Hong Kong Stock and Residential Indexes: Back Together Again after a 6 Year Divorce

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

April 2008

Before 1997, it had always been said that Hong Kong stock prices, as reflected by the Hang Seng Index, and Hong Kong real estate prices, in particular the residential sector, went up and down together. Then sometime not long after 1997, when the real estate market went bust amid the Asian Financial Crisis, the two markets appeared to have parted ways. But out of curiosity, what is the ‘marital status’ these two markets are in today? 

Let’s find out. Here we rely on 2 published data sets:

a)     The University of Hong Kong-Real Estate Index Series (HKU-REIS) = http://hkureis.versitech.hku.hk/ 

b)     The Hang Seng Index (HSI) =  http://hk.finance.yahoo.com/q/hp?s=%5EHSI&a=06&b=31&c=1991&d=03&e=12&f=2008&g=m&z=66&y=66 

Both are monthly data series and they run from July 1991 to January 2008: 

In addition, the HKU-REIS contains not only an overall Hong Kong residential index, but also separate ones for Hong Kong Island, Kowloon, and the New Territories, which are the 3 major geographical components in Hong Kong. Simple correlations were performed between these various HKU-REIS residential indexes and the HSI and these are the observations and results: 

1)    From 1991 to 2008: spanning over 18 years (Separated overall) 

Basically, the correlation between the HKU-REIS and HSI is insignificant, i.e. there is little if any relationship between the two in terms of price movements. This applies too when the various HKU-REIS and the HSI are compared, though the HKU-REIS for Hong Kong Island appears to have the most (but still weak or insignificant) correlation among the 4 HKU-REIS indexes.  

2)    From 1991 to 1996: the 1^st 6 years (Marriage) 

Curiously, the correlation between the HKU-REIS and HSI is quite significant during this period, though the HKU-REIS for New Territories appears to have the least (but still strong) correlation among the 4 HKU-REIS indexes.  

3)    From 1997 to 2002: the 2^nd 6 years (Divorce) 

Then they parted ways. Essentially, the HKU-REIS were on a downward spiral while the HSI was down, then up, and then down again. Thus, the correlation between the HKU-REIS and HSI is non-existent.  

4)    From 2003 to 2008: the 3^rd 6 years (Remarriage) 

Miraculously, they were back together again. The HKU-REIS indexes and the HSI are significantly correlated during the period.  

So far so good, but what are the probable implications? Your humble author suggests a few as follows: 

A)     There seems to be a pattern or habit, coincidentally though this may be, of the two markets, stock and real estate, going hand in hand during GOOD times and parting ways during BAD times.

B)     IF so, this may mean little risk reduction is achieved via investing in both (Hong Kong) stock and (residential) real estate i.e. you may feel you have diversified your risk via investing in different asset types (stocks and real estate) but actually you have not during GOOD times. And it does not matter much, from a macro angle, how one allocates one’s investment capital among stock and real estate as similar returns could be made.

C)     Yet, during BAD times, risk reduction is possible via investing in both stock and real estate as the two markets appear to part ways. 

Up to the point of writing this article, the Hong Kong economy is still in relatively GOOD times notwithstanding global concerns for the sub-prime crisis, and the stock and real estate markets appear to be married still i.e. correlation-wise.  

As such, the recent HSI drop from a 30,000+ point to 24,000- point deserves closer monitoring by real estate investors, unless one thinks economic BAD times are imminent OR as mentioned, bets such correlations being entirely coincidental.   

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.                                

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