IIR

Working Paper

No.57

Asset Price Fluctuations and Macroeconomic
Behavior in East Asia

塩谷雅弘

２００８年２月

Issued by：
大阪国際大学

国際関係研究所

大阪府守口市藤田町６丁目２１－５７
570-8555
Institute of International Relations
Osaka International University
6－21－57 Tohdacho, Moriguchi
Osaka 570－8555
Japan
この Working Paper の内容は、著者の文書による同意なくしては、
一部といえども、引用、再録されてはならない。

Asset Price Fluctuations
and Macroeconomic Behavior in East Asia*

Masahiro ENYA**
Osaka International University
enya@pel.oiu.ac.jp

February 2008

1 Introduction
2 Asset Price Fluctuations in East Asia
3 Event Studies
4 VAR Analyses
5 Conclusions* An earlier version of this paper was presented at Research Conference on

Globalization, Digitalization, and Management, February 24-26, 2008, in Kitakyushyu,
Japan. I would like to thank the conference participants for their helpful comments.
** Associate Professor, Correspondence: E-mail: enya@pel.oiu.ac.jp, Office: 3-50-1, Sugi,
Hirakata, Osaka, Japan, Tel: +81-72-858-1616, Fax: +81-72-858-4982.

1 Introduction
Over the last two decades, both the industrial and emerging economies haveexperienced financial liberalization and globalization. With widespread financial
liberalization and increased globalization of capital markets, we have witnessed a lot of
episodes of financial crisis. Financial crises have often coincided with boom and bust in
credit markets, and/or asset markets (IMF, 2000, BIS, 2001). For instance, the S&L
crisis in United States in late 1980s, the collapse of asset prices in Japan in early 1990s,
the Asian economic crisis in 1997, and the IT boom-bust in US in early 2000s. In recent
years, Asian economies have experienced boom in housing markets while the US
housing market has crashed and Europe’s housing markets have slowed.
Asset prices may affect the real economy through various channels (IMF, 2000).
Since equities and properties constitute a significant part of households’ wealth andfirms’ assets, their price changes affect decisions on consumption and investment,
thereby affecting domestic absorption and aggregate output. Private consumption canbe affected through three main channels. The first channel is via wealth effects.
Households may consume much more as their net worth increase. Second, current
consumption can be affected by the expectations about future income formed on asset
prices. The third channel is via changes in household’s borrowing capacity to financecurrent consumption. On the other hand, investment can also be affected by change inasset prices through three main channels. First, the firms will invest much more if themarket valuation of their capital rise. The second channel is via expected future growth
formed on asset prices. Third, rising asset prices will improve firm’s balance sheet, andhence improve firm’s ability to borrow because assets are often used as collateral.
Collaterals play an important role in credit contracts under severe asymmetric
information in credit markets. Therefore, property price fluctuations may have moresignificant effects on macroeconomic behavior more than equity price fluctuations inemerging economies.
This paper will address the following questions for East Asian economies.
1) How were the asset price movements in East Asian economies?
2) How did the asset prices affect macroeconomic behaviors?
3) Have the asset price impacts changed recently?
4) What are the differences between property price impacts and equity priceimpacts?
We will investigate these questions using standard event study and VAR
impulse-response analysis.
Several studies investigated the relationship between bank lending and-2-

property price. Property price fluctuations may affect the real economy through thebank lending under the credit channel mechanism. Hofmann (2001) investigated for 16
industrial economies and found the mutual relationship for most of these economies.
Several studies investigated for Asian economies (Collyns and Senhadji (2002), Gerlach
and Peng (2005), Inoguchi (2007), and Liang and Cao (2007)). They investigated therelationship between bank lending and property price based on time-series analysis.
However, they found the impacts of property price on bank lending and vise versa forseveral economies (i.e. Hong Kong, and Singapore).
The structure of this paper is as follows. The next section discusses the asset
price cycles in East Asian economies. Then, we characterize the impacts of property
price shocks on macroeconomic variables, and compare the outcomes with that of equity
price impacts in section 3. In section 4, we characterize the relationship between asset
price and macroeconomic behavior using the estimated impulse response functions
based on VAR estimation. Finally, we summarize our results in section 5.

2

Asset Price Fluctuations in East Asia
In this section, we would like to identify patterns in the fluctuations of asset

prices over the last two decades in 7 East Asian Economies. We will focus on property
and equity as an asset. Equity price index data are obtained from IFS database. Most
data on property price index are obtained from CEIC data base and/or national data (e.g.
form central bank or housing bank)1. For the Philippines and Indonesia, we use CPI for
property sub-sector as a proxy for property prices. Both asset prices are quarterly,
deflated by CPI, and then transformed into natural log.
Figure 1 shows the fluctuations in both asset prices from 1979 to 2005.
2-1 Asset price fluctuations in Hong Kong, Korea, and Singapore
For 3 Asian economies, i.e., Hong Kong, Korea, and Singapore, we foundcyclical fluctuations in both asset prices. In Hong Kong, property prices were decreasingfrom 1981, then started to increase in 1984 and reached its peak in 1997. After 1997, it
had decreased continuously until 2003. On the other hand, equity prices dropped until
1995, then recovered through early 1997 only to drop again until 1998.

It hasrecovered and reached its peak in 2000 but dropped again thereafter and continued
until 2003.
In Korea, property prices were increasing from 1987 and reached its maximum
1 Note that the definitions of property prices are not uniform.

-3-

in 1991.

However, it began to drop, then, decreased even more drastically from 1997. It

broke out of slump and had increased since 2001. On the other hand, equity prices
began to increase form 1985 and continued until 1989. It had decreased till 1992 andrecovered for a couple of years. In 1995, it had decreased seriously continuing until 1998,
after which it recovered quickly.
In Singapore, property prices started to decrease in 1982, and decreased
further until 1986. It has recovered after and continued to increase until 1997.
decreased since then.

It hasEquity price cycles are shorter than property price cycles.

Equity price dropped steeply in 1998 after a continuous increase since the mid 80s. It
recovered immediately after 1998 only to drop again until 2003.
2-2 Asset price fluctuations in Thailand, Philippines, Malaysia, and Indonesia
For 4 ASEAN economies, i.e., Thailand, Philippines, Malaysia, and Indonesia,
we can not find clear cyclical fluctuations in property prices. Generally, property prices
increased from 1991, but dropped sharply in the 1997 Asian crisis, except forPhilippines. Equity prices, on the other hand, also dropped immediately before or
during 1997 Asian crisis.

>>Figure 1: Real property and equity prices in East Asia around here

3

Event Studies
In this section, we would like to characterize the pattern of interaction between

asset market price shocks and macroeconomic variables. Following the standard event
study methodology, the behaviors of key macroeconomic variables before and during an
asset price busts are compared. We will also focus on the common and different features
between property price impacts and share price impacts. First, we discuss the impacts
of property price busts. Then, we compare them with that of share price busts that weredetected in previous study (Kohsaka and enya, 2007).
3-1 Identification of the property price bust periods
As in the approach in IMF (2003), we first identify peak and trough in real
property price. Then, we will define a bust as a large peak-to-trough decrease. To qualify
as large, a bust in a given economy has to be in top quartile of all peak-to-troughdecreases in that economy. Most property price indices are residential housing price-4-

indices (land price index only for Thailand). We use the property price deflated by CPI.
Property price index data for 7 East Asian economies are obtained from CEIC
data base, regional central bank, and/or regional housing bank. Using this methodology,
we found 12 property price busts in the 7 East Asian Economies over the last two
decades.2 However, we did not include 2 bust episodes in the Philippines because thedecline sizes of these two busts were much smaller compared with the other economies.
In addition, we also did not include Malaysian bust in 2004 because of the data
limitations. Hence, we included only 9 busts in the succeeding analysis.
3-2 Event study Results
The left side panels in Figure 2 shows the behavior of macroeconomic andfinancial variables before and after a peak in property prices that was followed by a bust
(t=0 period). Panels in the figure include the median, the bottom and top quartiles.

>>Figure 2: Property and equity price busts around here
Our findings are as follows. Property price busts were associated with a cyclical
upturn, followed by a downturn, in output and domestic absorption. The property pricebusts were associated with substantial output losses, where the output growth one year
after the bust decreased by about 5 % from average growth rate of 8% during the 3 years
up to the bust. In terms of timing, the slowdown in the output growth began
immediately after the bust, and recovery started two years after the bust. We will turnto the components of domestic absorption. The slowdown in the investment was larger
than the slowdown in private consumption. It may suggest that household’s wealth issmall, and that mortgage financial market is small in East Asian economies. The
slowdown in credit growth happened later. The credit recovery also was slow.
We will compare the outcome with that of share price bust case detected by
Kohsaka and Enya (2007, Figure5). The right side panels in Figure 2 are share pricebust case. The IMF (2003) report claimed that bank-based economies are more
vulnerable economies to asset market price busts generally and to property price busts
in particular, and that property price busts tend to affect key macroeconomic variables
2 The property price busts were Hong Kong (1981, 1997), Korea (1991, 1997), Singapore(1981, 1997), Thailand (1997), Philippines (1987, 1995), Malaysia (2004), and Indonesia(1985, 1996).
On the other hand, the share price busts identified in Kohsaka and Enya (2007) were
10 busts for 7 East Asian economies from 1975 to 2004. They were Hong Kong (none),
Korea (1989, 1994), Singapore (1996), Thailand (1995), Philippines (1979, 1996, 1999),
Malaysia (1983, 1997), and Indonesia (1997)-5-

more seriously than share price busts. If these hold true, emerging market economies in
East Asia are relatively vulnerable because they are bank-based. Major differences
between the two busts were in the magnitudes of swings and the speed of recoveries of
the key macroeconomic variables. In fact, we found that the output growth declined
more sharply and immediately after the property price busts than after the share prices
busts in East Asian economies. However, the magnitude of slowdown in output andinvestment after a property price busts are similar. The beginning of key variables
slowdown after a property bust coincided with the beginning of bust itself. The
recoveries of output and the components of domestic absorption after a property pricebust were faster than an equity price bust.
In addition, the band between upper quartile and lower quartile of a property
price bust was wider. The behaviors of key macroeconomic variables after a property
bust varied widely across East Asian economies.

4 The VAR analysis
In this section, we will formally characterize the relationship between asset
prices and macroeconomic variables. To investigate the impacts of asset price shocks on
macroeconomic variables, we will run individual-country VARs with three or four
variables: property price, equity price, and macroeconomic variables (GDP, or thecomponents of domestic absorption), and then, we will check the impulse response of
macroeconomic variables to asset price shock. We examine the two VAR models. The
first model is VAR model with real property price growth (dlrpp), real equity pricegrowth (dlrsp), and real GDP growth (dlrgdp). The second model is VAR model with real
property price growth (dlrpp), real equity price growth (dlrsp), real private consumption
growth (dlrpc), real investment (dlri). The sample of countries includes Korea, Hong
Kong, and Thailand. Data are quarterly. The lag length, selected by Akaike information
criterion, is 1 for Korea and Hong Kong, is 2 for Thailand.
For Korea, Figure 3a and 3b show the impulse response of each of the threevariables to a shock origination from one of the three variables. To investigate thestructural change effects, we divided sample periods between the first half and the later
half. Figure 3a shows impulse response for the first sub-sample, while Figure 3b shows
the impulse response for the later sub-sample. The first and second panels in the third
row in Figure 3a and 3b, depicting the impulse response of dlrpp and dlrsp on dlrgdp
respectively, are the most relevant.
The results indicate that the impacts of equity price and property price shocks-6-became stronger and more significant in the later sub-sample than in the firstsub-sample. The differences in the impacts on real GDP growth between two
sub-samples reflected differences in the impacts on key components of domestic
absorptions between two sub-samples. Although the impacts of both equity price shock
and property price shock on private consumption were not significant in the firstsub-sample (the first and second panels in the third row in Figure 4a), the impacts
became significant in the later sub-sample (Figure 4b). On real investment the impacts
became more significant in the later sub-sample (the first and second panels in the
fourth row in Figure 4a or 4b).
For Thailand, Figure 5 shows the impulse response of each of the threevariables to a shock origination from one of the three variables. We estimated only inthe later sample because of data limitations. The impact of property price shock on real
GDP was not significant, while the impact of equity price shock on real GDP was
positively significant (the first and second panels in the third row in Figure 5). The
impacts of property price shock both on private consumption and investment were notsignificant, while the impacts of equity price shock both on private consumption andinvestment were positively significant (the first and second panels in the third andfourth row in Figure 6). The results indicate the impacts of property price were small
and not significant even recently.
Finally, for Hong Kong, Figure 7 shows the impulse response of each of thethree variables to a shock origination from one of the three variables. We also estimatedonly in the later sample because of data limitations. The impacts of both property priceshock and equity price shock on real GDP were positively significant (The first andsecond panels in the third row in Figure 8). We also found the spillover effects on prices
in the other asset class. The impact of property price on equity price was positively
significant, and vice versa. The spillover from property price to equity price was larger
and more significant than vice versa. This spillover effects may have the impacts ofasset prices severer.

>>Figure 3a, 3b: Impulse Response to one S.D. for Korea: 3 variables model>>Figure 4a, 4b: Impulse Response to one S.D. for Korea: 4 variables model>>Figure 5: Impulse Response to one S.D. for Thailand: 3 variables model>>Figure 6: Impulse Response to one S.D. for Thailand: 4 variables model-7-

>>Figure 7: Impulse Response to one S.D. for Hong Kong: 3 variables model>>Figure 8: Impulse Response to one S.D. for Hong Kong: 4 variables model

5 Conclusions
This paper examines the relations between asset price fluctuations andmacroeconomic behavior. The paper presents the following results from several
empirical studies for East Asian economies; (1) the beginning of output slowdown after aproperty bust coincided with the beginning of the bust itself, and was quicker than thatafter an equity bust; (2) the behaviors of key macroeconomic variables after a property
bust varied widely across East Asian economies; (3) in Korea and Hong Kong, theimpacts of both property price shock and equity price shock on real economy havebecome larger and more significant recently; (4) in Thailand, the impact of a property
price shock on real economy remained limited even recently, although the impact of anequity price was significant.
How can we interpret these mixed results on the impact of property priceshocks in East Asian economies? The impact of a property price may depend on the
structures of financial system. It depends not only whether the economy is bank-basedor market-based but also depends on the extent of mortgage loan market development
as well as the size and structure of sectoral balance sheets. Financial sectors in many
East Asian economies after the 1997 Asian financial crisis have shifted from lending tocorporate sector to lending to household sector. Therefore, the size of household’sbalance sheet has expanded. The trends may increase the impact of a property price inthe future. Furthermore, the progression of a globalization may make asset pricefluctuations more vulnerable through the surge in capital flows. We must have more
serious thought for debt management in household sector.

References
BIS (2001), ‘71st Annual Report.
Collyns, Charles and Abdelhak Senhadji (2002), “Lending Boom, Real Estate Bubbles
and the Asian Crisis”, IMF Working Paper, WP/02/20.
Gerlach, Stefan and Wensheng Peng (2005), “Bank Lending and Property Prices in-8-

Hong Kong”, Journal of Banking and Finance, Vol.29(2), pp.461-481．
Hofmann (2001), “The Determinants of Private Sector Credit in Industrialised
Countries: Do Property Prices Matter?”, BIS Working Papers, No.108, Bank forinternational Settlements, pp.1-34.
IMF (2000), “Asset Prices and the Business Cycle”, World Economic Outlook, May, 2000,
Chapter III, International Monetary Funds, pp.77-112.
IMF (2003), “When Bubbles Burst”, World Economic Outlook, April, 2003, Chapter II,
International Monetary Funds, pp.61-94.
IMF (2004), “Are Credit Booms in Emerging Markets a Concern?”, World Economic

Outlook, April, 2004, Chapter IV, International Monetary Funds, pp.147-166.
Inoguchi, Masahiro (2007), “Bank Loans and Real Estate in East Asia: The Influences ofReal Estate Prices on Lending Behavior of Domestic Banks”, CCAS Working Paper,
No.2, Center for Contemporary Asian Studies, Doshisya University, pp.1-20.
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MIT Press, pp.101-129.
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Asian Economics, Vol.18, pp.63-75．
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Figure 1 Real property and equity prices in Asia

Source: Hong Kong: Property Prices Index (Domestic Premise) (CEIC)
Korea: Housing price Index (CEIC)
Singapore: Property price Index (Industrial NADJ)(CEIC)
Philippines: CPI Housing (NSCB), Thailand: Housing Price Index: Land (CEIC)
Indonesia: CPI Housing (Bank Indonesia), Malaysia: House Price Index (CEIC).

- 10 -

Figure 2 Property and Equity Price Busts
Property Price Busts

Equity Price Busts

Source: Author’s calculations for property price busts. Kohsaka and Enya (2007, Figure 5)
for Equity Price Busts.

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Figure 3a

Impulse Response to one S.D. for Korea

3 Variables VAR (real property, equity price, real GDP): 1987Q2−1997Q3

Figure 3b

1995Q1−2007Q2

Source: Author’s calculations- 12 -

Figure 4a

Impulse Response to one S.D. for Korea

4 Variables VAR (real property, equity price, real private consumption, real investment): 1987Q2−1997Q3

Source: Author’s calculations- 13 -

Figure 4b

Impulse Response to one S.D. for Korea

4 Variables VAR (real property, equity price, real private consumption, real investment): 1995Q1−2007Q2

Source: Author’s calculations- 14 -

Figure 5

Impulse Response to one S.D. for Thailand

3 Variables VAR (real property, equity price, real GDP): 1994Q2−2007Q3

Figure 6

Impulse Response to one S.D. for Thailand

4 Variables VAR (real property, equity price, real private consumption, real investment): 1994Q2−2007Q3

Source: Author’s calculations- 15 -

Figure 7

Impulse Response to one S.D. for Hong Kong

3 Variables VAR (real property, equity price, real GDP): 1995Q2−2005Q1

Figure 8

Impulse Response to one S.D. for Hong Kong

4 Variables VAR (real property, equity price, real private consumption, real investment): 1995Q2−2005Q1

Source: Author’s calculations- 16 -