The inter-tier spread of housing bubbles: are luxury markets to blame?
Understanding the spread of asset bubbles is pivotal to the effectiveness of risk management. This study thus estimates housing bubbles and investigates how and to what extent price bubbles spread between the tiers of luxury and mass housing in Hong Kong. The results show that price bubbles spread between housing tiers, the spreading of bubbles is not uni-directional from luxury to mass tiers, and more than 60% of bubbles come from inter-tier spreading. Moreover, bubble shocks from the luxury tier have stronger spreading influences on the movements of bubbles in the mass housing tier than the other way around during the period before the end of the global financial crisis (GFC), whereas the opposite is true for the period after GFC. The findings are important for policy makers attempting to tackle soaring housing bubbles, financial institutions seeking to managing lending risk, and housing investors wanting to time the submarkets.
First published online 11 February 2021
This work is licensed under a Creative Commons Attribution 4.0 International License.
Ambrose, B. W., Eichhottz, P., & Lindenthal, T. (2013). House prices and fundamentals: 355 years of evidence. Journal of Money Credit and Banking, 45(2–3), 477–491.
Bangura, M., & Lee, C. L. (2020). House price diffusion of housing submarkets in greater Sydney. Housing Studies, 35(6), 1110–1141. https://doi.org/10.1080/02673037.2019.1648772
Black, A., Fraser, P., & Hoesli, M. (2006). House prices, fundamentals and bubbles. Journal of Business Finance & Accounting, 33(9–10), 1535–1555.
Bourbeau, J., & Logan, N. (2016, June 3). Feds considering luxury tax to cool housing market. Global News. https://globalnews.ca/news/2738797/feds-considering-luxury-tax-on-foreignbuyers-of-multi-million-dollar-homes/
Campbell, J. Y., Giglio, S., & Pathak, P. (2011). Forced sales and house prices. American Economic Review, 101(5), 2108–2131. https://doi.org/10.1257/aer.101.5.2108
Candelon, B., & Lütkepohl, H. (2001). On the reliability of Chow-type tests for parameter constancy in multivariate dynamic models. Economics letters, 73(2), 155–160.
Capozza, D. R., Hendershott, P. H., Mack, C., & Mayer, C. J. (2002). Determinants of real house price dynamics (NBER Working Paper No. 9262). National Bureau of Economic Research. https://doi.org/10.3386/w9262
Case, K. E., & Shiller, R. J. (2003). Is there a bubble in the housing market? Brookings Papers on Economic Activity, 34(2), 299–342. https://doi.org/10.1353/eca.2004.0004
Chugani, M. (2018, July 19). Why Hong Kong’s property bubble won’t burst anytime soon. Hong Kong Economic Journal. http://www.ejinsight.com/20180718-why-hong-kong-s-property-bubble-won-t-burst-anytime-soon/
Costello, G., Fraser, P., & Groenewold, N. (2011), House prices, non-fundamental components and interstate spillovers: the Australian experience. Journal of Banking and Finance, 35(3), 653–669. https://doi.org/10.1016/j.jbankfin.2010.07.035
Coulson, N. E., & McMillen, D. P. (2007). The dynamics of intraurban quantile house price indexes. Urban Studies, 44(8), 1517–1537. https://doi.org/10.1080/00420980701373446
Damianov, D. S., & Escobari, D. (2016). Long-run equilibrium shift and short-run dynamics of U.S. home price tiers during the housing bubble. Journal of Real Estate Finance and Economics, 53(1), 1–28. https://doi.org/10.1007/s11146-015-9523-2
Davis, M., & Palumbo, M. (2008). The price of residential land in large US Cities. Journal of Urban Economics, 63(1), 352–384. https://doi.org/10.1016/j.jue.2007.02.003
Diba, B. T., & Grossman, H. I. (1988). Explosive rational bubbles in stock prices? The American Economic Review, 78(3), 520–530. https://doi.org/10.3386/w1779
Diebold, F. X., & Yilmaz, K. (2012). Better to give then to receive: predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57–66.
Diebold, F. X., & Yilmaz, K. (2014). On the network topology of variance decompositions: measuring the connectedness of financial firms. Journal of Econometrics, 182(1), 119–134. https://doi.org/10.1016/j.jeconom.2014.04.012
Dougherty, A., & Van Order, R. (1982). Inflation, housing costs, and the consumer price index. American Economic Review, 72(1), 154–164.
Ejinsight. (2018, October 29). Labor chief cites benefits from one-way permit scheme. Hong Kong Economic Journal. https://www.ejinsight.com/eji/article/id/1977582/20181029labor-chief-cites-benefits-from-one-way-permit-scheme
Ellyatt, H. (2014, December 4). Estate agents’ anger over UK 12% luxury homes tax. CNBC. https://www.cnbc.com/2014/12/04/luxury-homes-tax.html
Flood, R. P., & Hodrick, R. J. (1986). Asset price volatility, bubbles, and process switching. Journal of Finance, 41(4), 831–842. https://doi.org/10.1111/j.1540-6261.1986.tb04551.x
Gaspar, R. M. (2012). Comment on ‘Better to give than to receive’ by Francis X. Diebold and Kamil Yilmaz. International Journal of Forecasting, 28(1), 67–69.
Gonzalez, L., & Ortega, F. (2013). Immigration and housing Booms: evidence from Spain. Journal of Regional Science,
53(1), 37–59. https://doi.org/10.1111/jors.12010
Gyourko, J., Summers, A., & Saiz, A. (2008). A new measure of the local regulatory environmental for housing markets.
Urban Studies, 45(3), 693–729.
Hao, C. (2018, November 13). Money supply holds sway in Hong Kong housing market. Hong Kong Economic Journal. http://www.ejinsight.com/20181113-money-supply-holdssway-in-hong-kong-housing-market/
Harris, M., & Raviv, A. (1993). Differences of opinion make a horse race. Review of Financial Studies, 6(3), 473–506. https://doi.org/10.1093/rfs/5.3.473
Haruvy, E., & Noussair, C. N. (2006). The effect of short selling on bubbles and crashes in experimental spot asset markets. Journal of Finance, 61(3), 1119–1157.
Harvey, A. C. (1989). Forecasting, structural time series models and the Kalman filter. Cambridge University Press.
Heston, S. L., Lowenstein, M., & Willard, G. A. (2007). Options and bubbles. Review of Financial Studies, 20(2), 359–390. https://doi.org/10.1093/rfs/hhl005
Himmelberg, C., Mayer, C., & Sinai, T. (2005). Assessing high house prices: bubbles, fundamentals and misperceptions. Journal of Economic Perspectives, 19(4), 67–92.
Hirshleifer, D., Lim, S. S., & Teoh, S. H. (2011). Limited investor attention and stock market misreactions to accounting information. Review of Asset Pricing Studies, 1(1), 35–73. https://doi.org/10.1093/rapstu/rar002
Ho, L. S., Ma, Y., & Haurin, D. R. (2008). Domino effects within a housing market: the transmission of house price changes across quality tiers. Journal of Real Estate Finance and Economics, 37(4), 299–316. https://doi.org/10.1007/s11146-007-9070-6
GovHK. (2019). Hong Kong – the facts. https://www.gov.hk/en/about/abouthk/facts.htm
Global Property Guide. (2009, November 6). Hong Kong housing bubble! Mainland buyers blame. https://www.globalpropertyguide.com/Asia/hong-kong/Price-History-Archive/Hong-Kong-housing-bubble-Mainland-buyers-blamed-1059
Hong, H., Scheinkman, J., & Xiong, W. (2006). Asset float and speculative bubbles. Journal of Finance, 61(3), 1073–1117. https://doi.org/10.2139/ssrn.498022
Hui, E. C. M., & Shen, Y. (2006). Housing price bubbles in Hong Kong, Beijing and Shanghai: a comparative study. Journal of Real Estate Finance and Economics, 33(4), 299–327.
Kandel, E., & Pearson, N. (1995). Differential interpretation of public signals and trade in speculative markets. Journal of Political Economy, 103(4), 831–872. https://doi.org/10.1086/262005
Kindleberger, C. P., & Aliber, R. Z. (2011). Mania, panics, and crashes: a history of financial crises (6th ed). Palgrave Macmillan.
Koller, T., Goedhart, M., & Wessels, D. (2015). Valuation: measuring and managing the value of companies. Wiley.
Lam, K.-S. (2019). Luxury home sales in Hong Kong hit record US$24.6 billion last year, says Centaline report. South China Morning Post. https://www.scmp.com/property/hong-kong-china/article/2183201/luxury-home-sales-hong-kong-hit-record-us246-billion-last
Lee, M.-T., Kuo, S.-H., & Lee, M.-L. (2018). Diffusion of Hong Kong office property prices across quality classes: ripple down or ripple up? DLSU Business & Economics Review, 28(1), 150–165.
Lee, M.-T., Lee, M.-L., & Lin, S.-H. (2014). Trend properties, cointegration, and diffusion of presale house prices in Taiwan: can Taipei’s house prices ripple out? Habitat International, 44, 432–441. https://doi.org/10.1016/j.habitatint.2014.09.003
Leung, C. K. Y., & Tang, E. C. H. (2012). Comparing two financial crisis: the case of Hong Kong real estate markets. In A. Bardhan, & R. Edelstein (Eds.), Global housing markets: crises, policies and institutions (pp. 277–398). John Wiley & Sons.
Leung, K.-Y., Cheung, W.-Y., & Ding, E. J. (2008). Intrametropolitan office price and trading volume dynamics: evidence from Hong Kong. International Real Estate Review, 11(2), 47–74.
Li, S.-M. (2016a). Burst of the property bubble and Hong Kong’s changing land and housing policies post-1997. Eurasian Geography and Economics, 57(2), 228–248. https://doi.org/10.1080/15387216.2016.1231075
Li, V. J. (2016b). Housing Policies in Hong Kong, China and the People’s Republic of China (ADBI Working Paper Series No. 566). Asian Development Bank Institute.
Liu, P. (2018, July 25). Meet the ‘new wave’ of buyers who could keep Hong Kong’s property market hot. South China Morning Post. https://www.scmp.com/property/hong-kong-china/article/2156680/meet-new-wave-buyers-who-could-keep-hong-kongs-property
Liu, P. (2019). Expect more property cooling measures in Hong Kong ... but don’t expect them to work, says JPMorgan. South China Moring Post. https://www.scmp.com/property/hong-kong-china/article/3011561/hong-kong-government-will-keep-rolling-out-measures-tame
Luo, Y., Nie, J., & Young, E. R. (2013). Model uncertainty, state uncertainty, and state-space models. In Y. Zeng, & S. Wu (Eds.), State-Space models. Statistics and econometrics for finance (Vol. 1, pp. 91–112). Springer.
Maennig, W., & Dust, L. (2008). Shrinking and growing metropolitan areas – asymmetric real estate price reactions? The case of German single family houses. Regional Science and Urban Economics, 38(1), 63–69.
Mankiw, N. G., & Weil, D. N. (1989). The baby boom, the baby bust, and the housing market. Regional Science and Urban Economics, 19(2), 235–258.
Mayer, C. (2011). Housing bubbles: a survey. Annual Review of Economics, 3, 559–577.
Mayer, C., & Shiller, R. J. (2006). Bubble, bubble, where’s the housing bubble? Comments and discussion. Brookings Papers on Economic Activity, 2006(1), 51–67.
McCarthy, J., & Peach, R. (2004). Are home prices the next bubble? FRBNY Economic Policy Review, 10(3), 1–17.
Minsky, H. (1974). The modeling of financial instability: an introduction [Conference presentation]. The Fifth Annual Pittsburgh Conference on Modeling and Simulation. University of Pittsburgh.
Morris, S. (1996). Speculative investor behaviour and learning.
Quarterly Journal of Economics, 111(4), 1111–1133. https://doi.org/10.2307/2946709
Muellbauer, J., & Murphy, A. (1997). Booms and bust in the UK housing market. Economic Journal, 107(445), 1701–1727.
Navaratnarajah, R. (2013, February 27). Luxury home tax unlikely in HK: experts. PropertyGuru Limited. https://www.propertyguru.com.sg/property-management-news/2013/2/46706/ luxury-home-tax-unlikely-in-hk-experts
Ong, S.-E., & Sing, T.-F. (2002). Price discovery between private and public housing markets. Urban Studies, 39(1), 57–67. https://doi.org/10.1080/00420980220099069
O’Rahilly, B. (2015). Hong Kong: What can it teach us about property bubbles? The Irish Times. http://www.irishtimes.com/business/commercial-property/hong-kong-what-can-itteach-us-about-property-bubbles-1.2135582
Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economic Letters, 58(1), 17–29. https://doi.org/10.1016/S0165-1765(97)00214-0
Quigley, J. M., & Raphael, S. (2004). Is housing unaffordable? Why isn’t it more affordable? Journal of Economic Perspectives, 18(1), 191–214. https://doi.org/10.1257/089533004773563494
Saiz, A. (2007). Immigration and housing rents in American cities. Journal of Urban Economics, 61(2), 345–371.
Saiz, A. (2010). The geographic determinants of housing supply.
Quarterly Journal of Economics, 125(3), 1253–1296.
Scheinkman, J., & Xiong, W. (2003). Overconfidence and speculative bubbles. Journal of Political Economy, 111(6), 1183–1219. https://doi.org/10.1086/378531
Schweppe, F. (1965). Evaluation of likelihood functions for Gaussian signals. IEEE Transactions on Information Theory, 11(1), 61–70. https://doi.org/10.1109/TIT.1965.1053737
Shiller, R. J. (2005). Irrational exuberance (2nd ed.). Princeton University Press.
Sinai, T., & Souleles, N. (2005). Owner occupied house as a hedge against rent risk. Quarterly Journal of Economics, 120(2), 763–789. https://doi.org/10.1093/qje/120.2.763
Sing, T.-F., Tsai., I., & Chen, M.-C. (2006). Price dynamics in public and private housing markets in Singapore. Journal of Housing Economics, 15(4), 305–320.
Taiwan Today. (2013, July 28). Taiwan Luxury tax goes above and beyond. http://www.taiwantoday.tw/ct.asp?xItem=207822&CtNode=426
Tirole, J. (1982). On the possibility of speculative under rational expectations. Econometrica, 50(5), 1163–1181. https://doi.org/10.2307/1911868
Tsai, I.-C. (2015). Spillover effect between the regional and the national housing markets in the UK. Regional Studies, 49(12), 1957–1976. https://doi.org/10.1080/00343404.2014.883599
Teng, H.-J., Chang, C.-O., & Chen, M.-C. (2017). Housing bubble contagion from city centre and suburbs. Urban Studies, 54(6), 1463–1481. https://doi.org/10.1177/0042098016631297
Wen, H., & Goodman, A. (2013). Relationship between urban land price and housing price: evidence from 21 provincial capitals in China. Habitat International, 40, 9–17. https://doi.org/10.1016/j.habitatint.2013.01.004
Werner, J. (2018). Speculative bubbles, heterogeneous beliefs, and learning (2018 Meeting Papers No. 1216). Society for Economic Dynamics.
Wong, Y. C. R. (2015). Hong Kong land for Hong Kong people: fixing the failures of our housing policy. Hong Kong University Press.
Xiao, Q., & Tan, G. K. R. (2007). Signal extraction with Kalman filter: a study of the Hong Kong property price bubbles. Urban Studies, 44(4), 865–888. https://doi.org/10.1080/00420980601185650
Yeung, Y.-M., Lee, J., & Kee, G. (2008). Hong Kong and Macao under Chinese sovereignty. Eurasian Geography and Economics, 49(3), 304–325. https://doi.org/10.2747/1539-7220.127.116.114