An empirical study of the impact of income uncertainty on private residential property markets in Singapore and Hong Kong

Although many studies have found that unemployment has a negative effect on housing prices, the explanation put forward for this effect, that is, uncertainty over the ability to repay longterm mortgage loans, has not been empirically tested. This paper attempts to empirically test this explanation using a cross-city analysis. Singapore and Hong Kong have been chosen because they are both compact cities and are similar in many aspects. The exception is that Singapore has an established system of home financing from the Central Provident Fund, thereby enhancing greater certainty over the ability to repay long-term mortgage loans. Macro-economic factors, including unemployment rate, were analysed from 1993Q1 to 2003Q4 for Singapore and from 1985Q1 to 200OQ4 for Hong Kong. The results show that, unlike Hong Kong, Singapore's rate of unemployment has no statistical significant effect on housing prices. This study has confirmed the financial constraints hypothesis in the permanent income hypothesis study.