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What causes housing price in Hong Kong unaffordable? An Empirical Study on the Negative Real Interest Rate Hypothesis

Edward C.Y. Yiu

There are mainly two hypotheses explaining why housing price in Hong Kong, namely, (1) insufficient supply and (2) negative real interest rate. It has been empirically found that the cause of the previous housing price peak in 1997 was negative real interest rate in the 1990s. The housing price plummeted when the real interest rate became positive. Then, the real interest rate of Hong Kong has dived into negative zone again since 2008. The record-breaking housing price upsurge matches well with the negative real interest rate hypothesis.

Macau, another Special Administrative Region of China, also adopts a currency board arrangement, and its housing price has become highly unaffordable, even though a much larger number of housing units have been supplied than that in Hong Kong. Since both cities adopt similar anti-speculative measures and with very similar demographic and socio-economic environment, a comparison study between Hong Kong and Macau will shed light on the causes of high housing price. In order to control the effects of other factors, a difference-in-difference method is to be employed for the study.

Real Interest Rate v. Housing Price Index yoy of Hong Kong