Market Sentiment and High-Rise Housing Prices in Hong Kong

Abstract

Classical finance theories fall short of explaining volatile housing prices in Hong Kong. Employing principal component analysis (PCA) and factor analysis, this study constructs a unique Sentiment Index that integrates 11 market variables tailored to Hong Kong’s high-rise residential properties. Covering 2002Q1 to 2021Q2, including pivotal events such as the SARS epidemic, the Global Financial Crisis, stock downturns, political instability, and Covid-19, our analysis reveals the significant predictive capability of the Sentiment Index for property prices. A discernible relationship exists between housing prices and the Sentiment Index. While policies addressing smaller-sized flats (HPI40) should focus on demand-supply imbalances, those for larger apartments (HPI100 and HPI160) must consider speculative investments. An adaptive policy response with periodic assessments and measures responsive to market conditions, economic shifts, and geopolitical events is imperative for the robust and stable development of Hong Kong's housing market.