A Tale of Two Cities: Mainland Chinese Buyers in the Hong Kong Housing Market

Abstract

This paper examines the investment behaviours of mainland Chinese buyers in the Hong Kong
housing market. Contrary to the conventional belief that mainland buyers significantly drive up
price, we find that they only account for 3.7% of housing transactions in Hong Kong from 2001
to 2017. And their price premium over locals is only 1.4% on average, although it is 3.5% for
large-sized units and 1.6% for homes in central locations. The premium follows an upward trend
after 2003 and peaks around 2012, when the Buyer’s Stamp Duty policy was introduced to reduce
demand from non-local buyers. We further explore the mechanisms underlying housing premiums
and find robust evidence for a hedging motive. Mainland buyers’ price premiums rise significantly
when China’s economic policy uncertainty increases. Our study sheds lights on the spillover effect
of the economic outlook of capital flow origins on the housing valuations in destination regions.

Keywords: Hong Kong housing price, housing premium, Chinese investors, hedging effect, residential sorting, bargaining power

JEL Classification: R23, O18, F22