Real Estate Speculation as a Source of Banking and Currency Instability: Some Different Lessons from the Asian Crisis

A central feature of the Asian currency crisis of 1997/1998 was the vast prior capital inflow into the region, and the later rapid reversal of that movement. In seeking to explain why this outflow of capital took place and was so devastating for the countries concerned, various writers have laid blame upon a combination of connected lending, poor bank supervision, moral hazard and “crony capitalism”.

Our emphasis is different. Much of the capital inflow financed a vast over-expansion of commercial real estate development. Plunging real estate values accompanied by severe difficulties in the banking and financial sector were common occurrences across the region. The argument we advance is that property plays a special role in banks' portfolios and that large international portfolio capital flows mediated by banks will usually lead to rapidly appreciating asset prices which will result in banking/currency crises.