Research pick: Hong Kong’s ongoing housing crisis - "Why ‘spicy measures’ fail to cool down Hong Kong’s housing market?"

Efforts known as “‘spicy measures”, which included a series of stamp duties and charges on non-local and local home buyers, were put in place in an attempt to slow the escalation of house prices in Hong Kong. They ultimately failed. New research published in the International Journal of Sustainable Real Estate and Construction Economics, discusses the measures and the implications.

Jing Li of the Department of Geography and Resource Management, The Chinese University of Hong Kong worked with Wui Wing Cheng and Kam Hung Chui Department of Economics and Finance, The Hang Seng University of Hong Kong, Hong Kong. They have attempted to unravel this puzzle in terms of overflow of liquidity and low interest rate environment.

The team found, through their carrying out of a Granger causality test, that the impact of artificially low interest rates lasts only in the short-term. By contrast, the impact of excess monetary supply has a much longer-lasting impact. “The findings challenge the prevalent view that Hong Kong government has little to do with housing market exuberance, as spicy measures increased the transaction costs of home buyers according to the Coase theorem,” the team explains. They add that the major policy implication is that charging tax may be ineffective in cooling house prices in the face of a strong market. “The paper sheds light on understanding the housing price dynamics with varying market demand over time, an academic void not adequately filled in so far,” the team says.

There is huge economic inequality in Hong Kong the team suggests. Others have asserted that housing ownership stands out as a pivotal tool for personal wealth deposit and accumulation. The team adds that despite various interventions, to increase housing supply by the government, Hong Kong remains the world’s least affordable city in which to live. The decades come and go and nothing much changes, the team points out.

Li, J., Cheng, W.W. and Chui, K.H. (2019) ‘Why ‘spicy measures’ fail to cool down Hong Kong’s housing market?’, Int. J. Sustainable Real Estate and Construction Economics, Vol. 1, No. 4, pp.298–313.