Professor Tse-Chun Lin and Professor Shengwei Guo

13 May 2026

Data from Hong Kong’s Land Registry shows an approximately 18% year-on-year surge in overall transaction volume of residential units in 2025, with the upward trend continuing into the first two months of 2026. The official price index has risen for eight consecutive months, recording a cumulative increase of more than 10%. Market consensus has gradually shifted from “when the market will bottom out” to “how far moderate expansion can go”.

How has the local housing market evolved over the past few years to reach this point?

From population outflow to a supply peak

The post-2020 adjustment in Hong Kong’s housing market can be divided into two stages. First, from 2020 to 2022, the market was dominated by population outflow and impact from external factors. A rare net population loss of 190,000 was recorded, including many middle-class households that sold their properties before leaving. This weakened market purchasing power while bringing a large amount of listings onto the market within a short period, leading to a sharp downward adjustment in prices.

Second, from 2022 to early 2025, the adjustment shifted from population-driven demand contraction to one dominated by supply and inventory absorption. With the gradual completion of construction projects delayed during the COVID-19 pandemic, private sector flat production in 2024 climbed to a record high over the past two decades. The stock of unsold completed first-hand units approached a historical high of close to 30,000 units in early 2025. At this stage, amid a lagging recovery in demand, prices continued to lack rebound momentum.

Analysing the housing-market adjustment in these two stages through the lens of behavioural finance shows that the memories of losses formed by market participants after prolonged negative shocks directly affects their subjective assessment of risk during the recovery phase.

The window for a housing-market recovery

The market turning point in 2025 can be attributed to three main factors. First, the supply peak was progressively absorbed. The stock of unsold completed first-hand units fell from around 28,000 units in early 2025 to 18,400 units at year-end. Private housing completions also moved into a relatively stable range, averaging about 15,000 units annually from 2025 onwards, indicating that the downward pressure on prices was no longer strengthening.

Second, the interest-rate environment has entered a more favourable phase. In mid-March 2026, one- to six-month Hong Kong Interbank Offered Rates remained in the range of 2.1% to 2.6%, clearly below the highs seen in 2023 and 2024. Given current rental yields of approximately 2.5% to 3.5% and reasonable expectations for rental growth, the gap between holding costs and rental income has narrowed significantly. In some housing estates, monthly mortgage repayments have even dropped below rents.

Third, newly arrived talent is entering a favourable period for home purchases. Since the launch of the Top Talent Pass Scheme (TTPS) at the end of 2022, around 270,000 professionals and their family members have come to Hong Kong. While they mainly rented at first, these newcomers began to transition from renting to buying in 2025. With stable cash flows and lower sensitivity to short-term interest-rate fluctuations, their home-buying decisions tend to depend on the ratio between current rents and mortgage repayments, injecting a new source of high-quality incremental purchasing power into the market.

The factors above have not only expanded aggregate demand, but also reshaped the psychological and behavioural benchmarks of market participants. Existing local buyers are still influenced by their experience of past market corrections, while newly arrived buyers assess asset values from an entirely fresh perspective.

Loss aversion and reference dependence

The housing-market correction from 2020 to early 2025 established multiple negative reference points for existing local buyers. For those who entered the market at the highs between 2018 and 2021, the subsequent decline in property prices, together with the dual pressures of soaring monthly mortgage payments and tighter liquidity, left deep-seated memories of losses.

These memories interact with reference-dependent mechanisms to generate dynamic behavioural effects. In assessing asset values, most people tend to rely on concrete psychological anchors, such as their own historical purchase prices or the level regarded by market consensus as a reasonable property value. During the current recovery, despite the Centa-City Leading Index’s more than 10% rebound from its low, buyers who previously missed the market trough or incurred losses after buying at the peak may still view prices below 2021 levels as “still in recovery” rather than “beginning a new cycle”. Conversely, when prices approach or surpass their personal psychological anchors, they may be more prone to a fear-of-missing-out impulse.

Loss aversion, on the one hand, delays selling by highly leveraged holders and, on the other hand, prompts those on the sidelines to purchase more quickly once prices stabilize. Reference dependence also explains why different housing estates recover at different speeds: small- and medium-sized new developments anchored to recent lows are more likely to attract first-time homebuyers, while local buyers in traditional luxury districts may still be comparing prices with the highs of several years ago, resulting in a stronger wait-and-see stance.

How new arrivals dislodge old psychological anchors

For the vast majority of local families, the market peak of 2021 to 2022 remains an important reference point. By contrast, new arrivals to Hong Kong do not carry the baggage of the property market’s ups and downs from 2021 to early 2025. Their decisions are mostly based on observable variables, such as the comparison between rent and mortgage payments, job stability, and family planning needs, rather than retrospective anchoring to historical prices.

From a behavioural-finance perspective, this is tantamount to an external reset of the market’s existing collective reference point. When participants with heterogeneous reference points are present in the market, overall price dynamics tend to diverge. Incumbent participants are constrained by memories of losses and respond with a lag, whereas new participants, relying on independent anchors, become first movers in valuation and trading.

Such behavioural divergence is borne out by market data. In 2025, registrations of first- and second-hand residential properties purchased by Mainland buyers reached 13,906 transactions, involving HK$137.9 billion, with both the number of registrations and transaction value hitting record highs. In emerging districts (e.g. Kai Tak), Mainland buyers accounted for over 50% of purchasers in some developments, predominantly in new projects with small- to medium-sized units. By contrast, traditional luxury districts and the secondary market for relatively new properties remained dominated by local buyers and recovered more slowly. Such K-shaped divergence in prices and transaction activity reflects the structural differences in mental accounting and risk preferences across different groups.

Narrative power and future risks

Furthermore, the behaviour of market participants is profoundly shaped by macro-narratives and the information environment. When mainstream media focus on positive messages such as “eight consecutive months of price gains”, the market receives uniformly optimistic signals, which can easily trigger confirmation bias. Some buyers have already leaned towards the belief that “Hong Kong housing prices still have room to rise in the long term” and the continued rebound in prices has further reinforced this conviction. However, issues such as the Government’s planned housing supply target of 420,000 units over the next decade and whether net population inflows will continue are rarely discussed in day-to-day market conversations.

From a quantitative perspective, in the first quarter of 2026, the media sentiment index and online property-market search volume showed a simultaneous upward trend, with their correlation over time with transaction registrations significantly stronger than that of changes in interest rates or macroeconomic data over the same period. If improving fundamentals are combined with a positive narrative, short-term price momentum tends to be amplified. Confirmation bias not only speeds up new participants’ market entry, but may also blunt local buyers’ sensitivity to supply and demographic risks.

It is worth noting that structural changes are not risk-free. Take the TTPS, for example. As of the end of 2025, the renewal application rate among the first batch of visa holders with expired visas was approximately 53%. Should the external environment or local conditions deteriorate, some professionals may choose to leave Hong Kong, leading to a repeat of the population outflow and selling pressure seen in 2020. In that case, market reactions may depend heavily on behavioural framing: investors could again be driven by the availability heuristic, overgeneralizing from isolated renewal figures or individual departure cases, thereby triggering a new round of sentiment overshooting.

Dual validation from fundamentals and perception

The recovery of Hong Kong’s housing market hinges on two key questions: What changes have unfolded in the fundamentals? How do market participants perceive and respond to them?

When supply and demand improve, demographic replacement and policy support broadly align—as observed in 2025 and the first half of 2026—price and transaction trends persist and accelerate. When perceptions lag, e.g. as memories of losses fade, or when narratives become detached from the data, a turning point is often already brewing in micro-level behaviour.

The current structural recovery of the local housing market is jointly driven by fundamental repair, including supply absorption, falling interest rates, and talent inflows, and behavioural adjustments, featuring fading memories of losses, the resetting of mental accounts, and stronger market narratives. A positive environment provides upward momentum while behavioural inertia shapes the path and pace of the recovery. Over the next few quarters, the key will be to assess the persistence of these two forces: Can demographic replacement continue? Is the narrative consistent with the facts? Has a new equilibrium quietly formed between data and perception? The answers to these questions will determine whether the recovery can sustain or whether it will once again face structural challenges.