(This essay was published in South China Morning Post on 11 January 2017.)

 

In October 2013, a month after the Government’s Long Term Housing Strategy (LTHS) consultation document was released, I came to the conclusion that their estimate of a net annual increase of 29,400 new households in the decade 2015-25 had significantly underestimated future housing demand growth. Ever since then residential housing prices have continued to rise rapidly in spite of the imposition of hefty punitive stamp duties. This is strong evidence that my conclusion was correct.

 

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, but also because 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. It has since remained within the range of 0.89 to 0.93 despite considerable variations in supply and demand conditions.

 

Given that this ratio has remained stable since 1991, one could naturally conclude there is no housing shortage because 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 20,019 divorces in 2014. 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. It has also increased the applications on the waiting list for public rental housing.

 

Unlike divorced women, many divorced men remarry as their prospects are brighter. Between 1991 and 2014, the number of remarriages rose from 4,892 to 19,197. In 2014, remarriages constituted 34.0 percent of all marriages registered in Hong Kong (total registered marriages were 61,467 of which 37,237 were first marriages registered in Hong Kong and 5,033 were marriages registered in the Mainland). 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 five in the world today. Moreover, our remarriage rates must be leading the world with the many prospects from across the border.

 

But this still omits the number of new single person households that appear each year as young adults prefer to move out of their parents’ home. Between 2001 and 2011 an average of 7,000 to 8,000 new single person households were recorded each year.

 

Combining first marriage, remarriage and single person households would easily take us above 60,000 new households each year. What is more alarming is that public housing policy is committed to allocating a new public rental housing units to former tenants, who have become fresh low-income applicants on the waiting list after having divorced and becoming remarried again. This is a perverse incentive that adds to our public rental housing applications waiting list.

 

Our long-term housing strategy should not be focused only on how many housing units to build. It must also consider the kind of society we will be encouraging through our public housing policies. Are we encouraging divorce and remarriage? Creating an economic underclass in the public rental housing estates? Reducing upward social mobility and worsening intergenerational inequality? And fueling housing demand and the growth of subdivided housing units in the private rental market?

 

It is time for long-term housing strategy to change course in the next five years.

 

 

Photo: South China Morning Post

 

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