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Property finance and investment in Asia
Edited by Eddie Chi Man Hui
1 Introduction
The negative relationship between real interest rate and housing return has long been established theoretically since [8] Fisher (1930). However, there have been very few studies on negative real interest rate, let alone its effects on housing bubble implosion. The reason why there are so few empirical studies is probably because negative real interest rate is very rare in any parts of the world at any time of the history. Theoretically, negative real interest rate is considered abnormal, as it renders Gordon growth model and [2] Campbell and Shiller's (1988) dividend-ratio model inoperable. In general, monetary policy is to smooth economic fluctuations, thus it often results in a general converging trend between nominal interest rate and inflation rate. However, under the currency board (linked exchange rate at US$1=HK$7.8) system implemented in Hong Kong since October 1983, nominal interest rates in Hong Kong are exogenously determined by the US interest rates[1] . As a consequence, unlike most of the other economies, negative real interest rates have been commonly found in Hong Kong in the past 25 years[2] . Probably, it is the only city which has such a high proportion of negative real interest rate period, and encountered two large-scale housing bubble implosions within a 10-year horizon. It therefore enables the first empirical study on the impact of negative interest rate on housing return.
Yet, if that is the case, then this study would be very limited in its implications, and of no generalized insights for global markets. However, with the prevalence of fiat money and bank money in recent decades, together with the globalization of funds and shadow banking system (to be explained in the literature review section), negative real interest rate has no longer been an abnormal situation, and it is expected to be more common in the future. For example, the recent sub-prime crisis is also found to be coincided with a period of negative real interest rate in the USA ([31] Yiu et al. , 2009). Unfortunately, there are extremely few studies on the impacts of negative real interest rate on asset pricing, and the international markets have little experience on this phenomenon.
This paper thus attempts to...