An empirical study of the long and short-term impact of RMB to HKD exchange rate on non-residential property prices in Hong Kong

Abstract

Previous studies suggest that the exchange rate of one open economy can affect residential prices in another closely tied open economy (Tai, et. al., 2017). Empirical evidence shows that residential prices in Hawaii and Canada were affected by the exchange rate between the US Dollar and Japan Yen (Miller et. al., 1988; Krainer and Wilcox, 2013) and that between US Dollar and Canada (Benson et. al., 1997) respectively. However, there have been limited studies on the impact of exchange rates on non-residential real estate prices. This study aims to fill this research gap by examining the impact of the Renminbi to Hong Kong Dollar exchange rate (RMB) on non-residential real estate prices in Hong Kong. This study focuses on three types of non-residential real estate: offices, industrial buildings, and street-level shops. I estimated the co-integration (CI) Vector Error Correction (VEC) models for both the non-residential and residential markets using data collected from various sources in Hong Kong. The empirical results suggest that the RMB has a long-term positive impact on street-level shop prices (RETAIL) in Hong Kong. This is consistent with the conjecture that a stronger RMB will increase the tourist demand for retail goods and services from the mainland of China (Mainland), thereby boosting the investment demand for retail shops in Hong Kong. However, there is no empirical evidence to support a long-term positive impact of RMB on office prices (OFFICE) and industrial building prices (IND). The estimated CI and VEC models for offices and industrial buildings are qualitatively similar, indicating that many industrial buildings in Hong Kong have been used as offices. Over the years, the government has relaxed restrictions on industrial buildings for other uses, leading to a convergence of the demand driver for offices and industrial buildings, which is the total output of the service sector. Unlike the Mainland tourists' demand for retail goods and services, the demand for the total output of the service sector is less sensitive to RMB, mainly because RMB is not yet an international hard currency. Similar to previous studies, the results of this study show that RMB has a long-term impact on residential prices (RES) in Hong Kong. This suggests that there is a consumption and investment demand for residential properties in Hong Kong from the Mainland. Such demand may come from frequent Mainland travellers to Hong Kong who have business or other connections in the city. The results also suggest that the impact of RMB on RES is even stronger than that on RETAIL. There is no evidence of a short-term impact of RMB on the prices of all types of real estate, indicating that short-term fluctuations in RMB do not contribute to fluctuations in real estate prices in Hong Kong. However, the short-term impact of RMB on the stock market (Hang Seng Index) is more significant, which is in line with the more sluggish nature of real estate prices in response to external shocks compared to that of the stock market prices. The results of this study contribute to our understanding of the dynamics between real estate asset prices in the home economy and the exchange rate of its currency with a closely tied external economy. There have been no studies on this topic for the non-residential real estate market as far as the author is aware. The practical implication of the study's results is that retail shops and residential real estate investors should take into account the RMB, along with other market fundamentals. However, RMB is less relevant when it comes to investing in offices or industrial buildings.