Housing Supply versus Money Supply Effects on Housing Prices

It is an endless debate on the causes of housing price change. Among them, there are two main strands of argument, viz. (1) housing supply and (2) money supply. This article does not discuss about their theoretical justifications, as we have done a lot before (Yiu, 2020). Instead, I am going to update a recent empirical evidence on this debate.

House Supply and House Prices

Taghizadeh-Hesary, Yoshino and Chiu (2019) of ADBI analyze a time series dataset in 1999–2018 of macroeconomic variables and housing prices in Hong Kong, with both housing supply factors and money supply factors. They find that, among others, “housing supply has never been statistically significant; housing supply is not responsible for or affected by, or does it respond to price changes.” (p. 18) Yet, this is only a weak test on the housing supply hypothesis, as an insignificant result does not confirm or reject the hypothesis. Interestingly, even after the suspension/reduction of land sale and subsidized housing construction after the early 2000s (Figure 1), there is still no significant association between housing supply and housing prices. The housing supply is considered “insufficient” as the vacancy rate is rolling down below the natural vacancy rate of 4% (Figure 1).

Figure 1 Completion Quantity and Vacancy Rate of Private Housing, Hong Kong. Source: Rating and Valuation Department (2020)

Money Supply and House Prices

On the contrary, their results confirm the money supply hypothesis in a strong test: “lending interest rate has a negative impact on housing prices in the long run. However, in the short term, it is money supply (M3) that matters.” (p. 17) Money supply and interest rate are the two sides of the same coin, as the authors posit that “money supply reduces the interest rate.” Graphically (Figures 2 and 3), the annual changes of the two time series show a moderate and positive correlation (+37%).

Figure 2 House Price Index YoY and M3 YoY of Hong Kong. Sources: Rating and Valuation Department and Census and Statistics Department
Figure 3 HPIyoy and M3yoy of Hong Kong.

In fact, cutting interest rate is a common tool to increase money supply. It has become a standard monetary policy in crisis management. Certainly, there can be other channels that create money supply without changing interest rate, but as Rahal (2016) finds in his cross-country analysis that “an unconventional monetary policy shock, in the form of an increase of central bank total assets, has an effect not only on house prices but also residential supply and mortgage markets.” (p. 78) It still confirms the money supply hypothesis.

In 2020, in view of the pandemic, there is a global measure of injecting money supply into the markets mainly by cutting interest rates. The result is an immediate global rebounds of house prices. Let’s discuss the experiment next time.


Rahal, C. (2016). Housing markets and unconventional monetary policy. Journal of Housing Economics, 32, 67–80. https://www.sciencedirect.com/science/article/pii/S1051137716300730

Taghizadeh-Hesary, F., Yoshino, N. & Chiu, A. (2019) Internal and External Determinants of Housing Price Booms in Hong Kong, China, ADBI Working Paper Series, №948, May. https://www.adb.org/sites/default/files/publication/503436/adbi-wp948.pdf

Yiu, C.Y. (2020) Why Housing Supply Cannot Dampen Housing Prices, Medium, Oct., 4. https://ecyy.medium.com/why-housing-supply-cannot-dampen-housing-prices-2153f3fc0299

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

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