Our public housing policy is the direct reason why an unreasonably large proportion of housing units in Hong Kong are too small. Any public housing program is unavoidably committed to building uniform sized units for all. But when these units are small then a considerable proportion will be occupied by better-off households, who aspire to live in better and larger units. The provision has fallen short of these aspirations for the past 60 years, generating enormous pressure on home prices in the private market to rise even when all households have a place to live.

 

Many of these well-off tenants, however, have little incentive to give up their public housing unit even when they acquire a private unit. The Housing Authority (HA) has tried to entice them to surrender their rental units by offering them a Homeownership Scheme (HOS) unit in exchange. But this is a long slow process. As a consequence, many less well-off tenants in the private sector who could benefit from the rental flats have to queue on long Waiting Lists. The wait became even longer after the HOS program was suspended in 2003.

 

The HOS program itself aggravated matters because the HA adopted a policy of acquiring more land to build larger HOS units in order to recover small rental units from well-off tenants. This made less land available for private use with knock-on price effects and had long-term devastating consequences on the economy and social fairness.

 

Meanwhile the less well-off private tenant has to endure often years of high rent in the private market while awaiting a public housing unit.  When that unit is finally allocated, he often discovers to his chagrin it is in a bad location, but the waiting time has taken so long that he can wait no more. He adjusts his life to fit the housing unit, making sacrifices that used to be told in comic books about the communist nations. But this has been happening in Hong Kong for 60 years. No wonder Hong Kong has persistently underperformed Singapore.

 

Figures in Table 1 show that from 1971 to 1986 the total number of private and public housing units has been below the number of households. But from 1991 to 2011 the total number of housing units has been above the number of households. The excess of housing units over households has fluctuated between 9% to 12%. These variations probably reflect changes in market conditions in both the housing market and the overall economy. The composition of a household is sensitive to the state of the economy.  For example, during bad economic times more members may live together to save on expenditure. In good times members move out to enjoy better individual standards of living.

 

Table 1: Number of Domestic Households and Housing Units

 

 

Total
Number of Households

Total
Number of Housing Units

(
Permanent Quarters)

Number
of Housing Units per Household

1971

846,670

668,200

0.79

1976

990,290

897,110

0.91

1981

1,237,643

1,093,220

0.88

1986

1,445,689

1,410,100

0.98

1991

1,580,072

1,722,100

1.09

1996

1,853,248

2,004,900

1.08

2001

2,053,412

2,310,000

1.12

2006

2,226,546

2,477,300

1.11

2011

2,368,796

2,601,800

1.10

Source: Population Census and By-census

 

Of course these fluctuations may also reflect some errors in the measurement of data or changes in the supply of housing. Nonetheless they show the futility of planning a housing ladder for tenants in the public and private sectors. It is sheer folly to believe that one can steadily plot a pathway for households from public rental housing to HOS and eventually to private housing. Household compositions and sizes are not cast in stone and household members adapt to circumstances pro-actively. HA policies are simply part of the calculus to which they will adapt themselves. This will pro-actively influence the HA’s future policy course.

 

Mini Private Housing Units

 

Public attention has recently become focused on mini-units in the private market – rooms, cubicles, bedspaces, cocklofts, and caged homes, etc. Figures in Table 2 show that these mini-units are a diminishing problem according to figures published by the Census and Statistics Department. In 1981, there were 262,576 households living in such mini-units. Their numbers had declined to 21,699 in 2006. According to the 2011 Census of Population, the number of households living in rooms and cubicles were 8,870 and those in bedspaces and cocklofts were 766.

 

Table 2: Domestic Households Living in Private Residential Flats by Type of Quarters, 1981-2011

 

 

Private residential flats

 

Former subsidized sale flats

Whole quarters

Room or cubicle

Bedspace or cockloft etc.

1981

-

324,262

262,576

1986

-

447,937

188,202

1991

585,885

120,800

1996

714,568

95,519

2001

856,149

70,501

2006

976,764

21,699

2011

67,745

996,407

8,870

766

Source: Population Census and By-census

 

I believe their continuing presence is to a large extent a consequence of the public housing program. The HA has historically given priority for public housing units to married households, especially those with larger households. There are obviously good reasons for so doing, but the poor single individual often has to find housing in the private sector. Worse than being poor is to be poor without a family because these individuals cannot pool together meager resources with other family members. 

 

For a single individual a mini-unit close to job opportunities and work has a distinct advantage over a housing unit in a distant public housing estate, where job opportunities are few, especially for those who do not have regular work and have to work odd hours.

 

According to an iSun Affairs (陽光事務) report on 9 February 2012,  the total 21,200 mini-units units, a figure close the 2006 Census estimate, 7,200 are on Hong Kong Island and 9,900 are in the old Kowloon areas of Sham Shui Po, Kowloon City, Wong Tai Sin, Kwun Tong, Mongkok, Yau Ma Tei, and Tsim Sha Tsui. The combined figures for the urban areas account for 80% of mini-units are in urban areas. These mini-units continue to exist in the private sector because the demand for them in these areas is not met by the public housing program. This demand is coming in part from the younger generation which wants to split from their family to form a new household. The alleged growth of sub-divided rooms in urban flats has become a new media obsession. The 2011 Census suggests that this may be just media froth given the reported number of mini-units have declined.

 

In 2011, the average age of non-elderly one-person households on the Waiting List for public rental housing was 32. Of these, 79% lived with their parents (93% for those below the age of 30). Some 34% had at least post-secondary education (54% for those below the age of 30). Interestingly, 41% of those below the age of 30 were still students. The corresponding figure for the previous year, 2010, was only 18%. It has been reported that recent orientation programs organized by university student associations for new students included a session to counsel them on how to apply for public rental housing.

 

Surveys by the Housing Authority over the past 5 years show another source of growing demand for mini-housing units. The number of non-elderly one-person households on the Waiting List for public rental housing grew by 70% in the period 2007-2011, from 37,500 names to 63,800 names. Over the same period, the number of households who are on the General Waiting List (i.e., excluding non-elderly one-person households) grew by only 27%, from 69,800 to 88,600. Among the non-elderly one-person households, the largest increase came from those who were below the age of 30 (born in the 1980s): their numbers increased by 112%, from 13,700 to 29,100.

 

This is a new development and it is a consequence of a policy change adopted by the Housing Authority during the Asian Financial Crisis. At that time, many HOS and public rental housing units had been completed but there were no takers. To fill the vacant units, the Authority found justification in opening up the applicant pool to single person households. Many students applied for these units and were admitted.

 

Clearly there is a growing desire among the younger generation to move out of their parents’ home to form their own very often single-person households. There are many reasons for this. Living in their parents’ home may be too cramped for comfort, especially for those living in public housing. The desire for greater privacy is another factor. Proximity to work and social life in the urban area is of course a convenience that living in the parents’ home may not always provide.

 

A survey by the HA in 2011 found that among the younger generation on the Waiting List, about 21% are staying with their family in public rental housing and 28% are living in subsidized sales flats. If these single individuals apply successfully for a public housing unit then their families would have more space in their original living unit. Could this be simply another way for a public housing tenant to increase their original accommodation space given that moving into the private sector has become more expensive?

 

And if so, is the HA willing to provide an additional public housing unit to meet the aspiration for more living space among these families? If so, it will have accomplished a cross-generational feat. The “original household” would get an additional unit through splitting.

The dilemma for the authorities is that if they again give preferential treatment to married households, then these non-elderly one person households will have to seek housing in the private sector. The demand for mini-housing units may well rise again and the declining trend we have observed over time may reverse itself. This is a no-win situation.

 

If society deems it appropriate to provide public housing for these one-person households, it will not be easy to find urban land to build the new units and it will certainly not be cheap.

 

Liberate Small Units

 

Yet a faster, less expensive and non-wasteful solution exists; it is even “shovel-ready”. As I explain below, restarting the halted Tenant Purchase Scheme (TPS) and lowering the unpaid land premium would immediately increase the supply of existing units onto the market. If the TPS is restarted on a large scale there will be plenty of units all over Hong Kong that would become available, providing competition for mini-units in the private market. Both private and public tenant would have more options to choose from.

 

The inequity in the allocation of public rental housing generates huge economic inefficiency affecting everyone. Economic inefficiency occurs when somebody gives you a good that cost $100 to produce, but you only value it at $50. The inefficiency loss in this case is 50%. In such a situation the good should not have been manufactured in the first place. It would have been better to redeploy the resources into manufacturing some other product with a higher return.

 

But since the product has already been manufactured, it is better to give it to another person who would value it at $100. Transferring the unit to another person requires a decision by the owner of the product to approve transfers. The best mechanism to get the product to the right person is naturally the market.

 

The fundamental nature of the public housing program is a non-market approach to subsidizing housing. The beneficiary does not receive a cash subsidy or a housing voucher that can be applied to the rental of a housing unit on the open market. The beneficiary has no choice over the size of housing unit and very little choice over most other attributes of the unit including location, floor level, and so on. Units are offered with a take it or leave it option only.

 

It is crucial to remember that the demand for housing will change over time as society prospers and also over a household’s life cycle. Job locations can change, people get married, students start school or change schools, households decide to move closer to grandparents, parents, children, or grandchildren in a different part of the territory, and so on. The cost of being unable to change one’s housing unit over the life-cycle and as society prospers places an enormous burden on everyone and on the economy.

 

The public rental housing program has existed for almost 60 years. More than two generations and over half the population have lived in public housing units. It is to be expected that a very large segment of them are well-off enough to prefer more spacious accommodation. The small sized housing unit should ideally become available to meet the needs of less well-off tenants.

 

However, without a market it is not possible for public housing tenants to make such choices. They are literally forced to stay in the unit they started with. At any moment in time, this means an extremely large proportion of tenants in the public housing program is stuck with a unit that does not meet their ideal needs.

 

Mongkok or Apleichau

 

How do we know the proportion of unsatisfied households is very large? The answer is in the inequity of the public housing program. In last week’s essay, I showed that the distribution of household income between public and private renters overlaps enormously. The housing demands of many public housing tenants cannot be substantially lower than that of private renters. Many people in Hong Kong simply fail to appreciate this utterly important fact. Their ideas about public housing are based on gross errors of understanding.

 

Since public housing tenants are not allowed to exercise choice over their housing units, the value they attach to the units must be lower than the true worth of the unit or its worth to another person. The only way you can get a well-off person to accept or tolerate a small unit is to offer him a huge discount.

 

Let me quickly add that the housing unit is only undervalued to the person who is occupying it. If a market exists and the occupant can rent out this unit to anyone on the market, its true value would be realized. For example, a public rental housing unit in which the HA charges a monthly rent of $1,000 to the sitting tenant can readily be rented out on the open market at say $6,000 per month, conditioned on size, location and other attributes. The sitting tenant, however, values it at less than its true market value because its attributes do not fit his preferences.

 

For a person who is reasonably well-off, he may be unhappy that his Apleichau unit is not only too small, but also far from his work in Kwuntong and his children’s school in Kowloon, thus requiring long and costly commutes. There are also no direct transport routes to Tsimshatsui where his wife could work full-time so she takes up a part-time job in Aberdeen. Nor is there a direct link to Homantin where his wife’s mother lives thus making it difficult for her to see her grandchildren. He is willing to tolerate all this because the rent he pays the HA is only $1,000 per month.

 

He would, however, be much happier if the HA would allow him to sub-lease his Apleichau unit on the open market for $6,000 per month, allowing him to net $5,000 per month. He could then contribute another $4,000 per month himself and rent a $9,000 private unit in Mongkok, which he could pay for by saving on transportation costs and having his wife switch to a full-time job in Tsimshatsui. The family enjoys a larger unit and saves on commuting time so they can spend more time together, including seeing the grandmother. This is the kind of happiness and joy that a public housing bureaucracy cannot provide. Only the market can do this.

 

Notice the cost of the subsidy the HA provided to the tenant is $5,000=$6,000-$1,000 (ignoring other costs of operating the HA’s program). The value of the benefit received by the household can be estimated as follows: living in Apleichau the tenant pays $1,000 but his happiness is less than living in Mongkok where he has to pay $4,000 extra, therefore the benefit of Mongkok over Apleichau must be greater than $4,000. Since the subsidy that the HA provided is $5,000 therefore the benefit received by the tenant must be less than $1,000=$5,000-$4,000. This means that the efficiency of the program is less than 16.7% and more than 83.3% of the subsidy is not valued.

 

Dr. Yan Wai-Hin of the Chinese University of Hong Kong estimated the utility gains the average public housing tenant derived from their housing benefit during 1976-1996. Table 3 presents his estimates of the efficiency ratio of the program calculated as the ratio of the benefit to subsidy. The subsidy is the cost of the subsidy provided by government, whereas the value of the benefit is what the tenant perceives he has received. He also provides an estimate of the average household income and the gain in housing consumption per household.

 

 

Table 3: Subsidy and Benefit per Household per Month, and the Efficiency Ratio of the Public Rental Housing Program, 1976-1996

 

 

1976

1981

1986

1991

1996

Average
Household Income ($)

$1,560

$3,374

$5,680

$10,072

$16,547

Subsidy
Granted

per
Household ($)

$399

$559

$1,167

$1,696

$2,971

Benefits
Received per Household ($)

$243

$351

$873

$1,231

$2,090

Efficiency
Ratio

0.61

0.63

0.75

0.73

0.70

Estimated Cost of Inefficiency Losses ($bn)

$0.65

$1.04

$1.82

$3.21

$6.95

Estimated Cost of Inefficiency Losses as a
Percentage of GDP

1.03

0.60

0.57

0.46

0.56

Gains in
Housing Consumption per Household ($)

-

$118

-

$351

-

Ratio of
Gains in Housing Consumption to Benefits Received

-

0.34

-

0.29

-

 

Source: Yan (2000)

 

The gap between the subsidies granted and the benefits received is enormous. A fully efficient program will have an efficiency ratio of 1. The estimated efficiency ratio varied between 0.61 and 0.75 in the period 1976-1996. For each dollar the taxpayer spent on the public rental housing program, the tenants valued it at only 61 to 75 cents. The remaining 25 to 39 cents were deemed wasted because the household had to stay in a unit that was not its choice. Resources were grossly misallocated and therefore wasted.

 

The hidden annual economic costs of these economic inefficiency losses varied between 0.46% and 1.03% of GDP in the period 1976–1996. These are large numbers. The actual yearly dollar losses increased from HK$0.65 billion in 1976 to $6.95 billion in 1996. More recent estimates have not been made, but given the rising market values of property, the annual economic cost of these inefficiency losses are likely to be even higher than the earlier estimates.

 

The gains in housing consumption for the tenant household were $118 and $351 per month per household in 1981 and 1991. This is a very modest gain compared to the value of the subsidy that the HA provided at $559 and $1,696 per month per household. The ratio of the gains in housing consumption to the value of the subsidy provided was 0.34 in 1981 and 0.29 in 1991. The main benefit to the household was the cheap rent, not the increase in housing consumption.

 

A central issue critical to my thesis on the effects of the public housing program is that well-off tenants consider the units they occupy to be too small given their income. If this is indeed the case then the gains in housing consumption would be negative in value for them relative to what they could afford to consume. At the same time these well-off tenants may still be enjoying positive benefits because of the very cheap rent they pay.

 

Table 4 shows that the proportion of households receiving positive benefits from the program was 84.4% in 1981 and rose to 94.9% in 1991, again reflecting the declining proportion of well-off tenants. An estimated 15.6% in 1981% and 5.1% in 1991 of the households obtained negative benefits from the public housing program.

 

Table 4: Percentage of Households with Positive Benefits and Positive Gains in Housing Consumption

 

 

1981

1991

Percentage of Households with Positive Benefits

84.4%

94.9%

Percentage of Households with Positive Gains in
Housing Consumption

52.0%

64.5%

Source: Wong
(1998)

 

The percentage of households in the public rental housing program that had positive gains in housing consumption and in benefits received. In 1981, only 52.0% of the households had positive gains implying that half the households in the public housing program were living in units they considered too small given their incomes. The number increased to 64.5% in 1991. This is consistent with the fact that over time the proportion of well-off households in the program had declined, explaining why there was an upward price pressure in the private market.

 

The source of economic inefficiency or waste arises from the inability to trade public rental housing units on the market. Many public housing tenants live in housing units that are too small. At the same time many poor households living in the private sector have no access to these small sized public housing units. Without a market, the re-matching of tenants and housing units cannot take place legitimately. The HA may not wish to see this happen and certainly does not allow it to happen at the present time. Black market transactions, however, do take place. Since these are illegal transactions there must be too few of them.

 

But such transactions do not have to be illegal. The Tenant Purchase Scheme which was initiated then halted during the C H Tung administration could be reactivated on a much larger scale. A market in these units would then quickly emerge and the economic inefficiencies we discussed would be quickly eliminated in one fell stroke. For this mechanism to work well it is important to significantly lower the unpaid land premium – which purchasers are required to pay at the time of purchase at the current market rate – or otherwise there would be no incentive for trading to take place. 

 

I have been told by many that it is not fair for public housing tenants to get double benefits. The public has provided them with a subsidy to rent a public housing unit cheaply in the first place, therefore, to subsidize them again on the unpaid land premium is unfair to others who miss out. The issue of fairness will be the subject of a future essay.

 

 

References

 

Housing Authority, Memorandum for the Subsidized Housing Committee of the Hong Kong Housing Authority, Survey on Waiting List Applicants for Public Rental Housing 2011, 12 August 2011.

 

YCR Wong, On Privatizing Public Housing, City University of Hong Kong Press, 1998.

 

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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