“The Anatomy of a Housing Bubble” by Grace WONG
University of Pennsylvania
The Hong Kong residential housing market index (CentaCity Index) experienced a real increase of 50 percent from 1995 to 1997, followed by a real decrease of 57 percent from 1997 to 2002. Using a panel data set of over 200 large-scale housing complexes (estates), increases in transaction volume and considerable cross-sectional variation in the size of price upswings are documented. Movements in fundamentals cannot fully justify the dramatic price upswing, the changes in turnover rate or the crosssectional variation. The non-fundamental price component is explored. Evidence consistent with overconfidence-generated speculation is provided, based on the model in Scheinkman & Xiong (2003), which predicts both a cross-sectional variation in the speculative price component, and co-movements in turnover rates.