Modelling Price Dynamics in the Hong Kong Property Market

Abstract

The property market in Hong Kong plays an important role in the political, social and economic life of this vibrant city. Understanding the dynamics of the market is essential to guide government policy making and investment decisions. Using data collected between 1993 and 2006, this study investigates the monthly returns, volatilities, and time-varying correlations in the residential, office, and retail property markets in Hong Kong. A vector autoregressive (VAR) model is used to examine the conditional mean, and a multivariate generalized autoregressive conditional heteroscedasticity (MGARCH) model is adopted to analyze the conditional variance. The dynamic conditional correlation (DCC) approach is utilized to specify the MGARCH model. All of the property types show strong auto-and cross-correlations, which indicates that the sectors relate to each other closely. All three sectors have higher volatilities when major political and economic events occur. The findings reveal the possibility of balancing investment portfolios between the three sectors in the Hong Kong property market. However, exposure to the residential sector may reduce the chance of investment diversification because of the higher correlation of this sector with the other property sectors.

International Real Estate Review

“…First, to the best of our knowledge, this is the first paper that takes into account, the unique features of the Hong Kong property market (e.g., multiple units sharing the same floorplan and multiple replicas of the same building in an estate) using a hierarchical Bayesian model. In this respect, this paper is similar in spirit to other methodological papers, such as Bao and Wan (2004), and Zhou and Bao (2007), which developed and applied advanced statistical methods to model the Hong Kong residential real estate market. Second, given that our data collection period (February 2008to February 2009 coincides with the peak of the global subprime crisis, our model parameters provide a complementary insight (in additional to conventional median-price trend analysis) on the effect of the global financial turmoil on Hong Kong real estate prices.…”

Regional and global contagion in real estate investment trusts

“…Lastly, a number of papers also find relatively low correlations between investments in REITs and shares (Chen and Peiser, 1999; Hartzell et al , 1999; Clayton and MacKinnon, 2001), which from a multi‐asset class portfolio viewpoint is desirable. More recently, these correlations have, however, been found to be more significant or increasing over time (Glascock et al , 2002; Cotter and Stevenson, 2006; Zhou and Bao, 2007; Rong and Trück, 2010; Yang et al , 2012; Case et al , 2012; Liu et al , 2012) suggesting a diminishing diversification potential of REITS in multi‐asset portfolios.…”