Measuring Price Differentials Between Large and Small Housing Units: The Case of Hong Kong

In Hong Kong, the private residential property prices have undergone significant changes over the last two decades which can be mainly divided into three phases: the price level grew nearly 105 % between year 1993 and 1997, then followed by a radical decline of 66 % during 1997-2003, and then a fourfold surge since 2003. Over this time span, there was increasing divergence of price changes in the luxury (large units) and mass (small units) residential markets. One possible explanation is that large units are preferred by investors and therefore more sensitive to changes in investment demand, whilst buyers of small units are mostly owner-occupiers and thus mainly affected by changes in consumption demand. As house price appreciation plays an important role in household's decisions of when, where and how "much" house to buy, this study aims to investigate the main factors contributing to the price differentials between large and small housing units. We hypothesize that the changes in price differentials of large and small housing units are primarily caused by changes in investment and consumption demand. We test this hypothesis using empirical data from Hong Kong and find that capital flow and market sentiment have a stronger impact on the prices of large units than that of small units since they can induce more investment demand for housing. Instead, marriage rate, divorce rate, unemployment rate and mortgage ceiling are closely related to the housing consumption demand and are found to affect the prices of small units more.