Concrete Analysis | This indicator has proven to be an accurate gauge for Hong Kong house prices
- Local home prices have been highly correlated with the Hang Seng Index
- Declines in stocks since the second half of last year suggest a significant correction for housing in 2019
In Hong Kong, housing prices are a constant topic in the media, on social networks and among professional pundits.
Yet, when it comes to predicting its future movement, no one seems to be sure who to believe. By August 2018, it had been on rising streak for 28 months. Then there were signs of a correction beginning to emerge. By November, it had dropped 3.6 per cent month on month. But prices still rose 3.9 per cent over the whole 11-month period last year.
One would be forgiven for not knowing what to expect in the next 12 months. Opinions are split even among many professionals. People often seek answers from interest rates, the supply pipeline, new government taxes, the movement of hot money, or various combinations of these factors. But we think given the relative simplicity of our economic system, there has to be a more straightforward indicator to forecast price trends. In this sense, we have conducted a correlation analysis to see which among a host of popular factors impacts our housing prices the most.
We started with government policies. In Hong Kong it is widely believed that the cooling measures in recent years, from the double stamp duty to tightening of mortgage requirements, have virtually no impact on house prices. Our study further reveals that even over the long period of 10 to 20 years, policies have hardly made a dent on the long term price uptrend. Empirical evidence seems to suggest that we can discount policy altogether.
Then we conducted a similar series of tests on the historical movement of interest rates, money flow in the system, inflation, even the housing supply pipeline, to see if they have any bearing on housing price trends. Again, we found there is little or no correlation between their fluctuations and the housing price trend.
So what is going on? Remember, our aim here is to find a simple indicator of price movements for everybody instead of engaging in philosophical debate. Nevertheless, it may show that people in this city believe in one thing and one thing only: that is there is always demand for housing in Hong Kong. That belief alone is enough to counter the influences of mortgage rate hikes, the threat of hot money and the prospect of more future supply. Again, with these variables out of the equation, we are left with no clear-cut tools to forecast the price trends.