Evidence of Government Interventions Hindering Market Efficiency — a Case in HK Housing Market

Since 2010, Hong Kong Government has imposed several rounds of stamp duty levy, but housing price keeps on going up. Figure 1 shows the housing price index indicating that all the stamp duty measures could not stop housing price going up. Figure 2 also shows the dates and details of the 4 rounds of new stamp duties on housing transactions.

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Figure 1 Housing Price Index and the Month/Year of the Implementation of the New Stamp Duties. Source: RVD
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Figure 2 Dates and Details of the Stamp Duty Measures Since 2010. Source: SCMP (2018)

The market response is as expected that the number of housing transactions sharply declined, but housing price keeps on going up. It provides a good chance to test the impact of government interventions on the positive relationship between housing price and trading volume.

The positive relationship between market price and trading volume has been well established in many investment markets, including the housing market. There are at least 4 theories explaining the relationship, including Wheaton(1990)Supply-reduction Model, Stein(1995)Credit-constraint Model, Berkovec and Goodman(1996)Search Model, and Genesove and Mayer(1997)Loss-aversion Model. For a more detailed review of these 4 theories, please refer to Yiu (2018).

However, all these theories and empirical studies rely on a free market with little government interventions, and there have been very few studies on the impact of government interventions on market efficiency measured by the strength of correlation between market price and trading volume. This article is an initial attempt.

Figure 3a shows a very clear breakpoint that the secondary market trading volume TV2 (Red Curve) drops substantially after 2011, and the downward trend is continuous, in line with the 4 rounds of measures. Yet, the yoy change of the market transaction price (TPyoy) remains its stationary cyclical pattern (Orange Curve). This casual observation justifies an empirical test on the cause of the weakening of the link between the two.

Furthermore, Figure 3b shows the declining trend of the 7-year rolling window correlation coefficient between TV2 and TPyoy. The correlation coefficient dropped below 50% since 2011 and has been decreasing to just 5.9% in 2017, which can be regarded as a total de-link between price and volume.

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Figure 3a Trading Volume of Secondary Housing Market TV2 and yoy change of Transaction Price of Housing TPyoy in Hong Kong, 2003–2018. Source: Rating and Valuation Department and Land Registry, HKSAR. Figure 3b is the correlation coefficients of 7-year rolling window of TV2 and TPyoy, 2009–2018.

With a heavy 15% stamp duty for purchasing and selling housing units in Hong Kong, sellers are more reluctant to sell for less than 15% profit, its effect is an immediate reduction of housing supply. Even at the time of price plummeting, because of the SSD penalty, owners would also have to defer their selling decisions (reinforcing the loss-aversion prediction of the Prospect Theory).

With such a small number of transactions, the market price discovery process would be severely distorted. The construction of the price index would also be subject to a much higher error and thus higher volatility. Investors may be misled by the erroneous price information and make wrong decisions.

It may explain why in June 2019 when the number of transactions dropped by 40%, but the housing price index was reported to be breaking the record by upsurging to 190!

[A Chinese version was published in Yiu (2019)]


Berkovec, J. and Goodman, J. (1996) Turnover as a Measure of Demand for Existing Homes, Real Estate Economics, 24, 421–440.

Genesove, D. and Mayer, C. (2001) Loss Aversion and Seller Behavior: Evidence from the Housing Market, NBER Working Paper №8143. https://www.nber.org/papers/w8143

SCMP (2018) Homebuyers paid Hong Kong government HK$133 billion in tax over past eight years, and stamp duty is here to stay minister says, Nov 22. https://www.scmp.com/news/hong-kong/hong-kong-economy/article/2174412/homebuyers-paid-hong-kong-government-hk133-billion

Stein, J. (1995) Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects. Quarterly Journal of Economics 110, 379–405.

Wheaton, W. (1990) Vacancy, search, and prices in a housing market matching model,” The Journal of Political Economy, 98(6), 1270–1292.

Yiu, C.Y. (2018) Delink between Trading Volume and Transaction Price of Housing in Hong Kong, Medium Dec 17. https://medium.com/@edwardyiu/delink-between-trading-volume-and-transaction-price-of-housing-in-hong-kong-4240259d8eb5

Yiu, C.Y. (2019) 辣招打破供求律,成交跌,價反飊。HKEJ Feb. 74-77. [Chinese]

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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