An Empirical Study of the Relationship between Economic Growth, Real Estate Prices and Real Estate Investments in Hong Kong

Abstract

This study examines the lead-lag relationships between real estate prices, real estate investments, and economic growth. The results suggest that there is no relationship between GDP and real estate investment. This contradicts the results of similar previous studies in other economies. We propose that the lack of relationship is due to the significant variation in the project's duration in Hong Kong. The variation in project duration implies that the observed volume of real estate investment in any period represents the realization of investment decisions made at different points in time in the past. The lack of a relationship between real estate investment and economic growth does not mean that changes in demand for real estate have no effect on economic performance. Since Hong Kong's real estate market is very efficient, changes in demand conditions in the real estate sector are reflected more accurately and quickly in real estate prices. Our empirical results show that real estate prices, especially office and residential prices, lead economic growth The findings in this study have a number of implications. First, real estate prices, office and residential prices in particular, were found to lead GDP growth. Therefore, movements in real estate prices can be used to forecast GDP growth. Second, since real estate prices lead GDP, policies that stabilize residential prices are also likely to stabilize economic growth. Third, any policy that suppresses or deters the real estate sector, especially the residential sector, is likely to negatively affect economic performance. Similarly, any policy that stimulates real estate prices will also stimulate the economy. In Hong Kong, the SAR Government has far more ability to influence real estate prices than aggregate demand, since the government is the only supplier of new developable land. For example, real estate prices will go up if land supply is restricted by the cessation of land sales, as investors would anticipate a lower supply of real estate units.