Both Singapore and Hong Kong have massive subsidized public housing programs on a scale that is unprecedented in free market capitalist economies. Approximately four-fifths of Singaporeans and half of Hong Kong residents live in government provided subsidized housing. But the two programs are critically different because of different restrictions on home ownership and tenancy rights.

In Singapore these restrictions have allowed for the establishment of an active market in subsidized public housing for rental and for purchase and sale. But in Hong Kong the restrictions have made the market for such units are non-existent and non-functional. In both cities, the purposes, evolution, and consequences of subsidized public housing programs have had permanent effects on society, the economy, and politics. Massive subsidized housing programs have defined and limited policy options with grave consequences for matters beyond housing issues.

In this first of five articles on Hong Kong’s subsidized housing program, I shall contrast Hong Kong’s housing program with Singapore’s. In future articles I shall also consider how housing policy can be improved in Hong Kong to better fit in with our present situation and our future circumstances. The opportunities and challenges facing Hong Kong today are different from those faced by Singapore and Hong Kong has to rethink its housing policy to prevent the middle class from becoming marginalized. I shall also draw upon Hong Kong’s experience to outline how the Mainland’s subsidized housing policies should be established to address the political needs of a fledgling emerging middle class that could become the engine of a more prosperous economy and the foundation of a more stable urbanized society.

Incomplete Ownership and Tenancy Rights

The history of subsidized housing policy in Hong Kong has taken many twists and turns over the years as policy aims have changed, leading to changes in housing programs. Often the changes had unforeseen consequences and some of them have led to disastrous consequences. These effects have long lasting and pervasive influences on the development of Hong Kong’s people, economy, society, and politics.

One of the main problems is that property ownership and occupancy rights are applied unevenly in Hong Kong. There are four broad categories of housing tenure – private sector owner occupiers, subsidized public sector owner occupiers, private sector renters, and subsidized public sector tenants – and rights differ between the private and public sector. See Table 1, below, for the percentage shares of households by type of housing and their tenure in the period 1971-2010; the classifications are primarily the result of over 50 years of government involvement in subsidized public housing policy.

The Public Rental Housing (PRH) unit tenant in the subsidized sector is not a true tenant; this is a misnomer. A tenant anywhere else has the right to choose within the limits of his affordability the unit he rents. But to do so there must be a market for housing units. This does not exist for subsidized public housing units in Hong Kong as the tenant is in effect limited to live almost permanently in the unit he was given in the first instance; the only other option is to leave the sector altogether. His rights are therefore different from the private housing tenant.

Unpaid Land Premium Uncertain

Hong Kong’s subsidized public sector Home Ownership Scheme (HOS) is also a misnomer because the occupant of an HOS unit does not have the same set of property rights commonly conferred by private ownership. A subsidy in the form of an unpaid land premium was provided by the government at the time when the unit was first purchased; therefore, the occupant must first repay the discounted land premium before the unit can be sold on the open market. The value of this land premium is not fixed at the time of initial purchase and is determined with reference to the market value at the time when repayment is to be made. Based on past history the expected value has often risen at a rate faster than inflation and household earnings.

The HOS property ownership right is therefore only the right to occupancy at the time of purchase and the option to have the right to sell on the open market after repayment of an unpaid land premium whose future value is not known. Ownership of an HOS unit is at most a form of “quasi ownership” with the rights to alienating the property he “owns” being a conditional one.

To illustrate this with a concrete example, Table 2 provides the average sales price of two of the earliest HOS units: Sui Wo Court Phase I, Sha Tin completed in 1980 and Chun Man Court, Ho Man Tin completed in 1981. The original sales price was given a 30% discount over the estimated market value; therefore, the true market price per square foot (psf) for these two developments would be about $320 and $317 at the time of their completion. In 2011, the open market price of transacted units in these two developments in 2011 was $4,066 and $5,685 psf. This represented an appreciation of 12.7 and 17.9 times over a 30 year period. It outpaced by a wide margin the increase in consumer prices of only 4 times over the same period.

As a consequence, the occupant of one of these HOS units is highly unlikely to be able to sell his property on the open market because after returning the land premium to government, the occupant may not be able to afford the purchase of another unit on the market.

The occupant becomes effectively a permanent occupant of the unit. Having paid for the development cost of the structure, the occupant household can remain in the unit for “free” but they are restricted to these premises even when this may no longer be in their best interests due to changing aspirations over the household’s life cycle. Because they cannot afford to pay the land premium they have no choice but to stay in the same unit. The consequences of “forced” staying in a subsidized public housing unit are many and almost all of them are detrimental to the healthy development of society, the economy, and politics. I shall return to these topics later. In many respects it creates what amounts to an implicit “hukou” system for tying down households that the Mainland is trying to gradually relax.

In Singapore, a totally different housing program has been implemented. In terms of classification, only three broad housing tenure categories are needed because within the subsidized public housing sector, renters and owner occupiers form basically one single category and are in fact predominantly homeowners.

In Singapore all subsidized public housing stock, known as Housing Development Block (HDB) units, can be either rented or owned; renters may come to own their flat if they subsequently choose this option. The units are rented and sold to eligible households at a subsidized price. After 5 years from the date of effective purchase, owned units can be sold on the open market. There are no basic restrictions on selling HDB units on the open market and there is no requirement to repay the subsidized premium. In addition, the owner of HDB units can also “sublet” in whole or in part the unit on the open market. As a consequence there is no impediment to the emergence of a market for subsidized public housing both for renters and owners.

Free Market in Singapore HDB Housing

There is therefore no essential difference between HDB units in Singapore and private sector housing units except for the fact that the HDB units held by government must be rented or sold to eligible households in the first instance at a subsidized rate, and the standards and quality of the HDB units are in general lower than private sector housing units. Once the HDB units are sold by government, the new owners have a right to sell and lease the unit that is essentially unrestricted. The Singapore system effectively allows all residents of HDB units to reap the full benefits of the subsidy on land premium and to capture the entire appreciation in value over time, things that are not available to Hong Kong tenants and homeowners. It is not only more generous to eligible households, but far more market oriented than the program in Hong Kong.

In Singapore today, 73% of households live in HDB units as bona fide homeowners and 8.6% as tenants. In Hong Kong, 47% of households live in subsidized public housing units of which two-thirds are renters in Public Rental Housing (PRH) units and one-third “quasi homeowners” in HOS units. Some 80% of these “quasi-homeowners” have not yet repaid the outstanding land premium to government. They are effectively mere occupants and not bona fide homeowners like their counterparts in Singapore.

Table 3

The critical difference between Hong Kong and Singapore subsidized public housing, therefore, is neither the physical attribute of the unit nor the amount of subsidy on their prices or rents, but the restrictions on tenancy and homeownership enjoyed by the resident. The paramount issue is whether a resident in the subsidized public housing sector can have essentially the same choices as a tenant or property owner in the private housing sector.  These restrictions govern whether a market of subsidized public housing is allowed to emerge and function properly.

Hardly anyone in Hong Kong who lives in subsidized public housing ever becomes a bona fide tenant or property owner of the units they occupy in the same way that their counterparts in the private sector do, for the reasons mentioned above.  The result is that half the population of Hong Kong has to live in the same public sector housing unit they first moved into for almost the rest of their lives. This is despite the fact that the preferred housing tenure of most households will change over their natural life cycle. Events like work patterns, marriage, childbirth, child schooling, migration, retirement and death affect the demand for housing and tenure form; moreover, these events vary across households in different and uncertain ways. The impacts can also be felt the other way as the course of these natural life cycle events can be affected by housing supply and the available tenure choice.

Housing Policy is Always Political

Housing is not merely shelter. For most households, home ownership is the most important form of their savings and therefore a means of wealth accumulation and upward social mobility. For some households it can be a form of ready financing if the property can be mortgaged, especially for those who otherwise would have poor access to banks or financial help from relatives and friends. It could play a pivotal role as a source of social security for old age. Its effects span more than a single generation as it can also be used as a bequest.

At the aggregate macroeconomic level, home ownership is an important form of fixed investment and directly affects consumption, savings, and aggregate output over the business cycle; it is also affected by these cycles. Most important of all, land and housing are valuable scarce resources and whether they are efficiently deployed has important consequences for the growth and prosperity of a city and a nation.

It is almost inevitable that a subsidized public housing program will have significant effects on households and through them both society and the economy will be affected. Housing policy necessarily becomes a highly politicized issue. For developing societies, the absence of a subsidized public housing policy or a badly designed one can often be a source of social, economic and political disaster. Housing often generates various kinds of externality or spillover effects that are poorly handled by fledgling and weakly formed market institutions. A well-designed and implemented government program could improve upon these market institutions. I do not, however, think it is necessary or desirable to introduce a subsidized public housing program like the one in Hong Kong that replaces the market mechanism entirely in its design.

In the future articles, I shall explore some of the important effects that the role of choice of housing tenure and functioning markets should play in a subsidized public housing program, and the considerations and consequences for society, the economy and politics.

(1 of 5)

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One Response to Public Sector Housing Policies for Hong Kong and Mainland China – Core Considerations (Part I)

  1. XU Zichen says:

    The Hong Kong policy in effect is a program of massive government bad loan to the subsidized housing tenants. The government can never take back the appreciated land value over time. And the loan is tied up. To give the property to household incur no loss on the government side while freeing up the resources.

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