Liquidity and Price Differentials: Evidence in the Hong Kong Residential Re-sale Market

Transaction data suggest the existence of a price differential between large-scale estates and single-block buildings. This paper attempts to explain why such a price differential may exist even in the long-term equilibrium position due to better quality of the structural attributes and the premium that home buyers are willing to pay for the additional liquidity of large-scale estates. Empirical results suggest a 15 per cent premium for better quality of structural attributes in the large-scale estates and the premium for liquidity accounts for more than one-third of the price differential. The market takes approximately four months to correct for equilibrium error, which might easily be shortened by the government agency with the use of an on-line registration system and hence market efficiency can be improved.