Share:


The inter-tier spread of housing bubbles: are luxury markets to blame?

    Shew-Huei Kuo   Affiliation
    ; Ming-Te Lee   Affiliation
    ; Ming-Long Lee   Affiliation

Abstract

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

Keyword : housing bubble, housing price, luxury market, spillover, spread

How to Cite
Kuo, S.-H., Lee, M.-T., & Lee, M.-L. (2021). The inter-tier spread of housing bubbles: are luxury markets to blame?. International Journal of Strategic Property Management, 25(2), 115-126. https://doi.org/10.3846/ijspm.2021.14328
Published in Issue
Feb 19, 2021
Abstract Views
300
PDF Downloads
207
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Allen, F., Morris S., & Postlewaite, A. (1993). Finite bubbles with short sale constraints and asymmetric information. Journal of Economic Theory, 61(2), 206–229.
https://doi.org/10.1006/jeth.1993.1067

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.
https://doi.org/10.1111/jmcb.12011

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.
https://doi.org/10.1111/j.1468-5957.2006.00638.x

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.
https://doi.org/10.1016/S0165-1765(01)00478-5

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.
https://doi.org/10.1016/j.ijforecast.2011.02.006

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.
https://doi.org/10.1016/j.ijforecast.2011.02.009

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.
https://doi.org/10.1177/0042098007087341

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.
https://doi.org/10.1111/j.1540-6261.2006.00868.x

Harvey, A. C. (1989). Forecasting, structural time series models and the Kalman filter. Cambridge University Press.
https://doi.org/10.1017/CBO9781107049994

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.
https://doi.org/10.1257/089533005775196769

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.
https://doi.org/10.1007/s11146-006-0335-2

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.
https://doi.org/10.2139/ssrn.2768070

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.
https://doi.org/10.1007/978-1-4614-7789-1_4

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.
https://doi.org/10.1016/j.regsciurbeco.2007.08.009

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.
https://doi.org/10.1016/0166-0462(89)90005-7

Mayer, C. (2011). Housing bubbles: a survey. Annual Review of Economics, 3, 559–577.
https://doi.org/10.1146/annurev.economics.012809.103822

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.
https://doi.org/10.1353/eca.2006.0018

McCarthy, J., & Peach, R. (2004). Are home prices the next bubble? FRBNY Economic Policy Review, 10(3), 1–17.
https://doi.org/10.1115/1.1667529

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.
https://doi.org/10.1111/j.1468-0297.1997.tb00076.x

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.
https://doi.org/10.1016/j.jue.2006.07.004

Saiz, A. (2010). The geographic determinants of housing supply.
Quarterly Journal of Economics, 125(3), 1253–1296.
https://doi.org/10.1162/qjec.2010.125.3.1253

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.
https://doi.org/10.1016/j.jhe.2006.09.006

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.
https://doi.org/10.5790/hongkong/9789888208654.001.0001

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/10.2747/1539-7216.49.3.304