densities under-represent their urban reality by very large margins. Both Japan and Korea are mountainous countries, where only about a fifth of the land is flat enough for agriculture or for cities with slopes of less than 15°. Similarly, the gross national density misrepresents the distribution of population in China. The “380-millimeter isohyet line” (or 15-inch isohyet) of annual rainfalls permitting agriculture is of major significance for understanding the geography and history of China. Only 43% of China’s territory lies east and south of this isohyet line, but 90% of China’s population was concentrated there in 2000. Excluding the city economies of Hong Kong and Singapore, Taiwan has the highest gross densities of the four EA economies, but it is somewhat less mountainous than Japan or Korea, and 45% of its land can be cultivated or used for cities. Figure 1.2 also shows how these high national population densities have risen further in every EA economy until 2010, but these densities are projected to stabilize by year 2020.

Figure 1.2 East Asia: high and rising gross population densities, 1950–2020.

The most conspicuous trait of East Asian economies is very high rural population densities. EA rural densities have been multiples of the rural densities found in Western economies and other regions of the world. National statistics differ significantly across countries in their criteria of what constitutes a town or a city, but everywhere they define urban areas explicitly or implicitly by their density. In East Asia, concentrations of rural population reach high densities that would be called urban elsewhere. On the other hand, urban population densities in the (administratively defined) cities of East Asia are closer in magnitude to the urban densities found in Western cities. Yet East Asian urban densities remain higher which, among its variety of impacts, contributes to the higher relative cost of floor space, everything else being equal. The successful EA growth strategies that followed from the 1950s have built on these high rural densities and the economies of scale that they permit, even in the early stages of development of labor intensive industrialization.

In contrast with the consistently high EA densities, population densities vary greatly across Western countries. Figure 1.3 shows the level and increase over time of gross densities in six Western countries in 70 years. Among Western countries, only the Netherlands has gross densities comparable to those of Korea or Taiwan, but a favorable qualifier is that there are no mountains in the Netherlands, and that it is a very flat country. Somewhat similarly to East Asia, high and rising Dutch densities, and the need to maintain the system of polders in rural areas, have led to strong communal practices towards land in both rural and urban areas and public value recapture in urban development (Needham, 2007). At the other end of the Western spectrum, Canadian gross densities are so low that they do not even show in Figure 1.3. In 2010, the size of the total population of Canada, with 33.4 million people living on 9.09 million km2, was of the same magnitude as that of the special municipality of Chongqing in Sichuan, China, with its 28.8 million people living on 82 000 km2, which is 110 times less land.

Figure 1.3 Gross population densities in six Western countries, 1950–2020.

Increases in urban densities have important impacts on housing, yet the economic consequences of high densities remains to be analyzed across countries, or even over time within one country. One pressing question is whether real housing prices follow a non-linear trajectory that becomes steeper as high population densities continue to rise. This issue faces every East Asian country, and several Western countries with high densities, such as the UK, the Netherlands and Germany. For the UK, Miles (2012) argues that the ‘impact of further rises in per capita income and in population is non-linear and will be increasingly on price2.” As levels of population densities, sizes of cities and household incomes keep rising, so also do concerns for the environmental sustainability of cities and the demand for green development. We cannot ignore that, between 1950 and 2010, the total population of the six EA countries increased 2.33 times from 665 million in 1950, to 1,553 million in 2010 (UN Population Division, 2012).

1.2.2 Significance of the Confucian cultural legacy for East Asian institutions and policies

From the 1950s to the 1980s, East Asian cultural and political legacies have shaped the emergence of national real estate systems through the balance between public and private property rights in land use, policies followed toward the development of the financial system and housing finance, and other economic and urban choices. The social and political thoughts and beliefs behind these choices become clearer by considering the impacts of the Sinitic cultural legacy on these societies, compared with Western and other societies.

East Asia, as a civilization, “comprises countries which in the past have embraced the classical Chinese language and script as a principal medium for their high culture, and which in some significant degree have embraced both Mahayana Buddhism and neo-Confucianism. Four countries meet all these conditions: China, Korea, Japan and Vietnam. This, no more and no less is East Asia. […] This high culture provided the cultural norms of the educational systems […]. It is the network that provides common ground for the diverse ethnic groups of China, Japan, Korea, and Vietnam, and unites these extremely diverse individual cultures” (Ramsey, 2013).

The ideals of the Confucian tradition have had deep and lasting impacts on both the public and the private spheres. Their influence remains present today, even after decades of very rapid economic development, so compressed in time.

Contrasting political and social traditions in East and West, a leading Western scholar points to, “a specific and distinctive commitment to public service and humanistic scholarship in ways not typically associated with traditions deriving from Semitic religions. […] For Confucians the applicable criterion was the greater good of the commonalty. […] and since the model for the commonalty was the family, the essential criterion has been whether economic activity, including capitalist activity, served the long-term interests and values of the family or, by extension, the state as a whole” (de Bary, 1988, p. 118).

Included in these values, views of the law in traditional East Asia have differed from those in the West.

Confucian legacies that have played an immediate role in the very rapid economic growth of East Asia are a very strong emphasis on education, life-long learning and personal diligence, which has resulted in a level of human capital that was considerably higher than would be predicted based on the level of per capita GDP alone. Respect of family, social hierarchies, and an emphasis on proper social interactions and group loyalty, have also meant a strong emphasis on the common good. Civil service systems have recruited the best students on merit through competition, which means that the civil service has enjoyed a high degree of prestige, and also that social mobility has been high, especially during the economic take-off. The Confucian concept of the “benevolent ruler” has also been used in support of authoritarian governments during the economic take-off. Long traditions of detailed record-keeping has meant that the quality of economic and social information has also been high, considering the per capita GDP level. Given these conditions favorable to development, the critical factor has become the choice of economic strategies and the quality of their implementation over time.

1.2.3 The “Developmental State” and its role in East Asian economic growth take-offs

A major impact of the Sinitic tradition in the economic sphere has been the emergence of the “developmental state”, which gained strength first in Japan in the pre-World War II period, and then spread across the emerging East Asian economies during the post-war decades. One concise description is that, “the secret of development in our world seems to lie in the combination of the rationality of the market in allocating scarce resources, and the strategic guidance of the state in charting the development course in a comprehensive way, while keeping the state’s relative autonomy over the interests of specific groups” (Castells et al., 1990). The concept of the “developmental state” was first articulated by Johnson (1982) in his influential study of the political economy of Japan’s industrialization between 1925 and 1975. Chalmers Johnson has summed up the main features of the developmental state across East Asia as follows:

“My contention is that the Japanese, Koreans and Taiwanese have put together the political economy of capitalism in ways unprecedented in the West…[These are]: (1) financial control over the economy; (2) labor relations; (3) the degree of autonomy of the economic bureaucracy; (4) the degree to which the state has been captured by its main economic clients; (5) balance between incentive and command in economic guidance; (6) special private sector organizations… and (7) the role of foreign capital” (Johnson, 1982).

Expanding upon Johnson’s analyses, Wade (2004) found that the East Asian success in “governing the market” had three main outcomes: very high levels of productive investment, relatively more investment in certain key industries, and exposure of many industries to international competition. These outcomes resulted from economic policies, incentives, controls and risk-spreading mechanisms that came from a strong and proactive government.

Public interventions, which we shall revisit later from an urban and housing sector perspective, included:

redistribution of agricultural land in the early post-WWII period;

controlling the financial system and making financial capital subordinate to industrial capital;

maintaining stability in the key economic parameters that affect long term investment – exchange rate, interest rate and the general price level;

managing the impact of foreign competition and prioritizing the use of scarce foreign exchange;

promoting exports;

promoting technology acquisition;

providing assistance to specific industries.

The developmental state achieved different production and investment outcomes from that which would have resulted under free market policies. Critically, such public actions would not have been possible without a specific organization of the state and of the private sector during the economic take-off. East Asian success combined a strong public administration and a strong private sector, in contrast with other developing countries that either have had a weak state or a weak private sector, or both (Lindblom, 1977; Riggs, 1964).

1.3 Organization of the book

To better understand the interactions between housing and the wider economy in East Asia, the study goes deeper than econometric studies comparing housing cycles, financial cycles and business cycles, which take the underlying institutions shaping these cycles as given and focus on measurable and testable quantitative outcomes (Igan et al., 2011). We proceed in three complementary ways.

First, we look back at the emergence of modern mass housing markets across East Asia during the growth take-off period, to learn how these decades have laid the foundations of current EA housing markets, because understanding the origins of these housing systems throws considerable light on how they work today.

Then, within the constraints imposed by data limitations across countries, we use established econometric techniques for the study of cycles to investigate the secular and cyclical components of East Asian housing prices, as well as their volatility in comparison with Western housing systems.

Finally, to investigate the specific source and channels of interactions between housing and the macroeconomy, a third level of analysis investigates the distinct behavioral incentives of the six key players that shape housing cycles in different ways in different economies. These six players are the central bank, the central government, local governments, households, banks, and developers. The interactions over time between these six players determine the risks of a boom-bust cycle. These interactions are best understood at the country level and we focus on China given the widespread interest in the implications for the wider economy of a housing downturn in this new market system. We also focus on S. Korea as a comparator to China in terms of extremely rapid development, except for scale.

1.3.1 Part I: Foundations and emergence of modern East Asian housing systems

Part I shows how the foundations of present EA housing systems were laid during the decades of fastest industrialization and urbanization of these countries, known as the “economic growth take-off stage”, and then proceeds to analyses of the individual dynamics of present housing systems in Japan, Taiwan, Hong and Singapore. Part I shows the validity of the observation that “knowing how something originated often is the best clue to how it works” (Deacon, 1997).

The comparison of the emergence of organized mass housing systems in other East Asia several decades ago, during their growth take-offs, throws considerable light on the recent emergence of a new housing system during China’s own growth take-off stage, which has just come to an end. Clearly, this “growth take-off stage” holds a central place in Part I – but what is it? Development economics finds it significant to distinguish two main stages in the long-term economic growth and development of a country (Rodrik, 2005). First, there is a rather rapid growth take-off stage, until the economy reaches a per capita GDP of around $10 000 PPP dollars (Brülhart and Sbergami, 2009; Eichengreen et al., 2013).

The second stage of development is marked by a shift in growth regimes to a slower, sustained long-term growth, during which a country reaches a high income level and becomes fully urbanized. Between these two stages lies a critical “growth transition”, often called by development economists the “middle-income trap”, because it is economically and politically a risky transition that many countries have failed to manage successfully. China is currently going through this uncertain and risky growth transition. The other five EA economies did not fall into their own middle-income traps, and they are now advanced economies. The ratio of their urban population is between 80% and 100%, which also means that their housing assets now constitute the largest class of assets in the economy, above financial assets.

The impact of economic growth regimes on the organization of housing systems in East Asia has been very significant throughout the development of these housing systems. Chapter 2 presents the urban and housing dimensions of the development policies that drove urban growth take-offs that were exceptionally rapid and powerful across East Asia. Chapter 3 then discusses the transition of traditional East Asian vernacular housing system into modern mass housing urban systems, driven by the spatial transition from a historical “Von Thünen urban dynamics” to the modern “Krugman urban dynamics” of industrialization and the growth take-off. Far from leading to identical housing systems, the differences in the growth strategies adopted by individual East Asian governments at the start of the growth take-off resulted in four very distinct types of housing strategies, whose effects are still being felt today. One benefit of looking back at the emergence of modern housing systems across East Asia in Part II is to show that, far from being unique to China today, the peak rates of urban concentration that characterize the earlier EA growth take-offs also led to skyrocketing land and housing prices which, in turn, induced strong and lasting public policy responses, especially in Japan and South Korea.

When discussing the transition from pre-industrial vernacular housing to the organized urban mass housing markets of today, Part I highlights characteristics of EA housing systems that differentiate them from western housing systems in four areas:

the regulation of land use and urban planning;

financial sector policies and housing finance;

housing taxation and subsidies; and

the direct provision of public housing.

1.3.2 Part II: Current East Asian housing systems

Five of the six East Asian economies are today high-income, advanced societies with large, deep and internally differentiated housing systems. Only China remains a middle-income, only partially urban economy that expects a considerable increase in its urban population over two decades. Chapter 4 first provides a regional overview of the six housing systems. It then compares and contrasts the impact of the 1997 Asia Financial Crisis, and then that of the Global Financial Crisis a decade later. The severity of the impacts of these crises, two decades apart, was clearly different for the six EA housing systems taken as a group. These impacts differed significantly between countries, as well as during each crisis. Three country groupings emerge for both crises. Korea, Hong Kong and Singapore were the most impacted each time, in terms of housing prices and GDP, but the AFC resulted in bigger downturns in housing prices than during the GFC. China and Taiwan were essentially unaffected. The behavior of Japan’s housing and other real estate stands apart, because the two crises occurred when Japanese housing markets were still in decline in the prolonged aftermath of the burst of Japan’s multiple asset price bubbles in 1990. Remarkably, Taiwan is the only EA country to come out virtually unaffected by either crisis.

To understand better how each country reacted differently to the two crises, Chapter 5 analyses the institutional structure and contrasts the behavior and dynamics of the Japanese and the Taiwanese housing systems, where the capital region in Taiwan and the six largest cities in Japan behave differently and are more volatile than the rest of the national system in these two countries. Chapter 6 then compares and contrasts the city-states of Hong Kong and Singapore.

The case studies of China and Korea are postponed until Part IV, to avoid covering these two housing systems in detail twice. The rationale for this decision is to complement the quantitative analyses of the drivers of East Asian housing cycles that is carried out in Part III