Rational expectations and market fundamentals. Evidence from Hong Kong’s boom and bust cycles
| DOI | https://doi.org/10.1108/14635780210416237 |
| Pages | 9-22 |
| Published date | 01 February 2002 |
| Date | 01 February 2002 |
| Author | Eddie Hui,Tsz‐Ying Lui |
| Subject Matter | Property management & built environment |
Academic
papers: Market
fundamentals
9
Journal of Property Investment &
Finance, Vol. 20 No. 1, 2002, pp. 9-22.
#MCB UP Limited, 1463-578X
DOI 10.1108/14635780210416237
ACADEMIC PAPERS
Rational expectations and
market fundamentals
Evidence from Hong Kong's boom and
bust cycles
Eddie Hui and Tsz-Ying Lui
Department of Building and Real Estate,
The Hong Kong Polytechnic University, Hong Kong
Keywords Housing, Pricing, Forecasting, Marketing, Hong Kong
Abstract This paper uses an econometric approach to examine the relationship between real
(ex post) and rationally expected housing prices in Hong Kong over its boom and bust cycle.
Models of market fundamentals are developed from a rational expectation hypothesis to compare
the ex post housing prices and expected housing prices, and to test whether the housing price can
reflect the market fundamentals. The findings suggest that the private housing price in Hong
Kong is cointegrated to the market fundamentals in the long-run only; and exhibits a volatile
performance in the short-run. The short-term market ``noises'' are believed largely to be the result
of government intervention and unexpected market fluctuations.
1. Introduction
The housing market in Hong Kong has exhibited high volatility with periodical
boom-bust fluctuations. The residential sector experienced a boom when the
economy rose sharply in 1978-81, but it turned to bust in 1982-84 brought about
by excessive speculation and oversupply in the early 1980s. The residential
market began to revive when the economy was expanding in the late 1980s.
The emergence of negative real interest rates extended the boom to the early
1990s and caused sharp fluctuations in housing prices (Tse et al., 1998).
Although the Gulf crisis broke out in the early 1990s, its impact to the property
market was eliminated by the negative real interest rates.
The residential market continued its boom despite the restrictions on
mortgage lending announced by the government and the banks in 1992. In
1994, for example, the bullish residential property market rose by 193 per cent
year-on-year. The speculative activities reached a new height with almost
70 per cent of the new flats snapped up by speculators (South China Morning
Post, 1994). Immediately, in April, the government announced a ``task force on
land supply and property prices'' to dampen speculation. After a short period of
consolidation, the market recovered in late 1996 and began another boom in
1997. At the time, the housing prices rose rampantly due to the shortage in
supply, coupled with the continuation of negative real interest rates.
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This research was financially supported by the Hong Kong Polytechnic University (A/C Nos. G-
T029 and B-Q364). The authors wish to extend particular gratitude to Mr. Paul Fox and the
anonymous referees for the useful comments and suggestions on the early draft of this paper.
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