Abstract
The current study attempts to investigate the proposition that Hong Kong residential market is only driven by a rational speculative bubble, in addition to fundamentals. The fundamentals are chosen according to the present value model, but will account for latent private information. Potential roles of other public information are also explored. The study finds that the influence of the rational bubble on the price growth is highly significant. However, in contrast to Seoul and Singapore housing market (Xiao, Citation2006; Xiao and Huang, Citation2007), neither the fundamentals, nor the rational bubble can explain much of the price growth in the market of concern. This finding leaves large room for questioning whether or not this market is more prone to irrationality than its counterparts in Seoul and Singapore.
Notes
1 Source: CEIC Economic Databases, http://www.ceicdata.com
2 One of the most prominent economists among the skeptics is Friedman (Citation1969).
3 Johansen et al. (2000, p. 219) demonstrate that a speculative bubble has its observable features.
4 The proxy for a bubble to swell is the price appreciation lagged one period; that for a bubble to burst is the deviation of accrual price from the equilibrium price in the previous period (Abraham and Hendershott, Citation1994, pp. 2, 4).