Shows that there is a Granger causality relationship between house prices and mortgage flows in Hong Kong where there is a deposit‐rate ceiling and linked exchange rate. While the demand for housing units is distorted by mortgage constraint, any changes of housing demand or house prices will have a feedback on mortgage lending, and thus tend to iron out the housing demand to a level consistent with the short‐run availability of financing. The results strongly suggest that house prices in Hong Kong tend to lead the mortgage flows, not vice versa. Sudden unexpected changes in housing demand may not affect aggregate mortgage availability within a short period of time. However, as an increase in housing demand makes more permanent contributions to house prices, the higher housing prices will be increasingly translated into higher mortgage flows in the long run.
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Raymond Y.C. Tse (1996) studied this question.
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