In a recent study, Peng and Wheaton empirically examine the effect of restrictive land supply on Hong Kong house prices. However, we argue that the impact of the supply of new land by the Hong Kong government is not as important as they maintain in accounting for the volatile house prices in Hong Kong. We show that there is no causal relationship between land supply and housing prices. Our estimations, based on the annual data of Hong Kong's public land sales, find that the government acts to maximise land revenue. Maximisation of revenue from land sales is, however, consistent with the efficient allocation of resources. We also show that the amount of land sales by the government and land in developers' land banks tend to decrease when market interest rates increase. Land banking behaviour is governed by economic conditions. Long-term land holding costs should cover interest costs.
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