Early Warning Signal in the Hong Kong Property Market Cycle

This paper develops an early warning system for the Hong Kong residential property market by combining price, transaction, and gap divergence sentiment indicators within a discrete-choice econometric framework. Using official Rating and Valuation (RVD) property market data and a sentiment-based leading index recently introduced by the Hong Kong Monetary Authority (HKMA), the study first highlights stylized facts about the co-movement of prices and transaction volumes over the past decade. It then specifies a logit-type model to estimate the probability that the market is in a "pre-turning-point" state, adapting international housing-bubble early warning system methodologies to Hong Kong’s context. The empirical results indicate that sharp increases in transaction volumes and the divergence between primary and secondary market prices significantly raise the likelihood of entering a boom or bust cycle within four to six quarters. This paper concludes that including private property price gap divergence between the primary and secondary markets, along with volume indicators, in macroprudential surveillance can significantly improve the timeliness and accuracy of early warnings for Hong Kong’s property market cycle.