The impact of interest rates upon housing prices: an empirical study of Hong Kong's market

Investigates primarily the role of interest rates on housing prices from expectation perspectives. It quantifies the impact of interest rates on price movements from 1981 to 2001 in Hong Kong. The principal finding is that housing prices display a moderately high correlation with interest rates in the deflationary 1998-2001 period. Reduced interest rates are linked to higher housing prices until 1997, thereafter, such inverse relationship appears to be non-existent. The impact of interest rates tends to be significantly positive in the inflationary pre-1997 period. But most of the fall in housing prices since early 1998 can be attributed to low hope-led price expectations. The results indicate that interest rates do not “Granger-cause” housing prices, and that the positive interest rate effect in deflationary periods seems to have been negated by anticipated capital losses.