Wealth effect, credit price effect, and the inter‐relationships between Hong Kong's property market and stock market

Abstract

Purpose

This paper aims to test the short‐ and long‐run interrelationships between Hong Kong's residential property market and stock market, as well as market fundamentals and China‐related factors, between 1990 and 2006.

Design/methodology/approach

The authors observed changes in the relationship between property prices and stock indexes by using Granger causality test, variance decomposition and CUSUM test. In contrast to some other studies, they have, at the same time, identified the break point(s) and variation of relation.

Findings

The findings reveal that the correlation between residential property price and stock index had become weaker over time, even though the trend of residential property price is similar to that of stock index during the sample period. Under such circumstances, it is more likely for investors to reap more benefits through portfolio diversifications.

Research limitations/implications

The credit price effect from the property market to the stock market, as observed between 1990 and 1994, has been replaced by a snowball effect within each of these two markets. In addition, stocks have become a hedge against inflation in the short‐run, while both stocks and real estate investments are utilized as such in the long‐run after 1995. Lastly, it appears that there are signs of interdependence between Hong Kong's stock market and the Chinese economy, whereas contagion might occur between China's economy and Hong Kong's property market.

Originality/value

The paper proffers some insights with regard to both real estate and stocks as investment options, and how closer integration between two regions (or nations) shape the interactions between various markets between them.

Citation

Hui, E.C.M. and Ng, I.M.H. (2012), "Wealth effect, credit price effect, and the inter‐relationships between Hong Kong's property market and stock market", Property Management, Vol. 30 No. 3, pp. 255-273. https://doi.org/10.1108/02637471211233864