Differential Price Changes in the High and Low-End Housing Markets in Hong Kong

This study aims to explain the price gap between high and low-end houses by evaluating four categories of reasons, including nominal influences, real influences, investment demand, and housing supply. The price gap is measured as the logarithm of the ratio of the price indices of Class D&E (large units) and that of small Class A (small units). Since we use price indices rather than actual prices, the price gap can be negative even though Class D&E units are always more expensive than Class A units. The sign of the gap depends on the base period. According to Rating and Valuation Department, both price indices are set to 100 in the year of 1999, so the price gap in the base year 1999 equals 0 by definition. In other periods, a zero price gap means that the prices of Class A and D&E units changed by the same amount since the base period, while a positive price gap means that the price of Class D&E units increased more, or decreased less, than the price of Class A units since the base period. From a financial perspective, the price gap can also be interpreted as a cumulative excess return since the base period ñ the cumulative Class D&E return minus the cumulative Class A return. The price gap will be regressed on these four categories of factors: 1) factors of nominal influences, such as inflation rate; 2) factors of real influences, such as unemployment rate, real wages and numbers of household formation; 3) factors of investment demand, such as mortgage ceiling, performance of alternative investments, stamp duty and property market yields; 4) factors of housing supply, such as supply of high and low-end houses. Quarterly data over the period of 1980:Q1 ñ 2009:Q4 in Hong Kong will be employed.