(This essay was published in Hong Kong Economic Journal on 30 May 2018.)
Our Housing Plight
People intuitively understand that building more private homes would not address Hong Kong’s immediate housing woes. There are two reasons why. First, a faster rate of housing production is simply not possible because land is not available at the moment. One would have to make aggressive plans now to increase land supply to increase future housing supply.
Second, high market prices make private homes unaffordable for almost everyone. Building more private homes, say 30,000 units or even 40,000 units a year, is unlikely to make private homes more affordable. To many, it seems the housing shortage will not improve unless government commits to supplying a great deal more public housing.
One must realize that private housing is not affordable to a large majority of the population, not only to those living in subdivided units or remote public rental housing estates in the New Territories. Today 80 per cent of all households have monthly incomes below the eligibility level for either public rental housing or subsidized sale flats: virtually none of them can afford private housing.
In addition, many young middle-class families with incomes among the top 20 per cent (and who are therefore not eligible to apply for any kind of public housing) feel their lives are at “near poverty” levels because they, too, cannot afford to buy homes, alongside providing quality education for their children and footing expensive health and elderly care services for their parents. These families want the government to make homeownership more affordable – to them, the Starter Home idea first broached by Mrs. Carrie Lam in her Chief Executive election campaign has definite appeal.
The less well-off in Hong Kong is a very large and diverse group, but high home prices have homogenized their housing demands into an undifferentiated preference for more public rental housing and cheaper subsidized sale flats.
The “Housing Ladder” and Our Housing Vision
It is not difficult to understand why there are now loud populist voices wanting government to build more (or even only) public housing. But should this be Hong Kong’s housing development vision?
I know most people still hope to own a private home – the kind that is both a comfortable shelter and a good investment or store of value. For most people, housing wealth is their second most important asset after human capital. When only a third of the people in Hong Kong have private homes, can there be a good feeling among them? The current desperate desire to want more public housing is a choice born from frustration.
Our government’s housing vision has always been the “housing ladder” narrative. It envisions households without means starting at the bottom rung of highly-affordable public rental housing will move up to subsidized sale flats as their incomes and savings grow with a rising economy; and finally, they will rise to the top of the ladder – private homes, a mark of economic and social achievement in capitalist Hong Kong.
The “housing ladder” narrative implies that as the economy prospers, most people would be homeowners. Prosperity would shrink the public housing sector, at least as a share of the economy. C H Tung’s 1997 goal to achieve a 70 per cent homeownership rate envisioned an expanding private housing sector and a contracting public housing sector. It reaffirmed government’s commitment to private housing and homeownership – to realize the vision behind the “housing ladder” narrative.
But the ladder has been broken with runaway home prices, which have halted the growth of private homeownership. Should people now forsake their dreams? Is there a way to halt the slide into more and more public housing? Can the “housing ladder” be restored and people’s hopes and aspirations be rejuvenated?
For decades, our housing supply followed a 50-50 split between public and private housing. The balance was shifted to 60-40 in favor of public housing under the administration of C Y Leung. This signified a policy drift towards public housing, even though there was hardly any serious discussion and debate at the time. It sent a signal that adherence to the “housing ladder” narrative and commitment to private homeownership was eroding.
The fact that 80 per cent of all households today are eligible to apply for public housing is another sign that the housing ladder and the private homeownership dream is in jeopardy. Government housing policy has committed it to providing public housing to four-fifths of the population by default. This may not be an explicitly stated policy, but the unstated implication tells a very sad state of affairs.
On the issue of land acquisition held by developers and landlords, populist advocates favor land resumption by government over a public-private participation approach. Their preference is not difficult to comprehend. The former approach allows the government to take all the land it needs for public housing, while the latter only allows it to acquire part of any plot possessed by developers and landlords. The former approach socializes housing supply faster.
Philosophical Case for Private Housing and the “Housing Ladder”
Let me make the philosophical case for private housing by quoting from a book of mine published 20 years ago:
“Most governments have recognized the benefits of political and social stability based on a community of homeowners.
“Political philosophers have recognized for centuries the subtle and intimate relationship between the moral foundations of a free society and its underlying property rights structure. No society can be truly free if its inhabitants are overwhelmingly residents of public housing estates.
“As Hong Kong becomes increasingly democratic and open, it is imperative to reconsider the structure of property rights in our society.
“A community enslaved by the state will vote in favor of more entitlements, but one composed of free men and women will support greater protection of private property rights and individual freedom. Only in the latter situation can we realize the full benefits of a democratic system.”
I believe that our government’s “housing ladder” narrative is a practical policy solution to the philosophical argument in favor of private property rights. Indeed, the very idea that those without means should be provided some government support so that they could have a realistic opportunity to climb up the ladder reflects a housing vision for private homeownership.
The government assistance provided does not guarantee success for everyone. One has to save and work hard to climb the ladder, but the government provides support and assistance to make the climb feasible, for many if not all. Therein reside the values of social responsibility and individual enterprise that Hong Kong has long cherished.
Rethinking Housing Affordability and the “Housing Ladder”
Hong Kong is now in a bind, largely by default, where the support and assistance provided by government is no longer adequate to meet the people’s hopes and aspirations. The distance between the rungs has widened and the climb is now too steep for almost anyone without considerable means.
Rapidly rising home prices and high down payments for mortgage loans in the past 30 years have made private homes unaffordable. The problem is not high home prices alone, but also the high initial down payment. A high down payment means I cannot borrow against my future income to make a purchase. It is as if the interest rate I am charged is infinite, so I cannot borrow at all. Economists have a fancy term for this problem – capital market imperfection.
But if I have a parent who is willing to advance me a loan for the down payment at “risk free” interest rate, then I can afford to buy a private home. I can hitch onto the “housing ladder” and buy at a high but affordable price because my father has helped me overcome the capital market imperfection challenge.
In today’s circumstances, the government is faced with two choices. On the one hand, it can tackle the housing problem by building more affordable public housing and charging low rents and cheap prices, but prohibit or limit the circulation of these flats on the market or set prohibitively high restrictions that limit circulation. A public housing sector filled with non-circulating flats traps occupants in the “archipelago” housing estates.
On the other hand, the government could sell public housing at low down payments and with loans bearing “risk-free” interest rates like those parents would offer their children. This narrows the wide distance between the rungs. It allows the less well-off to hitch onto the “housing ladder” in public flats to become private homeowners, and repairs the broken “housing ladder” for this large group. It thus restores government’s housing vision and revives the hopes and aspirations of free men and women in a free community for private homeownership.
Introducing a market mechanism into our public housing sector would be an opportunity for the Hong Kong government to help unwind our community from the bind we are in.
Contrary to what many people think, I do not have any prejudice against the Housing Authority or public housing. Public housing has served as the bottom rungs of the “housing ladder” and it is the path by which the less well-off can achieve the ultimate goal of owning private housing. This worked in the past. Public housing should not be the ultimate social goal.
The Housing Authority has done a remarkable job housing millions and helping many find their way to a better life. It will have an even more important role to play now and in the future – to revive the role of public housing as a step towards private homeownership.
The Case for Market Mechanisms in Public Housing
The domination of public housing that cannot circulate is detrimental to society’s economic prosperity, social cohesion, and political inclusiveness.
Economics teaches us that goods and assets that have no market (or cannot be traded) are worth a lot less. Adam Smith’s most important message was that the division of labor is limited by the extent of the market. If our public housing flats can circulate unfettered, our GDP would increase by at least 1 per cent and $4 trillion in lost wealth would be regained. Individuals living in public rental housing now have a 2 per cent lower labor force participation rate and a 2 per cent higher unemployment rate than similar individuals renting private housing.
Divorce rates and single parenthood rates among ever-married public rental housing households are, respectively, 18.4 and 19.5 per cent. Both rates are significantly higher than the overall rates of 13.5 per cent and 10.5 per cent in the population of ever-married households, respectively.
And if you examine voting patterns, you will find more support for left-wing and right-wing populist candidates among people living in the younger public rental housing estates.
A vote for socialized housing is a vote for less economic prosperity, for social dissension, and for political divisiveness. Worse, it will not lessen the divide between the “haves” and “have-nots”. Need I say more?
Wong Y.C. R., On Privatizing Public Housing. City University of Hong Kong Press, Hong Kong, 1998.