This is the second of five articles on public sector housing programs. In my article last week, I pointed out that the most important issue in designing these programs is the existence of a functioning market that allow households to choose housing tenure, i.e., between tenancy and home ownership. This is especially important in developing economies with weak institutions that are experiencing rapid urbanization and industrialization. In this article I explore why the choice of housing tenure matters on social grounds, the foregone costs to households when there is effectively no choice and the cost to society in economic terms.
In Hong Kong, 47.3% of households live in public sector housing units, of which 30.8% live in Public Rental Housing (PRH) units and 16.5% live in Home Ownership Scheme (HOS) units. The tenure arrangements unfortunately mean that these households are overwhelmingly unable to change their premises once they have moved in because of the absence of markets in the public housing sector. The PRH tenants are grounded because administrative hurdles make it unfeasible for tenants to change leases from one unit to another in any regular manner, and so there is no rental market for public housing units. The HOS households must pay exorbitant land premiums before they can sell on the open market and this essentially makes selling prohibitive to them. Households therefore cannot move to a location that is more convenient for them to go to work, for their children to go to school, or for them to be close to their grown-up children and grandchildren in old age.
Nearly half the population of Hong Kong therefore is destined to stay in the same initially assigned premise for almost the rest of their lives. Households are compelled to make inferior or sub-optimal decisions conditioned on the location of their residence. A person living in Tuen Mun, for example, is more likely to give up a good job opportunity in Ap Lei Chau and accept a less preferred one in Tsuen Wan because of the inconvenience and cost of commuting.
Restrictions on Mobility Hurts All
As compared to residents of private housing units, who can more easily move house and are more likely to do so, those in public sector housing units have reduced mobility. They are more likely to have to tolerate much longer commutes to work, schooling, and family visits, or to have to compromise their job opportunities, schooling choices and family togetherness than households living in private housing.
Over the years, a rising proportion of households have been absorbed into the public sector housing sector. At the same time, the number of PRH and HOS housing estates located in satellite towns in the New Territories has grown. Since the urban areas are where the best jobs are concentrated and the preferred schools are located, to be stranded in remote locations far away from these opportunities cannot be to the advantage of households in the public sector. Such developments inevitably increase the hidden costs of foregone opportunities.
As the public sector housing sector grows, more middle income families are drawn into these estates. Their foregone opportunities become more costly still because of the inefficient use of their time as a result of being located so far from the center. The lower middle income class today is less likely to tolerate the restrictions on mobility imposed by the public sector housing programs that the lower income class tolerated in years past.
Research in Europe and the US has shown that the unemployment rate is higher in cities with a larger proportion of homeowners. The reason is that compared to renters, homeowners have to bear higher costs or even give up their existing premises to take up a new job opportunity in another location. By the same logic, households in PRH and HOS units face even more restrictive and costly constraints because they cannot afford to give up their present unit without exiting the public sector housing sector altogether. Relocating to another public sector housing unit in the vicinity of their job is prohibitively more difficult for them than even private sector homeowners.
The problem with satellite towns is that they fail to recognize the benefits of mixed developments. Old areas should coexist with new ones and areas where people live should be better mixed with where they work. Moving large numbers of people to huge public housing estates in a new satellite town means moving people away from where jobs are located.
The flaw of such an urban planning philosophy is best exemplified by Tuen Mun and Tin Shui Wai, probably some of the worst cases of satellite town development in Hong Kong’s history. These satellite towns were created with huge public sector housing estates. Connecting these residents to where jobs are located requires a very long and often expensive commute. Even though the mass transit railway system has now been connected to these remote towns, the damage that was done to a whole generation of earlier residents cannot be reversed.
Speaking to families who live in these remote satellite towns is revealing of the plight they face. A family with a young child can only afford to have one parent commuting to the urban areas for work. The other parent stays home to care for the young child as the family is stranded in a remote housing estate where neighbors are not necessarily relatives or friends. The level of income is barely enough. On weekends the entire family stays in the housing estate as a trip into the city is unaffordable; only major holidays are occasions for family outings away from home.
The grandparents often live in another part of Hong Kong making it difficult for them to care for their grandchild; and as is often the case the grandparents might well be living in another public sector housing estate. Within the housing system, it is almost impossible to make arrangements for relatives to move closer to each other for mutual support. These too are opportunities that are foregone. One wonders if some of the family tragedies that we learn of could have been mitigated and avoided with more robust and immediate family support.
As the young child reaches adolescence the parents can both go to work. The child is then stranded alone at home and may acquire undesirable peer group habits without a parent, relative, or grandparent to provide oversight. Often times the child grows up with little access to the world outside their remote neighborhood and is unable to develop friendships with people who do not live in the neighborhood.
Family ties become weaker over time as relatives do not get together. Adult children who do not live near their parents are more likely to neglect them. Grandchildren who are not accessible to their grandparents also get neglected. The inability to move closer to each other encourages a greater reliance on professional social workers to step in to take care of both the elderly and the young, leaving adults to make long, expensive and tiring commutes to work.
Land Values Evaporated
Modern urbanized living probably contributes to the breakdown of the extended family in many ways, but do we need to exacerbate the process through a public sector housing program that leaves relatives and family members even more isolated from each other than is necessary? Even the professional social worker could achieve more if family ties survived better in Hong Kong’s urban environments. I often wonder why we have put in place public sector housing programs for our population that worsen our social problems, family problems and economic problems. And why we address these problems by making remedial investments in even more publicly funded social service and welfare programs.
The hidden social cost of foregone opportunities and remedial measures are rarely understood and fully appreciated. These are what economists call “social deadweight losses.” They arise from regulatory restrictions imposed on the use and sale of PRH and HOS units. These restrictions reduce the value of a very valuable asset like land in Hong Kong because many uses are not allowed. The losses of the tenants and homeowners are not gained by any body else because the land cannot be used by anybody else for any other purpose because they are occupied. Economists call them efficiency losses due to the misallocation of resources. When this occurs part of the value of the land has effectively been evaporated.
But these are not the stuff that politicians focus on or care about. The costs are also hardly ever measured, but they are undoubtedly very large for the simple reason that so many households are impacted and for such long periods of time. Professor Liu Pak-Wai of the Chinese University of Hong Kong and I have estimated the annual economic cost of these “social deadweight losses” to be equal to 0.95% of the GDP using 1981 data. Dr. Yan Wai-Hin has estimated the cost to be 0.53% of GDP using 1991 data. These are large numbers. More recent estimates have not been made, but given the rising market values of property, I believe the annual economic cost of these “social deadweight losses” has to be higher than the earlier estimates.
The opening of China in the past 30 years has increased cross border mobility between Hong Kong and the Mainland. How would this alter preferences for public sector housing and for home ownership in Hong Kong? I am sure as some households choose to live on the Mainland side of the border, the requirement to occupy PRH and HOS units in Hong Kong in order to remain an entitled resident will become increasingly constraining. The foregone opportunity costs would keep rising over time if housing policy continues to hold people in their premises by suppressing the development of a market for public sector housing units.
Rural Migrants Without Hukou
Hong Kong’s housing program and its failures may offer some lessons for the Mainland as its own housing program develops. The massive influx of rural migrants into the cities from the early 1980s increased the proportion of renters, but 30 years after opening up, a rising proportion of these migrants have chosen to stay in the cities and the metropolitan areas and increasingly aspire to become permanent residents and preferably homeowners. There is little doubt that the migration of rural workers into the cities has greatly facilitated China’s economic development. Allowing this process to continue smoothly has to be one of the central features in China’s march towards modernity and long term prosperity and stability.
Low income households are poor precisely because they have poor access to good jobs and their children have poor access to good schooling. Another critical weakness is that low income households do not have access to capital markets that allow them to borrow at interest rates that are not exorbitant, which limits their opportunities for enterprise and for protecting their meager savings and making good on any investments.
In a growing urban metropolitan environment, the best opportunity for a low income household to accumulate wealth is to own property. As land values rise their savings are protected and grow. For unskilled and uneducated households, a propertied asset is the least demanding in terms of the knowledge needed to make reasonably good and safe investments. It is a source of savings that one can draw down through mortgages to meet urgent emergency health and other needs, and it provides for security in old age. The value of this savings is intimately tied to the prosperity of the place where the household lives and works; and so it provides the best mutually compatible set of incentives between social commitment to the community and individual self-interest.
In China, the rapid rate of economic growth means household and individual earnings are rising rapidly. Unfortunately the financial markets there are still not fully open and mature. The typical low and middle income earners have very limited opportunities to invest in reliable assets and protect their savings. The more rapid their earnings grow from year to year, the more rapidly the real value of their savings lag behind what is required to pay for the many crucial expenditures their households will encounter over their life cycle – marriage, childbirth, childrearing, sickness, retirement and old age.
Homeownership Interest in Cosmopolitan China
In a recent public lecture by Yale University Professor Deborah Davis at the University of Hong Kong on marriage behavior in cosmopolitan China, she found that young couples in major coastal cities are even keener than those in Hong Kong to own domestic property before marriage. Parents of both the prospective groom and bride would contribute their life savings to help the young couple become homeowners ahead of marriage. Clearly in China home ownership is perceived to be a vital first step before one could proceed safely and securely to the next stage of the household’s lifecycle.
As more rural migrants settle permanently in cities, the more rapidly the traditional family and village support structure will fade away. A new community and socio-economic support structure has to be developed for stable and sustained progress. Home ownership and housing markets could provide the essential core infrastructure to meet such social needs.
Singapore’s public sector housing program has provided a model for achieving such ends by allowing for the establishment of an active market in public sector housing for rental and for purchase and sale. But Hong Kong’s program has succeeded only in providing affordable shelter. It has failed to provide an effective vehicle for low income households to protect their savings and to share in the rising prosperity of a growing urban community. Without being able to own property, many low income households also find it difficult to support the many critical decisions they have to face over their household’s life cycle.
I believe the inability of low and middle income households to share in the rapidly rising prosperity of the community is behind the deep animosity against property hegemony in Hong Kong today. It is a misplaced animosity because the real failure is a failure in the design of the city’s public sector housing policy.
It is entirely likely that such animosity could also emerge in Mainland urban centers if issues of home ownership and the functioning of markets for public sector housing are not adequately addressed by the authorities in the proposed “economic housing” policy initiative of the 12th Five Year Plan.
In the next article, I shall explore the history of public sector housing in Hong Kong and consider concrete steps for correcting some of the damage it has inflicted upon our society and the economy.
1. Y C Richard Wong and Pak-Wai Liu, “The Distribution of Benefits among Public Housing Tenants in Hong Kong and Related Policy Issues,” Journal of Urban Economics, 1988, vol. 23, no. 1, pp. 1-20.
2. Wai-Hin Yan, “Efficiency in the Distribution of Hong Kong Public Housing Resources (70s’-90s’), Ph D Dissertation, School of Economics and Finance, The University of Hong Kong, 2000.
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