Academic journal article Journal of Real Estate Literature

International Articles: The Impact of Housing and Financial Wealth on Household Consumption: Evidence from Hong Kong

Academic journal article Journal of Real Estate Literature

International Articles: The Impact of Housing and Financial Wealth on Household Consumption: Evidence from Hong Kong

Article excerpt


Housing is the most important single investment for most individual investors. Thus, the equity of housing capital would have a major psychological impact on the homeowners through a consumption effect. This study explores the wealth effect of housing and stock markets in Hong Kong. Taking into account the factors of money supply and interest rate, the results show that there is a long-term equilibrium relationship between household consumption and the changes in housing wealth. This effect appears to be more significant than that associated with changes in financial wealth.

The Asian Financial Crisis marked the beginning of the prolonged fall of the Hong Kong housing market: from the all time high index set at 100 in the third quarter of 1997, according to the Centaline Housing Index, it dropped to the lowest point of about 33 in the second quarter of 2003, then surged back to around 55 in the fourth quarter of 2004. Concurrent with such a fall in housing price is the drop in the Consumer Price Index. This is the longest ever deflationary period in the post war period of Hong Kong. (This is, however, still less severe than the long deflation experienced by Japan in the 1990s.) It has been argued that while the banking deposit was substantial (about US$500 billion in 2005), the collapse in consumer confidence in the direction of the economy has led to a sharp decrease in private consumption. Falling housing prices likely play a part in the decline in consumer spending. The clearest evidence of a housing market wealth effect should be observed amongst the large set of households that own the majority of housing stock, while the effect for individual households should be modest.

This study attempts to examine how the housing and stock wealth changes affect private consumption behavior in Hong Kong. Wealth creation was one of the dominant themes of the economy in United States in the 1990s (Poterba, 2000). The wealth effect on consumption due to rising house prices has attracted particular attention, leading to wide discussion of whether the Federal Reserve Board should consider housing prices in setting monetary policy. This is particularly important in view of the fact that the Hong Kong interest rate is linked to U.S. interest rate.1 The objective of this study is to examine how private consumption is affected by the slump of the Hong Kong housing market after the Asian Financial Crisis in 1997, where a large number of homeowners suffered from real capital losses. This paper consists of six sections: the first section provides an overview on the Hong Kong housing market; section two gives a brief literature review, section three is about the methodology of the study, section four discusses the data employed in this study, section five concerns the interpretation of results; and section six is the conclusion.

Overview of Hong Kong Housing Market

In studying how housing wealth affects consumption in Hong Kong, it is useful to begin with an overall perspective on the Hong Kong real estate market. Hong Kong is situated on the south-eastern coast of mainland China, adjoining the Shenzhen Special Economic Zone. It has a total population of around 6.9 million (end of year 2005 figure) and a land area of 1,084 square kilometers, covering Hong Kong Island, Kowloon peninsula, and the New Territories, which includes many islands, the largest is Lantau. About 80% of the land in Hong Kong is hilly; development costs are expensive. The remainder of the territory is mainly composed of uneven woodland and scrubland that are unsuitable for development. The built-up area is only around 5% (55 square kilometers) of all land for residential use. As a result, Hong Kong has always relied on reclamation as a source of land supply and high rise development is a norm.

All land in Hong Kong, with the exception of one,2 is held under leasehold with different lease terms that have been granted since the end of the nineteenth century. …

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