(This essay was published in South China Morning Post on 13 August 2014)
The prices of small housing units are showing signs of moving up again, suggesting that underlying demand is still strong. Housing prices in Hong Kong have escalated since the 1980s not only because of regulatory inertia that is slowing down new supply, as I argued in last week’s article, but also because we (both government and the market) have underestimated demand growth.
A commonly used measure of the gap between demand and supply of housing is the ratio of domestic households to permanent housing units, known as the “degree of sharing”. The ratio was 1.27 in 1971 and fell steadily to 0.92 in 1991 (see Chart 1). It has since remained within the range of 0.89 to 0.93 despite considerable variations in supply and demand conditions.
The very high ratios before 1991 were the result of the massive influx of immigrants that entered Hong Kong between 1945 and 1951, causing the population to rise from 600,000 to 2.3 million. Multiple families were often crammed into a single domestic premise. Housing construction targets in the wake of that influx aimed to lower the ratio to below 1.0 and allow some margin for turnover. Given that this target was reached in the early 1990s and has remained stable, one could conclude there is no housing shortage as the “degree of sharing” has not worsened!
Unfortunately, the “degree of sharing” has ceased to be a good indicator of a housing shortage for two reasons. First, from the 1990s the divorce rate in Hong Kong began to climb and increased more than three-fold from 6,295 in 1991 to reach 21,125 divorces in 2012 (see Chart 2). Divorce became a driver of housing demand as one ex-partner moved out of the household.
Most of those who divorce are from low-income households. This has fuelled the demand for “sub-divided” housing units concentrated in older buildings in the old urban areas. As units have become sub-divided, the supply of whole units has reduced and contributed to housing market tightness.
Unlike divorced women, many divorced men remarry as their prospects are brighter. Between 1991 and 2012, the number of remarriages rose from 4,892 to 19,542. In 2012, remarriages constituted 32.4 percent of all marriages registered in Hong Kong (total registered marriages were 60,383 of which 40,841 were first marriages). Remarried couples have become a new source of housing demand, especially public rental housing, as they relinquish the “sub-divided” housing units they previously occupied.
A second reason why the “degree of sharing” has become uninformative of underlying demand is that some divorced individuals move back to their parents’ household or live with other relatives, either for want of means or emotional companionship. As family members living under a shared roof, they become part of the household. But such members could remarry and then move out.
Forecasting divorce and remarriage patterns and their effects on housing demand has not yet become a regular exercise in the housing market studies of our policy makers. It should, because Hong Kong’s divorce rates are among the top ten in the world. Moreover, our remarriage rates must be leading the world with the many prospects from across the border
Looking ahead, in twenty years or so as the baby-boomers age, many of their housing units will begin to recirculate into the housing market. Unfortunately, these long cycles are very far from the planning calculus of policy makers, whose discount rates are usually very high. For now, the twenty–year horizon is a long way off and can be ignored at any reasonable discount rate. But this will not be the case in ten years’ time. Better that policy makers start grappling now with this long-term issue.