(This essay was published in Hong Kong Economic Journal on 14 June 2017.)

 

After the 1967 Riots and with the arrival of Governor Murray MacLehose, more policies in support of the disadvantaged were adopted in Hong Kong. The great expansion of the public housing program was the centerpiece of MacLehose’s new policy initiatives. It also presented considerable challenges for government in terms of land acquisition and finding the required resources.

 

Although the 1967 Riots were triggered by an industrial dispute, the public’s strongest complaints about life in Hong Kong centred on the harsh housing conditions that most residents had to endure. Their sense of injustice was exacerbated by the allocation of many valuable public housing units to squatters rather than low-income households.

 

The resettlement program that started in the 1950s had failed to address the plight of low-income households in finding basic accommodation. Indeed, census data from 1976 showed that only 53 per cent of working age households living in public rental housing had incomes below the median level of household income distribution.

 

The belief that those living in public rental housing were less well off was untrue even in the mid-1970s.

 

Today, the picture is of course very different with 80 per cent of working age households in public housing having income below the median level of the population. This is not surprising since the majority of those living in public rental housing in the 1970s were resettled squatters who were admitted without means testing at the outset.

 

The demolition of large numbers of rent-controlled prewar housing units in the early 1960s also severely worsened the living situation of those who were evicted and had to be accommodated in ever more cramped private housing units. The situation was most bleak for those who did not want to become squatters and could not therefore be resettled.

 

Expanding Public Rental Housing

 

MacLehose’s public housing program announced a new priority shift, from resettling squatters to accommodating low-income households. This was an important step forward following the 1967 Riots. MacLehose had correctly identified the injustice of the housing situation and moved to repair the damage that had been created by a series of bad decisions that are not well understood – rent control in 1947, the resettlement of squatters in 1954, and a poorly executed amendment of the plot ratio in 1962.

 

The early years of the resettlement rental housing policy determined the shape of housing policy after the 1967 Riots. Unlike Singapore, which chose from the very beginning to house its low-income population through subsidized homeownership units, Hong Kong embarked on a totally different trajectory with different objectives. At its peak in the year 1976, some 42.2 per cent of all households were accommodated in public rental housing units.

 

Another important legacy of the resettlement program has been the very small size of the units built. Urban land was in short supply so resettled squatters were provided with an extremely basic standard. This decision exerted a lasting influence on the size of all future public housing units. Even private developers were influenced and found it unnecessary to build much larger units to entice public housing tenants to become their customers. As the demand for housing grew with rising prosperity, housing units did not get much larger, only more expensive.

 

The decision to accommodate low-income households in the rapidly expanding public rental-housing program was a pivotal one, coming at a critical juncture in Hong Kong’s post-1967 history. It opened up the public housing program to accommodating two kinds of tenants: non-means tested resettled squatters and means tested low-income households.

 

Finding Land and Funding Construction

 

MacLehose’s Ten Year Plan required vast amounts of land that were available only in the New Territories. Since most of that land consisted of small agricultural plots owned by indigenous residents, the task of assembling land for development was quite formidable, in terms of both time and cost.

 

New market exchange institutional arrangements in the forms of “Letters B” and a “small house policy” were created to facilitate the surrender and assembly of land through exchange. Such market institutions encouraged the emergence of intermediaries that lowered the transactions cost with less confrontation and greater efficiency.

 

“Letters B” could be sold to developers, who could then exchange them with government for non-agricultural land after paying a premium for conversion of land use. This meant government did not have to spend resources to acquire land surrendered by owners, and indeed it gained revenue from land conversion to fund the construction of public rental housing.

 

Such market exchange institutional arrangements were an ingenious answer to solving the dual problem of finding land and funding construction with minimal coercion at a critical juncture in Hong Kong’s development, because they overcame the propensity to withhold land and resist development. As a result, many small dispersed plots of land could be assembled into larger contiguous pieces that could be usefully deployed with greater efficiency.

 

Without the twin instruments of “Letters B” and “small house policy”, MacLehose’s ambitious public housing program could not have been completed.

 

Well Off Tenants and Inherited Tenancies

 

The coexistence of non-means tested resettlement tenants and low-income households had, by the 1980s, produced the “well off tenants” problem. The issue of how to deal with the so-called “well off tenants” has continued to haunt the authorities to this day. Formal measures were introduced in 1984 to force “well off tenants” that failed the means test to either surrender their units or pay “double rent”. The measures were not always rigorously enforced, which probably was a prudent administrative judgment. As a result “well off tenants” often ended up paying “double rent’ rather than becoming evicted.

 

Many people may believe that “well off tenants” should not be allowed to use public housing resources, however, such abuse is not as outrageous as it sounds because many of these tenants were admitted as resettled squatters. Means testing was not a required condition for admission and many resettled households had lost their squatter units as a result of clearance or natural causes. Their occupation of government land might have been illegal at the outset, but some folks then and today sympathize with the idea that even squatters have some rights.

 

Another related concern was how to prevent public rental housing tenancies from being inherited by the next generation. This could commit the public to an open-ended responsibility for housing successive generations or families in public rental housing. The authorities used the same measures applicable to “well off tenants” to limit such kinds of abuse by requiring them to either surrender their units or pay “double rent”. The hope is to drive out the children of these tenants, especially married children, who have higher incomes.

 

Again these measures failed to drive out the original tenants, but were successful in getting their children to exit to avoid breaching the household income threshold. Some of these children, however, did not have high incomes and had to rent in the private housing sector. The irony is that it has helped to drive up rents in the private sector in the past decade and led to the mushrooming of sub-divided private housing units, estimated to have increased to 200,000 units altogether.

 

As a consequence, average occupancy per unit in the public rental-housing sector has fallen from 5.1 in 1976 to 2.8 in 2016, while that in the private rental sector decreased from only 3.3 in 1976 to 2.5 in 2006 and subsequently rose to 2.6 in 2016. The decision to penalize “well off tenants” and “inherited tenancies” has

 

exposed the odd situation that public housing cannot be sub-divided, but private housing can. The choice of measures to take in tackling “well off tenants” is another critical juncture in the history of housing policy choices.

 

Housing Ladder and the Homeownership Scheme

 

A Homeownership Scheme (HOS) was introduced in 1978 in response to public demand to provide a housing ladder for households whose economic conditions improved over time. In practice, this scheme was to a large measure another attempt to entice public rental housing tenants to surrender their rental units. Half the HOS units were assigned to green-form applicants from the rental sector for whom the income eligibility requirement was waived.

 

The first batch of units became available in 1980 and was sold with discounts of around 30 per cent of the market value. Buyers of these units had 100 per cent ownership, but subsequent HOS units were sold with the requirement that they repay the unpaid land premium. The discount on the market price was in effect a deferral of the unpaid land premium that was owed. Effectively, this meant the purchaser did not own 100 per cent of the unit.

 

The value of this unpaid land premium is assessed by the authorities at the time of repayment. This means if market values increase, then the amount to be repaid also arises. This new arrangement effectively makes it very difficult for most households to repay the land premium.

 

Up to the present time, only one-fifth of the HOS units have repaid this land premium. Owners of the rest cannot sell these units on the open market until they repay, too. And since these owners do not have 100 per cent ownership, there is considerable uncertainty about how these units could be redeveloped in future as the building deteriorates.

 

The decision to change a policy of giving discounts on the market price of HOS units to one of lowering the initial sales price on account of an unpaid land premium fundamentally alters the nature of HOS units as a step in the housing ladder. If HOS owners cannot sell the unit because of the unpaid land premium, then most of them are stuck in their unit without the prospect of upgrading into the private sector. The housing ladder now has some missing rungs. And when property prices increase more rungs on the ladder will vanish. The ladder ceases to function.

 

This was seen when property prices escalated after the 1990s. The pricing of HOS units in the end dampened the prospects for upward mobility among those in the middle class who had missed the opportunity to own a home in the private sector before prices took off.

 

This policy decision was taken just before the economy began to soar as China opened up and global integration began, in the very early 1980s. It was another critical juncture.

 

Will the Past Continue to Haunt Us?

 

Rent control in 1947 and squatter resettlement in 1954 set Hong Kong’s public housing policy on the trajectory of public rental housing and a pseudo-subsidized home ownership scheme that deprived some half the population from sharing in the rising prosperity of Hong Kong’s economic growth. This is most unfortunate. And Singapore is there to remind us of an opportunity missed and a society divided.

 

The housing policy mistakes of our past cannot explain all the causes of the 1967 Riots, but they did have a role to play. Would the visionary Governor MacLehose have imagined an ambitious housing plan not anchored in public rental housing if the resettlement program had not been in place and entrenched? It is hard to say. Path dependence is a powerful force, but must we forever be trapped in the past? The market-like institutions introduced to find land and fund the building program suggest that creative deviations from the standard fare are always possible for those who are bold and thoughtful.

 

 

 

Photo: Apple daily

 

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