Does liquidity affect housing market performance? An empirical study with spatial panel approach

This paper investigates the spatial effects of liquidity factors on housing market performance. We adopt the spatial panel approach to address spatial dependency and the spillover effect among neighboring housing estates. Using a special transaction database from the Economic Property Research Centre (EPRC), the results show that a higher housing liquidity level leads to a lower subsequent housing return, while the contemporary return increases with unexpected liquidity shock. Specifically, a 1% rise in the housing liquidity level leads to a 1.85% fall in the expected housing return in the following year, and a 1% unexpected liquidity shock would raise the contemporary housing return by 3.33%. Moreover, the results reveal strong spatial spillover effects of liquidity shocks in the Hong Kong housing market. This paper delivers useful implications for both policy makers and practitioners regarding spatial dependency and contagion among housing markets. The research framework and spatial approaches can be easily replicated and applied to other cities and regions.