(This essay was published in South China Morning Post on 20 April 2016.)

Urban housing is one of the most important issues in economic development. How society chooses to supply housing to meet the needs of both existing residents and new migrants has enormous long-term consequences for every facet of economic, social and political life.

 

Over the past half-century, Hong Kong’s primary response to this issue has been to develop a public housing program. Today, almost half of the population lives in publicly provided housing, making the program one of the largest in the world per capita.

 

There is, however, a price to pay for this achievement. Because of the increasing scarcity of urban land, many public housing estates are now found in satellite towns in outlying areas. Families are attracted by the low rents but the long, costly commute between home and work has reduced their ability to find and hold jobs in other parts of the city, or even to participate in the labour market at all.

 

Moreover, the rigidity in Hong Kong’s public rental housing requirements meansthey are likely to stay in the same unit permanently — even when moving to another district might make better sense, for example, to capture labour market opportunities there. Public rental housing residents are therefore far less mobile than private renters.

 

Owners of public housing units sold through the government’s Home Ownership Scheme (HOS) and Tenants Purchase Scheme (TPS) also face serious restrictions on their mobility because they have to pay the unpaid land premium when selling their units. This is assessed at the time of repayment, meaning they are unable to capture the full-appreciated value of their property.

 

There isevidence that workers are living farther from jobs. The urban core of Hong Kong Island and Kowloon Peninsula has consistently accounted for about 75 percent of total job opportunities for decades, even as the share of urban dwellers in Hong Kong has plunged from 91% in 1976 to 58% in 2011.

 

There are consequences of this on economic efficiency. My colleague William Chan and I recently completed a study quantifying the impact of public housing tenancy on labour force participation and unemployment.

 

Working withdata from the Census and By-Census Surveys from 1996 to 2011 and the General Household Surveys (GHS) from 1993 to 2012, we found male heads of households who were public renters had a 2.38-2.8 per cent lower participation rate in the labor force compared to private renters (the figures vary somewhat between the two surveys).

 

Among those who had not moved residence in the previous five years, the difference was 3.3 percent.

 

Male renters also had a consistently higher unemployment rate – 1.2 percent higher in the census data after controlling for other observable characteristics and 2.4 percent in the GHS data. Considering the average unemployment rate was 3.5 percent, the magnitude of this effect is very substantial.

 

Hong Kong has a reputation as the “best city in the world for commuters.” Yet tenancy in public housing is associated with significantly reduced labor force participation and increased unemployment – a problem that we believe is partly due to the rigid public rental system that means public tenants are basically stuck in their assigned units over time.

 

Partly to tackle this problem, the government has introduced a transport subsidy scheme for low-income workers and is constantly expanding coverage of the mass transit system. These initiatives are meant to facilitate access to jobs even as the population continues to migrate out of urban areas, but our results do not show any significant positive effect of access to mass transit.

 

If the heart of the problem lies with the inflexibility of the public housing system, then a more direct remedy would be to allow greater mobility within that system.

 

The government will not allow a bona fide market in public rental housing. However, I believe privatizing the public housing system would reduce the wastage and inefficiencies it has created in labor markets. Think of a retired public housing tenant who could rent out his unit in an urban area where jobs are located and rent another unit out in a more remote location.

 

Combining the consumption inefficiencies of public rental housing with the labor market inefficiencies adds up to a staggering cost for society. Privatizing the public rental housing stock alone would easily add 1-2 percentage points to GDP, and the present discounted value of this would be trillions of dollars.

 

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