Hong Kong’s Housing Crisis from the Lens of Behavioural Economists

Author: Truong Dam Linh Giang

Research Head: Aces Low Ying Xuan


As one of the original Four Asian Tigers, Hong Kong has faced its fair share of turmoil. In 1967, the Hong Kong Leftist riots. In 1997, the Hong Kong handover. Then, the Asian Financial Crisis. As of late, Hong Kong has faced a new crisis: the Housing Crisis.

Despite bearish sentiments following the onslaught of the COVID-19 pandemic and its resulting global recession, home prices increased by 3.3% in 2021. Over the past 12 years, Hong Kong's prices of residential properties have soared by 162% after adjustment for inflation (Delmendo, 2021). Though experts suggest that a housing bubble is forming, residents and international buyers alike are still pouring their money into Hong Kong's housing market (Arestis et al., 2017).

Housing Crisis & Behavioural Economics

The housing crisis in Hong Kong refers to a lack of accessibility to affordable housing. In 2020, the median price of a house in Hong Kong was 20 times the annual median household income (Demographia, 2020). We can further attribute this to excessive demand and limited supply, leading to an acute shortage and high residential prices. During such market disequilibrium, traditional economists may point towards the invisible hand as an exodus. Yet, the perceptions of economic agents can lead to decisions that diverge from what the classic demand-supply model dictates.

The first concept of behavioural economics that explains these divergences is prospect theory. When choosing between different prospects, agents tend to be risk-averse and stick to options that give lower returns but have higher probabilities of occurring.

Secondly, path dependency can explain why economic agents do not switch to more efficient methods of consumption and production. Once a predecessor has decided upon the initial strategy, they might have had to pay large sunk costs. Additionally, the strategy could have become so vastly integrated with other capital or policies that it would be too tedious to change.

Excessive Demand and its Causes

Relative to other means of investment, there has been a rising preference for real estate over stocks. The Hong Kong Dollar has long since been pegged to the US Dollar, thereby maintaining a low borrowing cost which increases accessibility to luxury properties (Kinder, 2021). In addition, major stock indices had fluctuated by more than 20% during the COVID-19 pandemic (Fig. 1.1). There was also a rise in speculative trading seen by the rise of "meme stocks", referring to stocks that skyrocket in price in a short period due to unforeseeable interest on social media sites such as Reddit (Costola et al., 2021). Risk-averse investors have again reverted to commodities with more predictable price changes such as gold and real estate in established gateway cities (PricewaterhouseCoopers, 2021).

We can look back at prospect theory to explain this phenomenon. During the onset of the coronavirus outbreak, investors adopted a myopic view that Hong Kong’s real estate industry would have a higher probability of protecting their wealth than the global stock market. Comparatively, they might assume that it is better to “definitely” earn $50 from investing in real estate than “maybe” earning $100 from investing in stocks. Despite the higher certainty, the performance of Hong Kong’s private housing sector (Fig. 1.2) remains lacklustre to composite indexes such as NASDAQ over 2006 to 2020 (Fig. 1.3).

Fig. 1.1: Change in value during coronavirus outbreak of selected stock market indices worldwide from January 1 to March 18, 2020 from

Fig. 1.2: Average price of private permanent housing flats in Hong Kong from 2006 to 2020, by district from

Fig. 1.3: Annual development of the NASDAQ Composite Index from 2001 to 2021 from

Supply Woes and its Causes

Though the Hong Kong government attributes the housing crisis to excessive demand, it would be naïve for us to cast aside possible supply-side factors. We will now turn our attention to the Hong Kong government and property developers.

The Hong Kong government periodically leases out its land for private and public development under the Land Tenure Program. A minimum price is set for the plot of land based on its government restrictions (such as how the land can be used and the duration of the lease). If the bids do not meet this minimum price, the government will not sell them to the developers (Chiang et al., 2006). In this case, the time taken to build houses increases, worsening the shortage.

With reference to path dependency, the Hong Kong government is hesitant to reduce the land premiums because their government revenue has been dependent on it for a long time (L. H. Li et al., 2016). Between 2016 and 2017, land premiums made up a sizeable amount (22%) of the Hong Kong government’s revenue (Global Institute for Tomorrow, 2017). This fund has been used in many public projects such as the Hong Kong-Zhuhai-Macau Bridge (Zhao, 2017). As the government has largely integrated the premiums into its spending, there is a low incentive for them to change.

Another policy that the government is adamant in keeping around is the Small House Policy which reserves land for indigenous male villagers to build on. In 2019, 5000 hectares of land had been reserved for this project, amounting to 20% of all urban space in Hong Kong (Zhao, 2019). Liberating this space for other public housing projects would best address the current housing shortage. However, the Heung Yee Kuk, a powerful statutory body representing Hong Kong's rural communities, has threatened to request the Mainland government’s help if the law were to be scrapped (Siu, 2021).

Firstly, the likelihood of Beijing getting involved could be high after the passing of the National Security Law in 2020. Additionally, the costs of Beijing’s intervention could outweigh the benefits of clearing the current housing shortage. Hong Kongers have left the island in droves due to the increasing alignment with the Mainland government (Yu, 2021) leading to a massive population decrease and brain drain (Steger et al., 2022). As an economy highly dependent on human capital (Lai & Maclean, 2011), Hong Kong needs to prioritise its residents’ trust in the government. In addition, Hong Kong’s strength as a global financial centre is its economic freedom (Y. W. V. Li, 2018). Increased interference from Beijing signals a lower level of autonomy for the region and hence lower rates of investment. As such, the Hong Kong government would prefer to stick with the status quo instead of scrapping the law.

Policies that the government can implement

While the situation seems dire, the central government's acknowledgement of Hong Kong's housing shortage has been promising. In September 2021, the central government requested real estate tycoons to pour their resources into solving the peninsula's housing shortage (Kwan, 2021). Perhaps this could signal Beijing’s backing of the Hong Kong government in scrapping the Small House Policy instead of supporting the Heung Yee Kuk. This development could lead to an increased supply of land available for building properties.

Yet, liberating this land from the Small House Policy without changes to the Land Tenure Program would not yield any effects. Therefore, the Hong Kong government should lower the housing premiums too. As mentioned, China’s backing could indicate financial aid to make up for the lost government revenue. However, this move would be highly unpopular and unlikely as the government would not want to give up this revenue stream during a recession. The COVID bill to aid business owners and households has put tremendous strain on Hong Kong's budget. In 2020, Hong Kong experienced a budget deficit of 12% of its total GDP (Fig. 2.1.). It also does not know for certain if China would be willing to come to its aid.

Fig 2.1: Government Budget in Hong Kong decreased to -12 percent of GDP in 2020 from -1.30 percent of GDP in 2019 from


The housing crisis in Hong Kong comprises two factors: excessive demand and crippling supply of affordable houses. Firstly, risk-averse investors see Hong Kong’s properties as relatively stable and valuable investments. There is also a lack of public properties for rent. On the other hand, the government seems to have vested interests in keeping land scarce and land prices artificially high. As noted, Beijing has taken an interest in the housing shortage. Whether there can be resolution could depend on whether Beijing genuinely prioritises the well-being of Hongkongers, or whether this is a political ploy to win over the distrustful residents.


Arestis, P., Gonzalez-Martinez, A. R., & Jia, L. K. (2017). House price overvaluation in Hong Kong. International Journal of Housing Markets and Analysis, 10(2), 282–304.

Chiang, Y., Joinkey So, C., & Stanley Yeung, C. (2006). Real option premium in Hong Kong land prices. Journal of Property Investment & Finance, 24(3), 239–258.

Chiu, R. L. H. (2006). Planning, Land and Affordable Housing in Hong Kong. Housing Studies, 22(1), 63–81.

Costola, M., Iacopini, M., & Santagiustina, C. R. M. A. (2021). On the “mementum” of Meme Stocks. SSRN Electronic Journal.

Delmendo, L. C. (2021, February 20). Hong Kong’s property market stabilizing. Global Property Guide. Retrieved February 18, 2022, from’s%20residential%20property%20price,minuscule%200.66%25%20y%2Do%2Dy%20in%202020

Demographia. (2020, January 20). 16th Annual Demographia International Housing Affordability Survey [Press release].

Global Institute for Tomorrow. (2017, September 1). Housing Affordability for the Next Generation [Press release].

Global Property Guide. (2021, February 20). Hong Kong’s property market stabilizing. Retrieved February 18, 2022, from’s%20residential%20property%20price,minuscule%200.66%25%20y%2Do%2Dy%20in%202020.

Hong Kong Housing Authority. (August 31, 2021). Average price of private permanent housing flats in Hong Kong from 2006 to 2020, by district (Hong Kong dollars per square meter) [Graph]. In Statista. Retrieved March 03, 2022, from

Il Sole 24 Ore. (March 18, 2020). Change in value during coronavirus outbreak of selected stock market indices worldwide from January 1 to March 18, 2020 [Graph]. Statista. Retrieved March 01, 2022, from

Kinder, T. (2021, December 30). In Hong Kong, property prices remain sky-high, despite the challenges. CNA Luxury.

Kwan, S. (2021, December 21). Hong Kong’s Property Tycoons Sacrifice Profit to Appease Beijing. BloombergQuint.

Lai, A., & Maclean, R. (2011). Managing human capital in world cities: the development of Hong Kong into an education hub. Asia Pacific Journal of Education, 31(3), 249–262.

Li, L. H., Wong, S. K. K., & Cheung, K. S. (2016). Land supply and housing prices in Hong Kong: The political economy of urban land policy. Environment and Planning C: Government and Policy, 34(5), 981–998.

Li, Y. W. V. (2018). Hong Kong in China’s Financial Globalization. Asian Survey, 58(3), 439–463.

PricewaterhouseCoopers. (2021, October 14). Emerging Trends in Real Estate® Asia Pacific 2022 [Press release].

Siu, J. (2021, October 11). Hong Kong’s law does not protect exclusive right of male villagers to build homes, say lawyers for ‘king of. . . South China Morning Post.

Steger, I., Wee, D., Wong, K., & Saito, Y. (2022, January 11). Hong Kong’s Brain Drain Worsens as Expats, Locals Flee City. Bloomberg. Retrieved March 3, 2022, from

Trading Economics. (n.d.) Government Budget in Hong Kong decreased to -12 percent of GDP in 2020 from -1.30 percent of GDP in 2019 [Graph]. Trading Economics. Retrieved 1 Mar, 2022, from

Yahoo. (January 14, 2022). Annual development of the NASDAQ Composite Index from 2001 to 2021 [Graph]. In Statista. Retrieved March 03, 2022, from

Yu, T. (2021, July 14). Hong Kong exodus gathers pace as thousands vote with their feet. The Washington Post. Retrieved March 3, 2022, from

Zhao, S. (2017, April 19). Does Hong Kong’s land sale system need a new lease of life? South China Morning Post. Retrieved March 4, 2022, from

Zhao, S. (2019, May 1). The battle over Hong Kong’s controversial small-house policy is not finished. South China Morning Post.

1 view0 comments

Recent Posts

See All