Policy-Driven Housing Cycle : The Hong Kong Case of Supply Intervention

This paper builds on the literature that shows policy often plays a key role in housing cycles. Using the cointegration approach which focuses on the supply and demand dynamics of the housing market, and with explicit consideration of housing price expectations proxied by the price-earning ratio in financial markets, this paper identifies two cointegrating relations: a long run demand-side relation that involves housing property price, interest rate, price expectation and income; and a supply-side relation that involves private housing completion, property price, interest rate, and building and land costs. Based on Hong Kong data from 1990 – 2012, which covers big cycles in the housing market, this paper suggests that policies to augment or restrain housing supply in the attempt to stabilize housing prices have been counterproductive.