Should Hong Kong have a new long-term housing strategy? If so, what should be the aims? The history of Hong Kong’s housing strategy in the post-war era – and the one we still pursue – is best described as a massive attempt by government to provide rental shelter and homeownership (or more accurately pseudo-homeownership) for the population.

Most people in Hong Kong are so accustomed to this provision that they hardly stop to think about what should be the government’s role in housing. Should it continue to build more rental shelters and pseudo-homeownership units? What is the proper balance between publicly and privately provided housing? And more importantly, how does a housing strategy fit into the economic, social and political development of Hong Kong for the long-term?

I believe Hong Kong’s long-term housing goal should be to provide a mixture of public and private units so that at least 80% of permanent residents can become bona fide homeowners. This 80% represents an advancement over the missed targets for homeownership previously proposed by the government – of 60% by 1997 in A Review of Public Housing Allocation Policies (1984) and of 70% by 2006 in the Ten-Year Housing Plan (1998). The rest of the population, including visitors, can rent housing on the open market. I will explain why this is justified for Hong Kong. I will also propose a strategy to achieve this goal quickly and to the advantage of all.

 

Other Housing Choices

In most countries governments are not involved in providing housing, and certainly not on the scale of Hong Kong where some 50% of the population live in public housing units. This is a postwar phenomenon – until 1954 the Hong Kong government was not involved in building homes. The decision to adopt such an approach was the product of a set of unique circumstances and misguided government policy in the immediate postwar years.

First, housing supply could not be easily increased at the time. Private developers faced formidable constraints in redeveloping the urban housing stock. Rent-control on pre-war housing imposed in 1947 had made it difficult to evict tenants for redevelopment.

Second, the massive influx of new immigrants increased the population from 600,000 in 1945 to 2.3 million in 1951 and led to an explosive growth in demand for housing. No society in peace time had experienced such a phenomenon. It was a unique situation. Land available for development was invaded by about 300,000 squatters seeking alternative housing from the old private tenement apartments.

Third, the government was initially reluctant to facilitate housing development despite intensive lobbying from private business interests. There was general hostility towards private developers many of whom took part in building squatter housing.

The government therefore became a provider of public housing by default. This path may have been motivated in part by public relations reasons, in order to put a humanitarian face on its actions to clear squatter housing, but this secondary reason subsequently became the main justification for the continued growth of the public housing program. After the social disturbances of 1967, the public housing program became the centerpiece of a policy to restore public confidence and calm down the community.

There could have been other strategies, but these were not explored. Singapore, for example, saw public housing as an instrument of land reform, the foundation for a socialist vision of society, and a nation-building tool of the People’s Action Party to capture the hearts and minds of the people. In 1959, fully six years before Singapore became an independent nation, Lee Kuan Yew created the Housing Development Board very shortly after being elected Prime Minister.

The city of Lima, Peru, decided against building homes for rural migrants and simply chose to tolerate their presence in shanty towns after it became politically infeasible to get rid of the newcomers and their settlements. Ultimately the Peruvian government learned to appreciate the broader social, economic and political benefits of allowing the squatters to gain legal titles to the shanty town property which they had illegally occupied and developed. Economist Hernando de Soto saw legalization of land and property titles in the shanty towns as part of an economic answer to the terrorism in Peru.

Hong Kong’s housing strategy has lacked such forward-looking goals. Moreover, it is characterized by a high level of government involvement in the housing market.

 

Influences on Housing Demand

Usually the number and type of housing units a society builds are determined by demand and supply conditions. Increases in population, growth of income, rises in the number of households, and changes in business cycle conditions can all affect the demand for housing. Changes in building costs (including construction costs for labor and materials), planning and building regulations, the politics of development, compliance with environmental restrictions and so on affect the supply of housing, especially the length of time needed to supply housing units where there are often long and uncertain delays.

Most societies leave these decisions to the market, where developers and contractors can make huge profits or losses (and even become bankrupt) depending on whether they make good or bad forecasts. Forecasting demand and supply conditions with some accuracy is a hazardous business, especially over the long-term. The list of failed private developers, in Hong Kong and elsewhere, is very long. Fifty years ago Hong Kong had a thousand developers; overwhelming numbers of them have since gone out of business.

But in addition to these market factors, the Hong Kong government is unavoidably involved in the business of forecasting the demand for housing because it is the monopoly supplier of land and the pre-dominant provider of housing. As land supplier the government need not have become a supplier of housing, but it ended up in this role for reasons I have discussed above and in other essays. Since 1954 the government has become the undisputed hegemon in property development. Unlike the case with private developers, the government does not face financial losses nor profit rewards for the accuracy of its forecasts. Good and timely forecasts are sometimes rewarded with political praise; bad and mistaken ones draw political condemnation. Praise and condemnation are, however, blunt instruments for motivating government officials to deliver performance.

In the three decades from the mid-1950s to the mid-1980s the government had a pretty much effortless task in making good and timely demand side forecasts. With a severe chronic shortage of housing units planning could be conveniently approximated by the excess number of households over the number of housing units.

The figures in Chart 1 show that in 1971 the ratio of domestic households to permanent housing units was 0.78. The ratio rose to 0.97 in 1986 and then to 1.09 in 1991. The ratio has remained within the range of 1.08 to 1.11 over the past 20 years despite considerable variations in supply and demand conditions.

 

Colonial Ambitions in Housing

The planner’s problem until the mid-1980s therefore did not require forecasting the many complex factors that drive market demand. Rather, the job was to fix a supply shortfall based on a simple arithmetic rule: count the number of housing units in supply and drive the ratio of domestic households to permanent housing units to slightly above one. The long-term housing strategy was to determine how long it would take for government to supply these units, so the only constraints on the accuracy of the forecasts were on the supply side. The demand side could be totally ignored. This was a planner’s ideal environment.

But the government failed to deliver the targeted number of housing units according to their plans. Under Governors Robert Black and David Trench it was supposed to supply 220,000 units in the period 1964-73, and under Governor Murray MacLehose to supply 350,000 units in the period 1973-83. Both plans famously fell short of their targets by about half (see Table 1which provides an outline of every housing plan announced by government and their main goals and outcomes). This did not bode well after the mid-1980s when government long-term housing strategies depended on accurate forecasts of both supply and changing and fluctuating demand conditions.

But until then, the severe chronic shortage of housing units in effect meant that accurate demand side forecasts were unimportant. It was not possible to get it wrong because demand was insatiable and the correct thing to do was simply to increase supply. And since the market was not producing housing units fast enough, the government decided to build them.

The public provision of housing units year after year became a supply driven only long-term housing strategy. When the supply fell short of the target, another plan would be put in place. This practice continued even after the mid-1980s when such a strategy had outlived its use and the number of housing units exceeded the number of households. At that point demand ceased to be insatiable. Business cycle effects became incredibly important in determining the demand side.

Apart from this challenge in the 1950s-1980s of meeting housing production targets, an even more important task was to set the criteria for allocating units to households. And what a mess that turned out to be!

There were three incompatible objectives – the resettlement objective, the income support objective, and the homeownership objective – and these have continued to create problems.

 

Embracing Public and Private Housing Strategies

The resettlement objective was a response to squatter clearance and did not require means testing. While urban squatters have largely been cleared, the problem of rural squatters continues to create trouble for the government’s development plans in the New Territories.

The income support objective aims to help poor households obtain decent shelter. Yet many households in the public housing program are quite well-off, and many households living in the private housing market are quite poor. Progress in recovering public housing units from well-off tenants in order to make more of them available to needy private housing tenants has not only been slow, it has become hugely expensive. More than half of the Homeownership Scheme (HOS) units are allocated to public housing tenants as an incentive for recovering the units they occupy, which they are not keen on surrendering.

Without a market for public housing units, it is difficult to rectify the widespread misallocation of public housing resources created by the two incompatible objectives of resettlement and income support.

This situation started becoming apparent in 1987 when the Long Term Housing Strategy was being prepared by the Governor Edward Youde, Chief Secretary David Akers-Jones, and Governor David Wilson. The severe chronic shortage in housing was gradually being alleviated as more public and private units were built and the supply shortage problem was being replaced by a more complex and diverse set of supply and demand factors.

The effects of rent-control legislation were also fading as the share of pre-war housing units in the total housing stock declined over time. Private developers were returning to the market. The annual production of public and private housing units was about the same. Economic growth and the rise of the middle income class created a growing demand for better quality and larger private housing units.

But at the same time, it was becoming more difficult to determine the proper balance between public and private housing units because clients in both sectors aspired to be homeowners. Their incomes overlapped to a considerable extent as there were many well-off households in the public sector and also many poor households in the private sector.

The homeownership objective aimed to address the situation by increasing the rate of homeownership in the community. The Long Term Housing Strategy (1987) wanted to achieve a 60% homeownership rate by 1997. This was revised to 70% by 2007 in the Ten-Year Housing Plan (1998). Both targets have been missed. The homeownership rate was 35.1% in 1986; 44.5% in 1996, 52.8% in 2006, and 52.1% in 2011.

Over the past 25 years the homeownership targets have slipped both when the private housing market was bullish and when it was bearish. When markets are bullish buying homes becomes unaffordable and when the market is bearish nobody is interested in buying homes.

The Long Term Housing Strategy (1987) reflected a realization that important changes were happening in the population’s demand for housing. Most importantly the housing strategy envisaged both public and private housing units to play significant roles in meeting housing goals. By incorporating private units into the housing strategy the role of demand became relevant and important for meeting housing goals. At the end of the day the number of private housing units supplied depends on whether developers find it profitable to do so. Market demand conditions will therefore play a central role. The original planning horizon was from 1985 to 2001 even though it was released in 1987. But the formulated strategy simply could not have foreseen the dramatic events that were soon to unfold.

The rising demand for homeownership and private property as an investment asset in the period after the mid-1980s coincided with historically unprecedented developments in the global economy – the rapid growth of the Chinese economy beyond all imagination and the onset of the Asian Financial Crisis and the Global Financial Tsunami together made government forecasts of housing demand largely irrelevant. Private property prices would first surge by 332% from 1989 Q3 to 1997 Q3 and then plummet by 65% from 1997 Q3 to 2003 Q3. 

 

Tung’s Unfortunate Timing

Combining market and planning forecasts to achieve multiple long-term housing objectives, such as efficiency, equity, and homeownership, became a nightmare compared with the previous strategy of setting quantitative targets to provide relief for severe chronic housing shortages. Planners everywhere have difficulty delivering strategies with multiple objectives. Doing it for housing that is subject to long and variable development lags with widely fluctuating market demands is a very difficult task to get right.

It is worth mentioning that in the simpler days of the 1950s-1980s, when planners had to worry only about supply and not demand, the proposed targets were still missed. They fell short by about a half!

By the time Chris Patten and C H Tung got into the business of addressing Hong Kong’s housing situation, the problem had changed enormously.  In the decade before the restoration of sovereignty, housing demand outstripped supply for many reasons but not because there were more households than housing units.

China’s opening and the migration of manufacturing across the border had created enormous wealth in Hong Kong. Inflation here reached double digit levels brought on in part by a weak US Dollar. Real interest rates were negative and property prices famously shot through the roof as households across town wanted to be in property and become homeowners. The labor market was so tight that some businesses were buying homes for their staff to prevent them from leaving. Households wanted better housing, to own their own homes, to own more than one home, and to invest in property. Therefore, although the housing production targets of the 1987 housing plan attributable to Youde, Akers-Jones and Wilson were successfully achieved they had nevertheless fallen short of the rising housing demand. And property prices in the market went through the roof in this period.

Against this background Tungdeveloped his Ten-Year Housing Plan (1998), which unfortunately was unveiled at the onset of the Asian Financial Crisis. In fact Governor Patten’s earlier proposal was quite similar to Tung’s housing plan.

Ironically unlike the plans under Black, Trench and MacLehose, the public housing targets under Tung’s plan were successfully executed under the leadership of two highly determined and skilled individuals: Rosanna Wong, Chairman of the Housing Authority, and Tony Miller, Director of the Housing.

The task of developing a long-term housing strategy must incorporate both demand and supply factors once the number of housing units is greater than the number of households. It is not enough to look chiefly at the supply side alone, as the earlier housing plans had done.

But what are the dangers of devising a long-term housing strategy today? What should be the goals? These are vital questions that will determine not only housing but the economic and political future of this city.  (To be continued next week.)


Chart 1: Number of Domestic Households and Housing Units

 Chart 1

 

Table 1: Summary History of Public Housing

 

Period / Governor or CE Policy Statement   Housing targets Housing outcome
1954-64Grantham  Major goal resettle squatters, minor goal provide low cost housing for poor 500,000 persons resettled  600,000 persons resettled240,000 persons allocated Low-Cost Housing
1964-73Black and Trench Review of Policies for Squatter Control, Resettlement and Government Low Cost Housing (1964) 1,980,000 persons rehoused 1,000,000 persons rehoused
1973-83MacLehose Ten Year Housing Program (1972) 1,535,000 persons housed350,000 public units 177,000 public rental and 23,000 HOS units
1985-2001Youde, Akers-Jones and Wilson A Review of Public Housing Allocation Policies (1984)    
Long Term Housing Strategy (1987) 1985-2001 1,085,000 public and private units  
Mid-Term Review of the Long-Term Housing Strategy (1993) 1985-93 605,600 public and private units 1993-2001 343,200 public units 

1997 60% ownership

1985-93 350,000 public and 262,000 private units

 

1997 46.6% ownership

1995-2006Patten  Long-Term Housing Strategy Review (1997) 1995-2006 47,000 public and 23,000 private units per year 1995-2001 54,000 public and 31,000 private units per year 

2001-06 39,000 public and 34,000 private units per year

 
1997-2007Tung Ten-Year Housing Plan (1998) 1997-2007 85000 units per year 50,000 public and 35,000 private units per year 

2007 70% ownership

1987-2007 50,000 units per year32,000 public and 23,000 private units per year 2007 53.1% ownership
Review of the Institutional Framework for Public Housing (2002)    

Note: summarizes the historical development of Hong Kong public housing programs conveniently divided into sometimes overlapping periods from Governor Alexander Grantham to Chief Executive Tung Chee-Hwa. The period 1995-2006 under Chris Patten was short-lived and quickly superseded by Tung Chee-Hwa’s era.

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