Hong Kong, China's housing market witnessed dramatic appreciations recently, with the price index for private domestic housing units being 3 times higher than 10 years ago. This trend is supported by both internal and external factors, as illustrated in this paper. By providing a theoretical model and empirical analysis on the key variables influencing housing prices, we find that changes in housing price index reinforce price trends in the long term. Hong Kong, China's dollar quantitative easing, and the gross domestic product of the People's Republic of China (PRC) are positively related to housing prices and negatively to lending. The inability to increase supplies in response to rising demand since 2003 has also much to do with the skyrocketing prices. Moreover, mortgage-to-total loans value is shrinking due to the unaffordability of housing units at current prices. This trend has to be tackled in time, otherwise the PRC may incur severe consequences similar to Japan's experience in the 1990s.

Hong Kong’s housing market witnessed a dramatic housing price appreciation in recent years, with the price index for private domestic housing units being three times higher than ten years ago. This trend is supported by both internal and external factors, as illustrated in this paper. By developing a theoretical model and an empirical analysis on the key variables influencing housing prices using monthly data from 1999 to 2018, we find that the main drivers of housing price appreciation are from the demand side and include income level, money supply and inflation. The main contribution of this study is the quantification of the role of Mainland China’s macroeconomic factors in housing price booms in Hong Kong. Our study shows that capital inflow from and inflation and recessions in Mainland China contribute to increasing housing prices in Hong Kong because the city’s real estate is seen as a way to preserve asset value. These findings call for the need for control of capital inflow between the two economies as well as for stricter regulations against empty houses in Hong Kong.