Price movements of large and small housing units in Hong Kong : an empirical investigation

Abstract

Housing is a dual commodity, which means it is not only a consumption, but an investment, good as well. Investors prefer larger units to smaller ones because larger units with higher ratios of the land-to-property-value will experience higher appreciation rates during a boom and enjoy higher liquidity. Therefore, changes in investment demand have a greater impact on the prices of larger units than on smaller units. Meanwhile, observations have revealed that buyers of smaller units are mostly prospective owner-occupiers driven by consumption demand. Thus, changes in consumption demand have a greater impact on the prices of smaller units than on larger ones. The aim of this study is to investigate the reasons for variations in the price movements of larger and smaller units. If the theory of the investment and consumption submarket holds true, the price differentials between larger and smaller units should capture the changes in investment and consumption demand. The changes in investment demand are measured by capital flows (the proxy of which is the LIBOR-to-HIBOR ratio) and the investment sentiment of the stock market (proxy: Hang Seng Index), whereas changes in consumption demand are measured by unemployment (proxy: unemployment rates). Three hypotheses are derived from the theory of the investment and consumption submarket:

1) The influx of large venture capital into Hong Kong should enlarge the price differentials, while the outflow of large venture capital should narrow them; 2) there is a positive relationship between investment market sentiment and the price differentials; and 3) the unemployment rate should positively affect the price differentials.

In the empirical analysis, the price differentials between larger and smaller units are regressed on the variables of the LIBOR-to-HIBOR ratio, the Hang Seng Index, the unemployment rates, and other control variables. Quarterly data from 1985 to 2009 in Hong Kong is employed. The results of the ordinary least squares (OLS) method confirm the three hypotheses of capital flows, investment market sentiment, and unemployment. The empirical results of this study have potentially important practical and policy implications. The findings on the different effects of investment and consumption demand on the prices of larger units versus those on smaller units will offer homebuyers guidance on what to buy and when to buy it.

Besides, studies on housing price should distinguish the price movements of larger and smaller units when different investment and consumption demands are concerned. Meanwhile, this study should shed light on investment activities. Other than conventional investment indicators, investors can predict price changes in larger units by tracking the influx or outflow of large amounts of capital to and from Hong Kong, respectively. The findings of this study should also help the government take action to influence the prices of larger units without affecting the smaller unit market, and vice versa.