Analysis of discontinuous housing prices

Abstract

This paper studies the relationship of changes in housing demand and changes of lagged supply, in order to analyze discontinuous changes of housing prices using cusp catastrophe model. Lagged supply makes housing price fall due to decreasing in demand for housing. Four phases of housing prices are defined in order to understand the impacts of lagged supply on housing prices. The four phases are the stable, the bubble, the unstable and catastrophe phase, and the recovery phase. Yearly data of private housing price index, take-up and vacant units collected from the Hong Kong government publication have been used to test the model. The analysis suggests that it is important to manage the lagged supply to meet the current demand requirements in order to minimize housing price fluctuation.