Why 'spicy measures' fail to cool down Hong Kong's housing market

Abstract

A notable feature of Hong Kong's current housing market is that despite various restrictive policies on home buyers, housing prices maintain unrelenting increases. This paper explores why the so-called 'spicy measures', a series of stamp duties and charges on non-local and local home buyers, fail to prevent housing price escalations in Hong Kong. Based on granger causality test of monthly data from 2008 to 2016, we unravel this puzzle from two aspects: overflow of liquidity and low interest rate environment. Granger causality test results reveal that the impact of low interest rate is short-termed, while the impact of excess monetary supply is long-lasting. The findings challenge the prevalent view that Hong Kong government has little to do with housing market exuberance, as spicy measures increased the transaction costs of home buyers according to the Coase theorem. The major policy implication is that charging tax may be ineffective to cool down housing prices if market demand is robust. The paper sheds light on understanding the housing price dynamics with varying market demand over time, an academic void not adequately filled in so far.