Government regulations on housing flippers target their high capital gains but ignore their risk-sharing function: rational arbitrageurs reduce market return volatility borne by other participants while undertaking high idiosyncratic risk. Regulations that tighten the limits of arbitrage in housing markets can adversely affect market efficiency by blocking this risk-sharing function. Using comprehensive housing transaction records in Hong Kong from 1993 to 2021, we find although flippers obtain higher annual capital gain returns than long-term buyers by 8.76 percentage points, they undertake substantially higher idiosyncratic risk due to its unique downward-sloping term structure. Only experienced flippers, who have at least two prior purchase experiences and constitute less than 20% of the flippers, outperform long-term buyers in risk-adjusted returns. Following the enactment of an anti-speculation policy that decreases the share of flippers by 14.2 percentage points in one year, the market return volatility of the entire housing market increases by 21.9%.

This article examines the impact of mainland Chinese buyers in the Hong Kong housing market, using complete transaction records between 2001 and 2017. We find that mainland buyers pay an average price premium of 1.4% compared with locals. The premiums are estimated to be 3.5% for large-sized luxury units and 1.6% for homes in central locations. The mechanisms that underlie the price premiums include a hedging effect, residential sorting, and information barriers, of which the hedging motive has the strongest impact. Mainland buyers’ price premiums rise significantly when the Chinese currency depreciates or China Economic Policy Uncertainty increases. Our study sheds light on the impact and mechanism of the ““China shock” on the global housing markets.