House price overvaluation in Hong Kong : Identifying the market fundamentals and understanding the “Bubble”

Purpose The purpose of this paper is twofold. First, the authors investigate the main drivers of house prices in the Hong Kong housing market. Second, further research is undertaken to confirm the existence of house price overvaluation, which has driven the market into a bubble episode. Design/methodology/approach First, the authors propose a theoretical framework to identify the fundamentals of the market. In the second step, they decompose house prices into fundamentals, frictions and bubble episodes for a better understanding of the evolution of house prices during the period 1996(Q3)-2013(Q3). Findings The results of this paper suggest an eventual possible correction of up to 46 per cent of house prices with respect to their 2013(Q3) level. Originality/value The originality of this paper is to use the procedure developed by Glindro and Delloro (2010) to analyse the Hong Kong housing market. The contribution of this paper also modifies the original Glindro and Delloro’s (2010) approach by including the Christiano and Fitzgerald (2003) filter to decompose house prices.