Housing construction and uncertainties in a high-rise city

In view of the “severe housing unaffordability” issue Hong Kong currently has, it is usually suggested in housing policy debates that the solution lies in the supply of more residential land sites (presumably leading to a higher supply of housing). Nevertheless, when considering the different ways in which land is supplied in Hong Kong and uncertainties in various aspects, how these factors affect developers’ timing of housing development is unclear. This is, thus, the focus of this study, in which short- and long-run effects of these factors on the amount of housing development (in GFA), from 1995:2 to 2016:4, is investigated, using Vector Error Correction Modeling. The findings first challenge the generally-perceived notion concerning land supply, as it only has a minimal positive impact on housing development in the long-run. Yet, the extent to which developers are involved in the land transaction process (i.e. land exchange), due to uncertainties in the negotiations between them and the government, is negatively related to the amount of housing development. Rather, housing development is highly subject to property price movements (both its expected movements and its volatilities). Also, it is found that volatilities in construction cost movements and in interest rate movements play much bigger roles than their respective expected movements in deciding the amount of housing space to be developed, in that developers tend to withhold housing construction when these factors become increasingly uncertain, hence delaying the supply of housing. Some implications on the current housing affordability situations are then discussed.