Study on Hong Kong housing market efficiency and housing price dynamics model under the condition of boundedly rational expectations

Abstract

Hong Kong housing market is arguably one of the most efficient markets in the world because of its relatively high transaction volume, high transparency, and low transaction cost. However, it has undergone boom-burst cycles and housing prices fluctuate considerably. Smooth changes in housing prices help maintain the stability and prosperity of the Hong Kong economy; on the other hand, sharp and severe changes in housing prices can dramatically influence and damage economic development. This study aims to test the informational efficiency of the Hong Kong housing market and explore the housing price dynamics under the condition of boundedly rational expectations. Firstly, the weak-form efficiency is examined both from the time series properties analysis and a two-stage regression model. The results show that the autocorrelations of housing price and excess returns exist, which suggest the weak-form inefficiency of the Hong Kong housing market. Furthermore, the semi-strong form efficiency is also tested based on an error correction model. The empirical analysis suggests that the housing price does not reflect all information fully and instantaneously. The divergence between the housing price and equilibrium price cannot be corrected immediately. Therefore, the semi-strong form efficiency is rejected for the Hong Kong housing market. The findings provide some evidence on the existence of fundamentalists and technical analysts. This provides insight into housing price movements in Hong Kong and shows possible causes for the housing market inefficiency. This study further computationally explores the housing price dynamics under the condition of boundedly rational expectations. The analysis is based on the Cobweb model with a simple user cost affected demand and a stock-flow supply assumption. The results show that “demand elasticity is less than supply elasticity” is not a necessary condition for the occurrence of oscillation. The housing price dynamics vary substantially with heterogeneous expectations and some other factors including demand elasticity, supply elasticity, supply lag and depreciation. Furthermore, this study is extended by considering the effects of interactions from heterogeneous boundedly rational agents on the housing prices based on an evolutionary system. The results show that the expected price of each group of backward-looking expectations follows the released actual price with some delays. The oscillation of expected price of adaptive expectation is decreased because of the heterogeneity of expectations and variation in the housing market structure. The increase of either supply lag or depreciation rate can increase the instability. As the demand elasticity, supply elasticity, supply lag, and depreciation rate differ across real estate environments, each market behaves uniquely in the event of an interest rate shock, which is meaningful to understand the policies that influence housing price changes.

Date of Award	2 Oct 2008
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Yee Tak Andrew LEUNG (Supervisor)