Negative Real Interest Rate and Housing Bubble Implosion: an Empirical Study in Hong Kong

Abstract

Purpose – The purpose of this paper to identify the asymmetric effect of real interest rate on housing return.

Design/methodology/approach – It tests empirically the impacts of positive and negative real interest rate on housing return in Hong Kong by time series regression analyses on series from 1984Q1 to 2009Q2, keeping other macroeconomic factors constant.

Findings – It shows that negative real interest rate imposes a much stronger, negative and significant effect on housing return than a positive one.

Research limitations/implications – The results imply that the two housing bubbles in Hong Kong could be largely explained by the negative real interest rate. Although it is theoretically sound, empirical evidence on this asymmetric effect of real interest rate on housing return has seldom been found, because negative real interest rate is very rare in other countries in the past.

Practical implications – It provides a good signal for housing bubbles in the future and helps understand the underlying causes of housing bubbles.

Originality/value – The currency board arrangement in Hong Kong enables the first empirical study on this issue.