House price overvaluation in Hong Kong: Identifying the market fundamentals and understanding the “Bubble”

Abstract

Purpose

The purpose of this paper is twofold. First, the authors investigate the main drivers of house prices in the Hong Kong housing market. Second, further research is undertaken to confirm the existence of house price overvaluation, which has driven the market into a bubble episode.

Design/methodology/approach

First, the authors propose a theoretical framework to identify the fundamentals of the market. In the second step, they decompose house prices into fundamentals, frictions and bubble episodes for a better understanding of the evolution of house prices during the period 1996(Q3)-2013(Q3).

Findings

The results of this paper suggest an eventual possible correction of up to 46 per cent of house prices with respect to their 2013(Q3) level.

Originality/value

The originality of this paper is to use the procedure developed by Glindro and Delloro (2010) to analyse the Hong Kong housing market. The contribution of this paper also modifies the original Glindro and Delloro’s (2010) approach by including the Christiano and Fitzgerald (2003) filter to decompose house prices.

Citation

Arestis, P., Gonzalez-Martinez, A.R. and Jia, L.-k. (2017), "House price overvaluation in Hong Kong: Identifying the market fundamentals and understanding the “Bubble”", International Journal of Housing Markets and Analysis, Vol. 10 No. 2, pp. 282-304. https://doi.org/10.1108/IJHMA-01-2016-0003