This paper finds evidence that a public housing privatization program produced adverse effects on housing transactions and the economy in Hong Kong. A Granger causality test shows that house prices drive housing transactions, lending support to the hypothesis that an increase or decrease in prices at the lower end of the market sends ripple effects throughout the whole market. A scheme announced in December 1997, offering tenants an opportunity to buy their units at deeply discounted prices, reduced public housing tenants’ bids for private homes and thus the equity of homeowners. The hypothesis is supported by evidence indicating a structural break in the housing price relationship at the time the privatization program is introduced. Declines in housing prices further eroded employment and set off a vicious circle.