Fundamentals and Market Sentiment in Housing Market

The primary purpose of this study was to explore the predictive power of sentiment on three market indicators (price, rent and transaction volume) in the housing market. Using an advanced causality analysis called Integrated Renormalized Partial Directed Coherence, the study focuses on the private housing market in Hong Kong during 1993-2012. The findings suggest that sentiment not only is a prominent indicator of price and liquidity (volume), but also provides an indirect linkage between rent and house prices in the short run. Armed with causality results, this paper further examines the effect of sentiment on the long run trend of housing market. The results explore different roles of sentiment in rent and transaction markets: sentiment affects housing price and its lagged term has an important bearing on rent.