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Political Uncertainty and the Real Estate Risk Premiums in Hong Kong

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Abstract

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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    Cited by:

    1. Lawrence W C Lai & Kwong Wing Chau & Daniel C W Ho & Veronica Y Y Lin, 2006. "Impact of Political Incidents, Financial Crises, and Severe Acute Respiratory Syndrome on Hong Kong Property Buyers," Environment and Planning B, , vol. 33(3), pages 413-433, June.
    2. 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.
    3. 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.
    4. Shizhen Wang & David Hartzell, 2021. "Real Estate Return in Hong Kong and its Determinants: A Dynamic Gordon Growth Model Analysis," International Real Estate Review, Global Social Science Institute, vol. 24(1), pages 113-138.
    5. 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.
    6. 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.
    7. Norman Hutchison & Patricia Fraser & Alastair Adair & Rahul Srivatsa, 2012. "Regime shifts in ex post UK commercial property risk premiums," Journal of Property Research, Taylor & Francis Journals, vol. 29(3), pages 247-269, April.
    8. Ling Li & Wayne Xinwei Wan, 2024. "The Effect of Expected Losses on the Hong Kong Property Market," The Journal of Real Estate Finance and Economics, Springer, vol. 68(4), pages 654-683, May.
    9. Helen X. H. Bao & Doris Ka Chuen Mok, 2020. "A Link between East and West: How the Guangzhou-Shenzhen-Hong Kong Express Rail Link Affects Property Prices in Hong Kong," International Real Estate Review, Global Social Science Institute, vol. 23(3), pages 993-1021.
    10. Johnson, Kelsey K. & Parton, Lee & Nolte, Christoph & Williamson, Matt & Nogeire-McRae, Theresa & Paudel, Jayash & Brandt, Jodi, 2023. "Moving to the country: Understanding the effects of Covid-19 on property values and farmland development risk," Journal of Housing Economics, Elsevier, vol. 62(C).

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

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