A study of the Hong Kong property market: housing price expectations

Abstract

The size and direction of correlation between housing price movements and expectations differ between housing actors and change over time in Hong Kong. A cross‐sectional market outlook survey was conducted in November 2000 to measure housing price expectations and their formation. The study challenges the traditional adaptive expectations theory and finds that the pessimistic mindset of market actors in a deflationary period was due to a lack of economic confidence – the root cause for weak expectations. It also suggests that there exist differential price expectations between different actors. Homebuyers and investors tend to be unrealistically overconfident in the long‐term performance of the real estate market. Evidently, the determination of house sale prices is predominantly forward‐looking, based more upon macroeconomic fundamentals than the past price trend.

Keywords:

• Expectation formation
• Hong Kong
• housing price expectations

Acknowledgements

The authors thank the anonymous referees for insightful comments and suggestions.

Notes

1. This paper reports only part of the results of a postgraduate research conducted in 2000 in the Department of Building and Real Estate at the Hong Kong Polytechnic University. Results in their entirety are available from the authors.

2. Detailed multiple regression analysis technique is described in, for example, Yu and Siu (2003).

3. Questionnaires and covering letters were written in English and Chinese. This point is particularly accentuated because English is the official language in Hong Kong after the handover of the sovereignty in 1997 although over 99% of Hong Kongers are Chinese.

4. The total number of Agreement for Sale and Purchase received for registration from 1990 to 1999, both years inclusive [The Land Registry, the Government of the Hong Kong Special Administrative Region (HKSAR) of the People's Republic of China (PRC)].

5. People in public rental housing, temporary housing and an average of 19.6% of people in private permanent housing are assumed to be ‘non‐home buyers’ (Population by‐census Report, 1996, HKSAR, PRC).

6. There were 2 410 000 people aged 35 and 55 years by the end of 1999 (Demographic Statistics, HKSAR). This group of people is assumed to be able to afford to buy a house in Hong Kong. The remaining 4 565 000 are classified as ‘non‐home buyers’.

7. The definition and distribution of the ‘classes’, size ranges and tenanted and owner‐occupied flats in different geographic regions are obtained from Hong Kong Property Review (various issues). They are published by the Rating and Valuation Department, HKSAR, PRC. These transaction‐based data on housing prices are compiled for stamp duty purposes. They are considered systematic and reliable property data source for the Hong Kong real estate markets.

8. Similar results are obtained by Fisher and Statman (2002). They studied the expectations of individual investors, constitutional investors and financial academics in the late 1990s and early 2000s. They found that investors are wrong, the victims of cognitive biases. They are unrealistically optimistic about expected stock returns surveyed by Gallup/PaineWebber, Business Week and Ivo Welch (2000, 2001). In connection with this, Dreman et al.'s (2001) survey of the expectations of individual investors in 1998 and in late March 2001 also reported higher expected returns than those in the Gallup surveys.

9. The Hong Kong Transition Project (HKTP) (September 2000) reported that there has been actually been a rise in worry over various economic aspects of life. In the August 2000 survey, 15% of respondents were ‘very worried’ and 22% ‘fairly worried’ about Hong Kong's economic prospects, against a mere 5% and 13% surveyed in June 1997, right before the handover of the sovereignty. Note HKTP is a multi‐national, multi‐disciplinary, longitudinal research project of academics from Hong Kong University, Hong Kong Baptist University, Academia Sinica and East Asia University, Macau on Hong Kong's transition from British Royal Crown Colony to the Special Administrative Region of the People's Republic of China and its people's transition from foreign subjects to citizens. Full reports are available at: http://www..hkbu.edu.hk/∼hktp.

10. Developed from this cross‐sectional survey conducted in November 2000, longitudinal property market outlook surveys on housing price expectations have been conducted in Hong Kong since June 2003 in collaboration with the Hong Kong Baptist University, the Texas A&M University, USA and the University of Cambridge, UK. The results and findings of the research project entitled ‘BRE Index for The Residential Property Market in Hong Kong’ are available at http://www.bre.polyu.edu.hk/research/bre_index/index.htm.