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Political Uncertainty and the Real Estate Risk Premiums in Hong Kong



This study investigates the effects of political uncertainty associated with the 1997 repossession of Hong Kong by China on the real estate market. Such effect is reflected in the change in the real estate risk premiums. A model is derived to estimate the trend of real estate risk premium for each subsector of the real estate market from observable market data. The results suggest that there was a discrete jump in the risk premiums when the 1997 issue was revealed to the public in 1983, indicating investor concern about the post-1997 future of Hong Kong. The increase in the risk premium is much more obvious in nonresidential real estate than in the residential sector. This is probably due to its dual nature (an investment good as well as a good for self-consumption) and the effects of rent control, which only applies to the residential units. However there is also very strong evidence that investor confidence has been increasing recently, thus leading to a decline in the implied post-1997 risk premium, although the increasing confidence is still not sufficient to bring the risk premium back to pre-1983 levels. If the concern about the repossession of Hong Kong by China turns out to be unnecessary after 1997, a revaluation of the risk premium will take place. This will bring the risk premium level back to the pre-1983 level, assuming no other significant changes have taken place. Other things being equal, such revaluation will result in a one-time discrete increase in property prices. This is in contrast to the common view that investors have already discounted the 1997 Hong Kong/China issue completely.

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  • K.W. Chau, 1997. "Political Uncertainty and the Real Estate Risk Premiums in Hong Kong," Journal of Real Estate Research, American Real Estate Society, vol. 13(3), pages 297-316.
  • Handle: RePEc:jre:issued:v:13:n:3:1997:p:297-316

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    References listed on IDEAS

    1. K. C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 431-452.
    2. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-164, March.
    3. R. Brian Webb & Mike Miles & David Guilkey, 1992. "Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(2), pages 325-357.
    4. Harris, Jack C, 1989. "The Effect of Real Rates of Interest on Housing Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 2(1), pages 47-60, February.
    5. David Geltner, 1989. "Estimating Real Estate's Systematic Risk from Aggregate Level Appraisal-Based Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 463-481.
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    Cited by:

    1. Ivo Wit, 2010. "International Diversification Strategies for Direct Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 433-457, November.
    2. K. Chau & S. Wong & C. Yiu & Maurice Tse & Frederik Pretorius, 2010. "Do Unexpected Land Auction Outcomes Bring New Information to the Real Estate Market?," The Journal of Real Estate Finance and Economics, Springer, vol. 40(4), pages 480-496, May.
    3. K. W. Chau & Lennon H. T. Choy, 2011. "Let the Buyer or Seller Beware: Measuring Lemons in the Housing Market under Different Doctrines of Law Governing Transactions and Information," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 347-365.
    4. Kwan, Yum K. & Leung, Charles Ka Yui & Dong, Jinyue, 2015. "Comparing consumption-based asset pricing models: The case of an Asian city," Journal of Housing Economics, Elsevier, vol. 28(C), pages 18-41.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services


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