(This essay was published in the South China Morning Post on 27 February 2019.)
The Tenant Purchase Scheme (TPS) was introduced in 1998 to help achieve the Government’s policy goal of 70 per cent homeownership in Hong Kong. Since then, 140,298 units have been sold to sitting tenants, representing a very substantial stock of public assets worth at least $300 billion – an amount much larger than the construction cost of the Shatin-Central Railway.
They have also had another consequence – on the labor market. Census statistics help to tell the story.
The 39 public housing estates selected for the TPS were all built between 1982 and 1994, and offered for purchase between 1998 and 2006. Another 60 estates were built in the same period that would remain solely public rental housing estates, offering an interesting point of comparison.
According to the 1996 By-Census, 186,000 households lived in the 39 future TPS estates and 209,000 households lived in the other 60 estates. They had similar labor force participation rates and unemployment rates among typical working age adults (defined as 18-64 years old). But thereafter, as the TPS started to be rolled out and beginning with the 2001 Census data, the numbers began to change.
TPS estates had significantly higher labor force participation rates and lower unemployment rates than public rental housing estates over time among both men and women.
By 2016, the labor force participation rate for men living in TPS estates was 0.938, against 0.931 in 2016 for those living in public rental housing estates – a 0.7 per cent difference, which translates into an additional 1,230 men in the workforce.
Among women, the labor force participation rates of TPS estate occupants was 0.758 in 2016 against 0.746 in public rental housing estates – a 1.2 per cent difference, which translates into an additional 2,000 women in the workforce.
Similar results can be seen in the unemployment rate, which was 0.049 among men in TPS estates in 2016 and 0.056 for those in public rental estates. For women the respective rates were 0.048 and 0.053.
Why are there these differences between occupants from TPS and public rental housing estates?
Normally one would expect the labor market behavior of homeowners to differ from renters. Economic theory tells us that households and individuals who become wealthier will increase their demand for leisure and work less.
Although the typical TPS unit homeowner has to pay the outstanding unpaid premium of their unit, equal to half the market value at the time of purchase, for the vast majority this ultimately is a gain that has been further enriched by the capital appreciation of their TPS units over time.
On the basis of this increasing wealth, TPS homeowners should have lower labor force participation rates and probably also higher unemployment rates than public rental housing estate occupants. But this is the exact opposite of what has happened.
The reason for this anomaly lies in the public rental housing program.
Tenants in public rental housing estates are means tested after 10 years of occupancy. If they are found to have become well-off, then they have to pay up to double rent. This provides an incentive for some members of the household to withdraw from the workforce either entirely or from time to time to avoid the penalty. Such opportunistic behavior lowers their observed labor force participation and raises their observed unemployment.
TPS homeowners do not have to engage in such opportunistic behavior because means tests are only applicable to renters and not homeowners. As a consequence, TPS estate occupants after 1998 have had higher labor force participation rates and lower unemployment rates.
Opportunistic behavior must be quite prevalent and substantial if it is able to offset the wealth effect of rising property prices such that it discourages labor market participation. This is borne out by Census statistics comparing labor market behavior between homeowners and renters within TPS estates (some flats in these estates remain public rental housing because the sitting tenant chose not to purchase).
In 2016, the home-owning men were 1.8 per cent more likely to be participating in the labor force than renters and 1.8 per cent less likely to be unemployed. The corresponding figures for women living in owned flats were 2.8 per cent and 1.0 per cent. If the TPS were introduced in all 220 public rental housing estates in Hong Kong, the total number of workers could increase by as many as 6,300 men and 10,400 women, producing a meaningful relief for labor supply tightness.
In one fell swoop, expanding the TPS to all public rental housing estates would remove the disincentive to work due to means testing and the double rent threat, foster greater attachment to the labor market, and encourage more human capital investment through on-the-job training – to add to the other housing market benefits of homeownership that I have written about previously.