Does the planning system affect housing prices? Theory and with evidence from Hong Kong

Hong Kong has been faced with property market ups and downs for many reasons over the past 10 years or so. It once experienced shortages of housing supply, leading to prolonged escalating prices. This was followed by a downturn of housing prices since the end of 1997 and in the wake of the financial turmoil in Asia. Hong Kong people have been very concerned with the housing market situation, particularly housing prices, and consider that the problem needs to be addressed to prevent its recurrence in the future. The Hong Kong government uses its land-use planning system to address this "market failure". Also, such a system imposes constraints on land supply and development, through various means by altering the supply of housing land. As a result, the residential property has been affected, and so is the housing price. This paper attempts to explore the impact of the land-use planning system (and land supply) on housing prices in the territory. It starts with the preliminary introduction of the planning system and a review on the previous literature on the impact of land-use planning system on housing prices in Hong Kong. An analytical model is established, followed by the discussion of the empirical findings of the impacts of the land-use regulation on land supply, housing supply and housing prices in the territory. The results in Section 7 show that the planning indicators: (i) the approval rates of planning applications; (ii) the residential floor area under planning applications; and (iii) the area of greenbelt and open space zones, have significant impact on housing prices.