Abstract—This study aims to investigate the cointegration and causality relationships between gross domestic product and property price in Hong Kong from 1980 to 2017. In contrast to other studies, the cointegration test used is the autoregressive distributed lagged (ARDL) cointegration (bounds testing) approach of Pesaran that based on the estimation of an unrestricted error correction model (UECM) and the causality test is based on non- causality test of Granger. The selection of Pesaran cointegration approaches instead of Johansen approaches address the problem of how to use a relatively small sample data to estimate the long-term relationship and the direction of causality between gross domestic product and property price that faced by many researchers in estimating the cointegrating relationships between gross domestic product and property price. The results of ARDL cointegration tests running from gross domestic product to residential and office property markets and vice versa provide strong evidence to support the hypothesis that the gross domestic product and residential and office properties are cointegrated. The results of Granger non causality test support to the view of wealth and collateral effect that property price has an important causal affect to economic growth in Hong Kong. The empirical results from cointegration and causality tests suggest that the economic growth are better predicted by including the lagged difference values of residential and office property price. Index Terms—Cointegration approach, Granger non- causality test, economic growth, property price, wealth Effect, collateral effect. I. INTRODUCTION The causal relationships between property prices and economic growth has long been the subject of substantial debate in both the academic and practitioner. Despite the wide attention that the subject of asset price and consumption has received in the financial economics literature, until recently there have been only few studies for the subject of property price and economic growth. There are three main reasons to select the property markets in Hong Kong. Hong Kong is one of the major international financial center and business hubs in the World that have made Hong Kong, one of the most attractive places for both China and international investors. Second, the property markets in Hong Kong are one of the most dynamic and expensive markets in the World. Third and the most unique reason, the adoption of quantity easing program by the developed economies of United States, United Kingdom, European Union and Japan since 2008 provides an ideal background for re-examining the relationships between Manuscript received July 26, 2018; revised October 19, 2008. Koon Nam Henry Lee is with the City University of Hong Kong, Hong Kong (e-mail: cmhenry@cityu.edu.hk). economic growth and property price in the emerging economies. Since the adoption the first United States quantity easing program in 2009, the Hong Kong residential property price and stock price increased by 275% and 175% (2009-2017), respectively. The objective of this empirical analysis is twofold. The first is to determine whether the gross domestic product (measures on economic growth) and property prices are cointegrated and linked together or both markets are segmented. The second is to explore the lead lag relationships and the possibility of feedback causality between gross domestic product and property prices, if both variables are cointegrated. With regard to the influence of GDP on property prices, it is reasonable to expect that an improvement in the performance of an economy would raise wage and profits and generate higher demand for residential and office properties. More importantly, as illustrated by Tsatsaronis and Zhu (2004) [1] that GDP would summarize the information contained in other macroeconomic factors which affect home buyers’ purchasing power, such as unemployment rate and household income. Assuming the supply is relatively fixed, the sale price of residential and office properties will go up when GDP is rising. It is therefore hypothesized that GDP have a positive relationship with property prices. For the influence of property price and GDP, it is reasonable to assume the wealth effect hypothesis and credit price effect (collateral) hypothesis on property price and GDP relationships. Strong property price tends to stimulate wealth, which the strong wealth effect in turn support further economic growth. Alternatively, it is hypothesized that the credit-price hypothesis tends to suggest a causation from property prices to gross domestic product and admits the possibility of persistent spiraling upturns in both markets. The credit-price hypothesis assumed the property assets act as collateral to especially credit-constrained firms. The increase in property prices, thus, would be favorable to the firms and household’s balance-sheet position in that they may get access to lower costs of borrowing and increase economic activity. Gross domestic product can be raised by the simulated economic activity due to the rise of property asset price. Thus, the credit-price hypothesis tends to suggest a reverse causality from property prices to gross domestic product and admits the possibility of persistent spiraling upturns in both markets and thus the effect of feedback causality. This paper will structure an alternative approach of cointegration and causality analysis by incorporating the Pesaran et al. (2001) [2] Autoregressive Distributed Lag (ARDL) bounds testing approach and Granger et al. (2000) [3] causality approach. The selection of Pesaran cointegration approaches instead of Johansen (1988) [4] approaches address the problem of how to use a relatively small sample data to estimate the long-term relationship and A Bivariate Causality between Economic Growth and Property Price: Hong Kong Evidence Koon Nam Henry Lee Journal of Economics, Business and Management, Vol. 6, No. 4, November 2018 180 doi: 10.18178/joebm.2018.6.4.571