Housing finance and financial stability: evidence from Malaysia, Thailand and Singapore

This paper discusses current housing finance practices in three emerging economies such as, Malaysia, Thailand and Singapore, as well as the impact of those practices on financial stability. National authorities and policymakers may find this analysis helpful as they reassess the structure and health of their housing finance systems, with particular attention given to those factors that have contributed to a stable housing finance system. The methodology used to determine the factors was panel cointegration and dynamic OLS. The country-specific housing finance systems vary significantly and have sometimes been shaped by pivotal historic events. Today’s housing finance systems are determined by a range of factors, including the products offered to investors (floating or fixed interest rates over various maturities); the use of prepayment penalties; funding (deposits versus capital markets); the degree of lender recourse to defaulted borrowers’ other assets and income; and government participation, including tax breaks. While different systems can work well to provide stable housing finance, a number of best practices emanate from the discussion and empirical analyses. They are enhanced underwriting and supervision; better calibrated government participation; and betteraligned incentives in capital-market mortgage funding. The paper concludes with a number of policy recommendations to encourage more stable housing finance system.