(This essay was published in Hong Kong Economic Journal on 29 November 2017.)

 

For many in Hong Kong our housing problem is high prices and high rents – a shortfall in housing. They conclude that the most adversely affected are the low-income and middle-income households so government must build more housing for these folks, which then means more public sector housing.

 

But there is another way of viewing our housing problem. High prices are not bad news for homeowners and landlords, only for prospective homeowners and renters. Our problem is that 51.5% of our households are now renters. Viewed from this perspective the real housing problem is the unequal distribution of housing wealth.

 

Given that prices and rents have risen many times against income it would take at least a generation to build enough housing to meet the shortfall in housing. Hong Kong’s divided society cannot wait that long.

 

I am not against a government policy to continue to build public housing units. But I believe the units should be offered to eligible households either for purchase or rent (with an option to buy later).

 

For existing occupants of public rental-housing units, I favor giving them the option to buy their unit at an affordable price, and with appropriate caps on the unpaid land premiums and enabling financing arrangements.

 

For the owners of existing subsidized homeownership units, I also favor having their unpaid premium appropriately capped so that there is an incentive to payoff the outstanding amount and become bona fide owners of private property.

 

Let me explain why building more public rental housing units would not solve our housing shortage any time soon and will continue to divide society.

 

Between 2006 and 2016 the number of households living in the private rental-housing sector increased by 178,800 from 351,100 to 529,900 (see Table 1). The total number of households in Hong Kong had only increased by 280,200 from 2,226,800 in 2006 to 2,507,000 in 2016.

 

Table 1: Number of Households by Accommodation 2006-2016

  2006 2016 Difference
Private rental households 351,100 529,900 178,800
Public rental households 701,000 761,300 60,300
Private owner households 822,600 844,100 21,500
Subsidized owner households 352,100 371,700 19,600
Total households 2,226,800 2,507,000 280,200

 

Private rental housing households were only 15.8% of the total number of households in 2006, but had grown within 10 years to 21.1% by 2016. Their growth constituted 63.8% of the total increase in households.

 

The relatively small private rental-housing sector has had to absorb the lion’s share of the total increase in households. It is not surprising that sub-divided housing units have blossomed in this sector. As a consequence, rents and property prices have escalated, the demand for housing has continued to be robust, and private developers are building ever-smaller units.

 

Meanwhile the applications waiting list for public rental housing units has shot up from 97,300 in 2006 to 284,800 in 2016. And the so-called “waiting time” has increased from 2 to 4.1 years. Where did these additional low-income households come from?

 

On the surface, these figures seem to suggest that the demand for public rental housing is increasing. The government goal to reduce the waiting time has missed the target again and again. One commentator even concluded, “public housing policy is failing those most in need.” But this is a superficial rendering of what is happening in Hong Kong’s housing sector.

 

A survey conducted by the government in 2005/6 showed that 25% of those on the waiting list lived in public rental housing and 10% lived in subsidized ownership units. The average household size and age of the applicants was dropping rapidly because the number of one-person household applicants was rising. In 2005/6, 43% of those on the waiting list were one-person households

 

In 2016, the number of non-elderly one-person household waiting list applicants constituted 47% of all applicants, with 25% living in public rental housing units and 21% living in subsidized ownership units. Among the general waiting list, 25% were living in public rental housing and 12% were living in subsidized ownership units.

 

Since the waiting list has risen enormously in the past 10 years, it is reasonable to conjecture that not a few of those now living in private rental housing originated from the public housing sector as well. This implies that a large fraction representing the majority of the demand for public rental housing actually comes from within the public rental housing and subsidized ownership sector, especially among non-elderly one-person households.

 

All of us know households have life cycles that affect their size and composition in an organic and evolutionary manner. The decision of whether and when to form a separate household depends on the incentives people face, but getting onto the waiting list for public rental housing is practically costless (subject to eligibility). So judging the intensity of the demand for public rental housing solely on the length of the waiting list is not without its pitfalls.

 

The issue is especially troublesome because Hong Kong’s rapidly ageing population, combined with the long life expectancy of the elderly, is creating additional demand for housing. Both the elderly and the young want housing at the same time. The situation is particularly acute in the public rental-housing sector. The shortfall is exacerbated by the inherent rigidities of a public system that builds relatively homogeneous units that do not allow for the exchange of units through a market system.

 

As a result, elderly members of a household do not vacate their units, so younger adult members seek to move out. This shows up in the rapidly declining average household size in the population.

 

First, long life expectancies mean that a growing number of households are now made up of elderly one-person and two-person households. In the public rental-housing sector, the average household size has declined from 4.77 in 1980 to 2.75 in 2016. Allocation rules for public rental housing units have also favored the elderly. In 2016, 41.1% of all elderly households above the age of 60 lived in public rental housing.

 

There are significant differences in household characteristics between public and private renters. The number of public renter households of one andtwo persons increased between 1996 and 2016, but the number of households with three or more persons declined (see Figure 1). Among private renters, the main increase from 2006 to 2016 was in the number of three or more person households.

 

Another important characteristic among public renters has been the rapid increase of elderly households (aged 60 years or higher) from 1976 to 2016 and the decline of younger households aged 20 to 39 from 1986 to 2016 (see Figure 2). By contrast, among private renters elderly households are not as important as younger and middle-aged households (both increased from 2006 to 2016).

 

Since 1996, all the increase in elderly public rental-housing households has been due to the increase in one-person and two-person households (see Figure 3). In 2016, elderly households constituted 48.1% of all public rental-housing households, of which 27.6% are one-person households and 28.8% are two-person households.

 

Among middle-aged public renter households (age 40-59), the continuous rise in one-person and two-person households was especially rapid from 1996 to 2016. Moreover, the number of households with three or more persons actually dropped after 2006.

 

A number of factors are responsible for such a development. Public rental housing allocation rules give preference to one-person households above the age of 40. Adult children are more likely to leave middle-aged parent households, especially if this helps reduce household income so that parents would not have to pay double rent on account of becoming a well-off family. And finally, there is the rapidly rising divorce rate, whose main incidence has fallen on public rental middle-aged households.

 

All these factors have driven down the average household size in the public rental-housing sector. These developments, together with the subsidized owner sector, has contributed to the growing number of applicants on the waiting list for public rental housing units.

 

Adult children, whose parents are private homeowners, can get financing from their parents to purchase private homes. Those in the public sector have to depend on the government – the ultimate landlord – to get assistance to solve their housing demand needs. But financing is not available from government so the solution is to queue for public rental units on the waiting list. The problem with this administrative allocation is that it is inefficient.

 

The inefficiency shows up in many ways. The allocations of pubic rental units are dependent on criteria adopted by the Housing Authority. The criteria are not necessarily bad, but they tend to be rigid and are often behind the times. Established criteria are difficult to change and tend to be defended by vested interests long after they are useful.

 

An obvious example of major inefficiencies is the homogeneity of the units. The primary official consideration is often fairness. But this becomes a barrier for parents and adult children to live together because units are too small for two generations to live in the same quarter. Another example is that the allocated units may be too far from the parents’ home causing other losses.

 

The inefficiencies can spill over into other non-housing areas. It is a no-brainer that many of the elderly households living in the public rental-housing sector are in need of domestic care. Mr. C K Law, Secretary of Labour and Welfare, has recently floated the idea that about 600,000 domestic helpers might have to be recruited by 2047 to care for the needs of the elderly poor. Obviously, most of these foreign helpers will be serving public rental-housing tenants.

 

The natural question to ask is, why aren’t some of these elderly households staying with their children? Or better still, why aren’t some of the children moving in with them? There are of course many reasons why this is not happening. But surely one of them is that the rigidities of the public rental housing program and its regulations do not provide such flexibility. Only bona fide housing markets can perform such facilitation.

 

If the government believes that building more public rental-housing units would shorten the waiting time, then it is betting that supply can eventually catch up with demand to clear the waiting list. But the longevity of our elderly population will drive the demand for public rental housing for a long time to come. Hong Kong’s housing shortage will not be solved any time soon. Society will continue to be divided between “haves” and “have-nots” and the feeling of injustice will not abate.

 

If this is the only approach the government has, then the waiting list will only get longer and longer because the only hope for vast numbers of people needing housing is to join the waiting list. Supply will continue to lag behind demand. Building ever more public housing will create the kind of perverse incentive that also plagued the 1950s resettlement policy to clear squatters. The number of squatters actually increased from 300,000 in 1954 to 600,000 in 1964. Eventually, more than a million squatters had to be resettled because more and more people voluntarily turned themselves into squatters hoping to be resettled. This is the Say’s Law of public housing: supply creates its own demand.

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