The process of determination of house prices in Asia-Pacific countries. This paper is a joint research project of the Bank for International Settlements, Bangko Sentral ng Pilipinas, the Bank of Thailand and the Hong Kong Monetary Authority under the auspices of the Asian Research Program of the Bank for International Settlements. The authors would like to thank Claudio Borio, Jacob Gyntelberg, Charles Leung, Frank Leung, Chu-Chia Lin, Patrick McGuire, Dubravko Mihaljek, Pichit Patrawimolpon, Marc Oliver Rieger, Niloka Tarashev, Kostas Tsatsaronis, Goetz von Peter and workshop participants at HKIMR, BSP, BOT, BIS, the 2008 Asian Finance Association annual meeting and the 2008 Asian Real Estate Society annual conference for helpful comments. Gert Schnabel provides valuable support for data compilation. The views expressed herein are those of the authors and do not necessarily reflect those of the authors’ affiliated institutions. There are good reasons why the public and policymakers should monitor house price developments closely. In most countries, housing is generally households’ single largest investment and hence house price risk may be considered to be the major financial risk they face (Co c co, 2004; Yao and Zhang, 2005). Fluctuations in residential property prices tend to have a bigger wealth effect than those of financial assets.6 In addition, there are strong linkages between the residential property cycle and the credit cycle, and by extension the banking sector and the macroeconomy. This is because the purchase of a house is predominantly funded by mortgage loans originated by financial institutions, and real estate property is widely used as a major collateral asset for bank loans.7 Reflecting these insights, the Financial Sector Assessment Program (FSAP), which was introduced by the IMF and the World Bank in 1999, advocates the inclusion of real estate prices in the recommended set of financial soundness indicators (FSIs). House price risk has attracted much attention in recent years. A number of industrialized economies, including those of the United States, the United Kingdom and Spain, have witnessed a recent, protracted period of significant increases in house prices. The perceived lower risk has encouraged laxity in mortgage market lending criteria, which lie at the heart of the ongoing subprime crisis. By comparison, housing markets in most Asian economies have been relatively tranquil during the same period. However, the situation has started to change in the past several years. China, Hong Kong SAR and Korea have witnessed very strong.