(This essay was published in Hong Kong Economic Journal on 22 January 2014)

 

Last September the media reported on a government study presented to the Poverty Commission that showed the number of poor people in Hong Kong would drop by almost half – from 1.29 million to 690,000 – if public housing subsidies were counted as part of a family’s income. The government study translated public housing into subsidies by estimating the market worth of public flats and subtracting the rent paid by tenants as the value of the “benefit” transferred to the tenant household.

 

Anyone who has studied an introductory economics course would know immediately that such a valuation method is inappropriate. The reason, as every economics student must know, is that subsidies-in-kind are in general always inferior to subsidies-in-cash. To understand this, imagine that this Christmas you received as a gift a green, striped ABC brand scarf, whose market price is $500. Did you receive $500 worth of value? Not really!

 

Two Views of Public Housing and Poverty Line

 

First, you may not need a new scarf because you already have one. Second, you may not want an ABC brand scarf and would prefer to have your favorite XYZ brand. Third, you may not prefer the chosen color or pattern, and would have wanted another design or style. Indeed, you would only be willing to pay $250 for the scarf you received. So a scarf valued at $500 in the market is only worth half its value to you.

 

The immediate public reaction of some social advocates of the poor in Hong Kong to the government study was not surprising. They feared the government might use the figures to downplay the plight of the poor. They warned against using public housing as a means of defining people out of poverty.

 

Mr. Ho Hei-wah, director of the Society for Community Organization, and Mr. Stephen Fisher, Oxfam’s Hong Kong director, together said the government report should be used for reference only. In other words, it is to be ignored in defining the poverty line. Both were opposed to treating public housing as a subsidy and counting it as income to be included in the calculation of the poverty line because it would, they argued, fail to truly reflect the poverty condition of those living in public housing.

 

Both were only willing to support establishing two types of poverty lines. The first would be set at half of the median household income after taxes, but before welfare payments are counted. The number of people currently living in poverty under this line is 1.29 million. The second line would be set at half of the median household income, after taxes, but counting welfare payouts in cash such as the Comprehensive Social Security Assistance and disability allowance as income. The number of people living in poverty falls to just over 1 million in this calculation.

 

But this position effectively excludes public housing subsidies from the calculation of the poverty line. Mr. Alex Lo of the South China Morning Post wrote on 3 September 2013 “that experts and advocates can legitimately fight over how to calculate public housing as a subsidy, but its inclusion is only fair and reasonable. Indeed, honesty and accuracy demand it.”

 

Mr. Lo elaborates: “If two families have the same household income but only one gets a housing subsidy in the form of public housing, obviously it would have more money to spend…. To count both households as equally poor would be absurd.” He thinks the approach of the government study “may be too simplistic but the basic idea is right. It’s a matter of getting fair and accurate rental equivalents.” Lo notes that “there is much room for debate over how to calculate housing subsidy as a part of household income.”

 

Difficulty in Valuing Public Housing

 

One suggested approach is to exclude housing expenditures from household income in the calculation of the poverty line. This compares disposable income after deducting expenditures on housing. The problem with such an approach is that homeowners typically make mortgage payments rather than pay rent. The amount of monthly mortgage payments depends on the outstanding amount of mortgage loans, the prevailing interest rate, the terms of the mortgage loan, and whether there has been refinancing, and all these can vary considerably from household to household depending on when the property was purchased. All these considerations make it very difficult to use such an approach to compare like with like across homeowners and renters in defining a poverty line.

 

Another approach is to determine the fair and accurate rental equivalent for a public housing subsidy when public housing units cannot be circulated – i.e. bought, sold or rented out. This is actually a rather complicated problem.

 

Let us begin with an example of how public housing translates into government subsidies. One can begin with by estimating the market worth of public flats and subtracting the rent paid by tenants. If a family pays a public rent of $1,000 while its private rental equivalent is $6,000, the subsidy is counted as $5,000. This is the cost to the government (or to society) of providing the public housing unit and it covers the value of land, the cost of building and managing the unit, and all other associated costs. But is this $5,000 the value of the subsidy received by the public housing tenant as a transfer income? This would be the case if the public housing unit occupied by the tenant was a unit he had freely chosen on the open market. As we know, this is not the case with our public rental housing program.

 

The choice of housing unit is severely limited when it comes to the public housing sector. Only units built by the Housing Authority can be chosen and these are typically assigned by the Housing Authority. A prospective public housing tenant can refuse an offered unit, but he will have to go back into the queue and wait for a fresh assignment at a future unknown date.

 

This means public housing tenants often sacrifice many attributes of their unit like location, size, neighbors and amenities. They accept a public housing unit only because the rent is so low. For some tenants the unit they are assigned might accidentally be exactly what they wanted, but these are untypical cases. More often it is like receiving a gift at Christmas from a friend who does not know you very well. He gives you a green striped ABC brand scarf that you don’t particularly like, but you accept it because you need a scarf and you have no other choice.

 

Let us assume that the value of a public housing unit is perceived by one tenant to be worth only $4,000. For him the value of the benefit is merely $3,000=$4,000-$1,000. It is possible another tenant may value it at only $2,500 and for him the value of the benefit is only $1,500=$2,500-$1,000. The value of the received benefit for the same unit may vary from tenant to tenant depending on his circumstances and preferences.

 

Restrictions on Sales and Rent Dissipates Value

 

My economics colleague Dr. Yan Wai-Hin of the Chinese University of Hong Kong, estimated the average value of the subsidies granted by government through the public housing program and the average value of the benefits received by public housing tenants for the period 1976-1996 (see Table 1). In 1976, the provision of the public rental housing program translated into a monthly subsidy per qualified household of $399. This would be equivalent to the estimated private monthly market rental value of the average public housing unit minus the average monthly rent collected from the public housing tenant. But the average value of the benefits received per household was perceived by the tenants to be only $243 per month according to the research findings.

 

Table 1: Monthly Subsidy Granted and Benefit Received per Household and the Efficiency Ratio of the Public Rental Housing Program, 1976-1996

 

1976

1981

1986

1991

1996

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

Source: Yan (2000)

 

This means for every dollar of resources the government spent in 1976, only 61 cents was perceived as received benefits by the average public housing tenant. The efficiency ratio is therefore only 61%. In 1986, the efficiency ratio rose to 75% and then fell somewhat to 70% in 1996. The ratio of benefits received to subsidies granted appears to vary between 60-75%. Market conditions will have some impact on the estimated value of these figures. More recent estimates have not been made, but there is no reason to believe they would be very different.

 

Can we then apply a 60% or 75% discount on the estimated private market rental worth of public housing units in our calculations to obtain an improved poverty line?

 

Unfortunately this is not correct either. The average ratio of subsidies granted to benefits received may not be the appropriate ratio to apply to any individual household. For someone who really likes a $500 green striped ABC brand scarf, the value of the gift is truly in the neighborhood of its market value. But for someone who does not like it then it could be as low as $250, or even lower. And typically we wouldn’t be able to easily identify which households value their public housing units highly and to what extent, and which don’t.

 

Better Way to Alleviate Poverty

 

If instead of receiving a scarf for Christmas, I had been given a red packet, a bank cash voucher, or even a cash coupon to a supermarket, I would not have this problem. This is the obvious difference between subsidies-in-cash (or cash-like substitutes) and subsidies-in-kind.

 

But wait a minute. Isn’t it true that if I didn’t like the scarf I received during Christmas, I can still give it away to another person? Indeed a lot of Christmas gifts get recycled. And only those gifts that people like stay with them. Many lucky persons have had this merry experience during Christmas. At this point the unwanted Christmas gifts become quasi-cash-equivalent objects that can be recirculated.

 

Unfortunately, public housing units cannot be recirculated. They are assigned to a household and seldom if ever get recirculated. Therefore, unlike the $500 green striped ABC brand scarf, it cannot become a commodity and be traded. Consequently, a public housing unit cannot be valued based on its private market rental price of say $6,000 because it cannot be circulated. The restriction that it cannot be bought, sold or rented turns a public housing unit into a much less valuable asset than its equivalent on the private market. In effect, the government’s public housing program is destroying value.

 

So the government study had assumed that public housing units have the same circulation properties as private housing units, which unfortunately they don’t. I privately wonder if government agreed to introduce a poverty line because it had been led to believe that public and private housing units can be treated equivalently. If so, then according to the government study an estimated 600,000 households could potentially be pushed above the poverty line by adding the market value of the public housing subsidy to household income. The resulting poverty problem then becomes far less severe than is often alleged.

 

I believe even if using the Poverty Commission definition of the poverty line, the true extent of households in poverty cannot be 1.29 million or even just under 1 million. Surely, as Alex Lo says, the public housing subsidy has to count for something even if it is not at full private market value.

 

Interestingly, the government study implicitly shows there is one very simple and costless way to alleviate poverty in one fell swoop. All one has to do is to transfer full private ownership rights of the public housing units to the occupying tenant free of charge. This would allow the tenant household to receive a transfer benefit that is exactly equal to the market worth of public flats after subtracting the rents they pay. This would, according to the government study, lift 600,000 households in public rental housing above the poverty line. This would have been the best Christmas gift the Poverty Commission could bestow on the poor people in Hong Kong on the eve of the sixtieth anniversary of the Shek Kip Mei Fire. Hallelujah!

 

References:

 

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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