(This essay was published in Hong Kong Economic Journal on 28 March 2018.)

 

The people of Hong Kong may have different views about many issues, but everyone agrees that the housing shortage is our biggest domestic problem.

 

Many think that the problem can only be resolved in a fundamental way by increasing housing supply. This means finding more land for housing construction, including perhaps reclaiming more land from the sea, and constructing taller building to house more people.

 

But such relief will take time. It takes 10 years or longer to reclaim land and develop residential flats.  Converting land from low-value uses to high-value residential uses is not much faster. Agricultural land in the New Territories owned by indigenous inhabitants and property developers is a significant source of convertible land but, given the present regulatory procedures and political hurdles that have to be surmounted, it could take nearly 10 years for residential units to materialize.

 

Even among those favoring more building, there are differences about what kind of housing should be built. Some groups believe the government should build more public rental housing units to benefit the least well-off who they claim have suffered most from the severe housing shortage. They point to the growing number of applicants, in particular one-person applicants, on the Waiting List for public rental housing. These groups argue that increasing the supply of public rental housing is the only way to directly address the economic, social and political problems arising from the housing shortage.

 

Other groups worry more about the vanishing hopes of the middle class for homeownership. They want government to build more subsidized sales flats, raise the income and asset eligibility thresholds, and set more affordable sales prices. They point to the large pool of eligible applicants that appear when Home Ownership Scheme and Green Form Subsidized Home Ownership Scheme units are put up for sale.

 

Still other groups want government to control rents and socialize housing supply more widely. They are angry with private developers for exploiting their dominant market position and deploying sales tactics that further drive up property prices in the primary market. They are also angry with landlords for charging high rents and sub-dividing units.

 

All these groups to varying degrees advocate for the interests of the constituencies they represent. But we need a more macro perspective to help bring effective relief to the severe housing shortage we face.

 

Using census data, I examined changes in the population between public and private housing occupants and renters and owner-occupiers in the decade between 2006 and 2016. By comparing the changes, I found extremely important evidence of how scarce and valuable housing resources are becoming less efficiently allocated.

 

The evidence shows that although many more public rental housing units were built over the decade, the total number of people living in public rental housing remained about the same, with the result that the average number of persons living in each unit fell. At the same time, the total number of people living in private housing increased a lot and the average number of persons living in each flat increased.

 

In numeric terms, the supply of new residential flats increased by 255,458 units, of which 138,959 were public rental flats, 7,245 were subsidized sales flats, and 109,254 were private flats (see Table 1). In percentage terms, 57.2 per cent of the total increase in new flats was public flats, in particular public rental housing flats, and 42.8 per cent private flats. The very low number of subsidized sales flats reflected the halting of the Home Ownership Scheme program during 2002-2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amazingly, over the ten-year period, the total number of people housed in the public rental sector only increased from 2,096,126to 2,100,126. In other words, while 138,959 new public rental flats were completed, a mere 4,000 additional people were accommodated in such flats – despite the background of a severe housing shortage! Meanwhile, the Waiting List increased from 97,300 applicants to 288,300.

 

An even worse result is found with subsidized sales flats, when the total number of people housed in subsidized sales flats decreased from 1,204,324to 1,144,774 from 2006-2016. In other words, despite the addition of 7,245 new subsidized sales flats, the number of people living in that sector actually fell by 59,550 (part of the reason might be the conversion of subsidized flats into private flats).

 

The situation for private residential flats was entirely different. The total number of people housed in private flats increased from 3,278,708to 3,789,474 – an addition of 510,766 persons even though the supply of new private flats was a modest 109,254 units.

 

Figure 1 presents the change in distribution of households and population by housing type and accommodation tenure between 2006 and 2016. It breaks things down further so we can examine more closely the contributing role of different housing types and accommodation tenures in meeting Hong Kong’s housing needs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Between 2006 and 2016, private flat rental households increased from 15.3 per cent of all households to 19.9 per cent. By comparison, there were decreases in public flat rental households from 31.0 per cent to 30.4 per cent, owner-occupiers of subsidized flats from 16.3 per cent to 15.3 per cent and owner-occupiers of private flats from 36.4 per cent to 33 per cent.

 

Nonetheless, the total number of households in each category increased. Private homeowner households increased from 810,277to 829,270 (2.3 per cent growth), subsidized flat owner households increased from 362,439 to 384,006 (6 per cent growth), private housing renter households increased from 339,675to 500,652(47.4 per cent growth), and public housing renter households increased from 690,788 to 761,905 (10.3 per cent growth).

 

The total increase in households amounted to 283,188 (12.7 per cent growth), of which 179,970 (or 63.6 percent) were accommodated in the private residential rental market, which has the smallest of the four housing accommodation types. As a consequence, this tiny segment of the housing market became more crowded.

 

The change is even more dramatic when we compare the distribution of population by housing type and accommodation tenure. Private flat renters increased from 13 per cent of the population to 18.8 per cent, while public flat renters decreased from 31.6 per cent to 29.5 per cent. Yet during this period more public rental flats were built than private flats.

 

Moreover, during this ten-year period, the average number of persons living in public flats decreased from 3.03 to 2.75 among public renters and from 3.32 to 2.97 among subsidized flat owners, and also decreased slightly from 2.96 to 2.93 among private flat owners. But it increased substantially among private renters from 2.64 to 3.07.

 

The disparities account for why sub-divided units have mushroomed in the private residential rental market. Estimates from the 2016 By-Census indicate there were about 91,787 households (or 18.3 per cent of households in the private rental market) living in sub-divided units. Approximately one-third of all private residential flats are rental units, of which 27,112 (about6.2per cent) have been subdivided.

 

These changes together clearly reveal that the middle class has suffered most from Hong Kong’s severe housing situation. Their hopes of owning or renting private flats have vanished. And their housing condition has significantly deteriorated in the past decade in terms of affordability, available supply, and less space to use.

 

The situation explains why the Chief Executive’s proposal to introduce a Starter Home Scheme is especially welcomed among middle class families, who have borne the brunt of crowded living conditions.

 

Low-income households can still draw hope from applying for public rental housing and perhaps even having the good fortune to succeed in the lottery for a subsidized  sales flat as a Green Form applicant. They can at least look forward to being allocated an affordable flat that could be considered modestly spacious in the present environment.

 

Evidently, our housing policies, especially those affecting public housing, have made our housing problem worse. This is not entirely bad news, however, for it also presents an opportunity to revise our policies and bring some very quick and substantive relief to the severe housing shortage.

 

How so?

 

Since public housing tenants do not own the housing resources they have been allocated, there is no incentive for them to economize on their use. Many flats are occupied by one-person and two-person households, often elderly persons.

 

Another reason why public housing resources are underutilized comes from regulations that disallow existing tenants from renting out their flats to others. Even worse are the incentives to evict adult working children in order to avoid breaching the double-rent threshold.

 

Owners of subsidized sales flats are also not allowed to rent out their premises if they have an outstanding unpaid premium.

 

The situation has worsened as demand has continued to grow due to an ageing population and more adult children joining the Waiting List for public housing applicants. Between 2006 and 2016, the share of applicants who were living in some type of public housing increased from 35 to 41 per cent (in 2014 and 2015 it was as high as 46 per cent). Half of the applicants are one-person applicants, and probably 5 per cent are elderly one-person applicants. The average waiting time is likely to be a flawed indicator of the genuine demand.

 

In recent years, rising private sector property prices and high down payments have eliminated the hopes of the middle class to buy or rent private flats. They are faced with two choices: either rent a tiny sub-divided unit in the private sector that costs about one-third of their income or apply for a more spacious public rental flat at a fraction of the private market rent.

 

Common sense tells us that a substantial fraction of owners and tenants in public housing flats would be keen to rent out part of their flat (if not the entire premise) to prospective renters. The total stock of public flats, comprising both owned and rented units, is over 1.2 million. If only an unbelievably low estimate of 5 per cent of these occupants made available their space for rent, then a new source of housing supply would be unleashed. Sub-divided housing rents in the private market would immediately decline.

 

The introduction of market forces into the public housing sector would immediately incentivize public housing occupants to utilize their housing resources more effectively. The demand for private sector sub-divided units would be diverted, and the severe housing shortages in the private rental market would see much-welcomed relief. Private landlords would stop having a reason to sub-divide their housing resources.

 

Given that reclaiming and converting land are challenges that can only yield fresh housing supply over the medium and long term, the only quick, short-term, immediate fix that we have available today is to unleash market forces in the public housing sector. By correcting the gross misallocations of public housing resources, we can achieve a better balance between the public and private housing sectors, remedy severe housing shortages, and quickly improve the lives of a substantial portion of the population.

 

This solution has hardly any losers and plenty of winners. To be sure, a short-term solution does not mean that medium and long-term answers are not needed. But I believe making progress today will restore hope in our population and make it easier for society to negotiate future progress.

 

Unleashing market forces within the public housing sector means it would be necessary to privatize the public housing stock and refocus public housing policy towards homeownership. How this can be done in a fair and efficient manner needs another article.

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