Spatial spillover effects of housing prices: An empirical study of Hong Kong

Abstract

While spillover effects of prices in general, such as those of stock market, have been studied intensively in mainstream economic literature, the same can not be said for housing prices. In this paper, we examine the spatial interactions of different property classes with respect to their prices. In particular, we hypothesize that high (low) housing prices will spatially “flow” to low (high) housing prices. Following Can (1992), several spatiotemporal autoregressive hedonic pricing models that incorporate (i) neighborhood effects, (ii) adjacency effects, and (iii) the process of comparable sales are constructed to empirically test the above hypothesis. With a sample of over 100,000 market-wide transaction data over a period of 10 years of Hong Kong, we find substantial evidence that spatial spillover effects exist among housing prices. More specifically, spatial spillover effects are on average three to five times more pronounced among same-class properties than among different classes. However, the effects are severely depressed once price volatility is taken into consideration. Our findings are of direct importance to the practice of valuation as well as theoretically relevant to the on-going debate over the validity of market segmentation hypothesis.