Applying the STOPBREAK model proposed by Engle & Smith (1999), this paper examines the long-run equilibrium relationship between house prices and rental prices from the perspective of Hong Kong private domestic units. The previous research based on the real estate economics suggests that house prices should maintain a stable ratio with rental prices over the current cycle. However, an unusual phenomenon in Hong Kong which can’t be explained by former research is that house prices rise much more rapidly than rental prices with a temporary deviation after shocked by structural breaks during the period of 1995-1998. The empirical results show that traditional cointegration test does not find evidence for a long-run equilibrium between them, but the STOPBREAK test, which allows temporary shocks during sample periods, does obtain evidence of their equilibrium relationship. Consequently, the follow-up study testifies and indicates that house prices and rental prices maybe temporarily diverge from each other but would finally converge and return to equilibrium level in the long run. Moreover, we also find unilateral causality from house prices to rental prices with the help of Grangercausality test.
展开▼
