(This essay was published in Hong Kong Economic Journal on 3 September 2014)


In 2013, the total value of housing capital in Hong Kong was estimated to be $6.80 trillion dollars or 320 percent of GDP. This is the net value of the total stock of private residential housing evaluated at market prices. It is based on the gross market value minus the total value of outstanding mortgage loans on private residential housing. Total mortgage loans were a modest $900 billion – a mere 11.8 percent of the gross market value.


French economist, Thomas Piketty in his book Capital in the Twenty-First Century, obtained similar figures internationally. He estimated housing capital to be worth 371 percent of GDP for France, 300 percent for the United Kingdom, 236 percent for Germany, 208 percent for Canada, and 182 percent for the United States in the year 2010.


But private residential housing only accommodates about half the population in Hong Kong. The other half is in government-provided public rental housing units and subsidized ownership units, mainly Tenant Purchase Scheme (TPS) units and Homeownership Scheme (HOS) units.


Unlock Public Housing Capital


The total market value of such government-provided housing is very substantial, but because there are extremely severe restrictions limiting their use either as rental property or as assets for sale on the open market, their values are highly discounted. When the use of these assets is limited almost entirely to providing shelter for the original occupants, they cannot be considered as housing capital. As such, they are marginal to the market economy and measured GDP.


The owner-occupants of the TPS and HOS units can bequeath the units to their children. However, the units can only be sold on the open market if the government-subsidized portion of the land premium has been paid off. This dampens the incentive to sell these units so the market for them is relatively illiquid. It is also not clear how these units can be redeveloped in future when the building ages.


If the restriction on selling TPS and HOS units on the open market were removed or the unpaid land premiums substantially lowered, then an active market would appear. The occupant would be able to realize a substantial gain therefrom. The TPS and HOS units would then become an important source of new housing capital and not just a physical shelter.


Regulatory Controls Depress Prices


Tenants of public rental housing units face even more restrictions because they do not have ownership rights over the units they occupy. When tenants leave, for example, upon death, the units are returned to the Housing Authority and cannot be passed onto their children. But if these units were sold to the sitting tenant at an attractive price without any unpaid land premiums to hold back resale, then the units could become a new source of housing capital and not mere physical shelter.


Privatization of public rental units and deregulation of sale restrictions for ownership units, on the other hand, would substantially enhance the market value of government housing. What would be their market value if such steps were taken?


Based on open market transaction prices on HOS and TPS units (see Table 1, Column III), I have estimated the total gross market value of public rental housing units at $2.45 trillion, TPS units at $0.41 trillion, and HOS units at $1.56 trillion. The total market value of government subsidized housing units is therefore $4.42 trillion, equal to 208% of GDP.


The open market transaction prices on TPS and HOS units are likely to be underestimated. Unlike private housing units, current TPS and HOS units are traded at a discount because they have limited redevelopment potential. In Singapore, Housing Development Board housing units can be traded on the market among residents, but are denied redevelopment rights. This, too, reduces their market value.


Partial Deregulation in the Secondary Market


TPS units are located in public rental blocks where many of the units are still occupied by public sector tenants. Such a mixed state of tenure, where government is part landlord, limits privately-initiated redevelopment potential.


Since the majority of the present owners of HOS units have not repaid the unpaid land premium, their redevelopment potential is also limited. With ownership rights partly held by government, any privately-initiated redevelopment prospects become highly uncertain, if not impossible.


But what will be the economic gain to society of privatizing public rental housing and waiving or substantially lowering the unpaid land premiums?


Note that the market values of existing TPS and HOS units under the current sales restrictions are already realized as part of housing capital. Owners can trade them on the “secondary market” among eligible purchasers, although these transacted prices do not include the unpaid land premium.


I have estimated their total value under sales restrictions to be $173 billion for the stock of TPS units and $908 billion for the HOS units (see Table 1, Column II), or $1.08 trillion in total. This is equivalent to 50.9% of GDP. It is worth noting that this is the gain society realized when the “secondary market” for HOS units was created in 1997. Creating the “secondary market” was one of the most benign policies of the Tung Chee-Hwa administration and the Housing Authority.


Unfettered Circulation Releases Full Value


Let me digress a little to explain the concept of capital in a market economy. Imagine that at this year’s Moon Festival you received a gift of a box of lotus seed moon cakes, whose market price is $150. Did you receive $150 worth of value? Not necessarily!


If you do not like moon cakes, or that specific variety or brand, you may only be willing to pay $50 for the brand that you received. So a gift worth $150 on the market is only worth one-third of its value to you.


But wait a minute. Isn’t it true that if you don’t like lotus seed moon cakes, you can still give it away to another person as a gift who likes it? Indeed, a lot of moon cakes get recycled during holiday season. And people only keep those gifts that they like. The unwanted moon cakes simply become quasi-cash-equivalent gifts in circulation.


Unfortunately, public rental housing units, TPS units and HOS units cannot be circulated, at least not very easily. They are often held by the initial occupant forever. Therefore, unlike the lotus seed moon cakes, this is not a commodity with sufficient circulation.


Given that, we can see that the current government’s housing program effectively evaporates the value of public housing capital by imposing restrictions on its circulation. Privatization and deregulation would establish private property rights of these units so they could be put back into circulation for others to use. As an asset, these units would be more valuable because they would have more than one use: as shelter, for sale, for rent, and for refinancing.


I estimate that the gain in housing capital from privatization and deregulation would be $3.336 trillion, equivalent to 156.9% of GDP (see Table 1, Column IV). The gain is significantly larger in magnitude than the “secondary market” deregulation in 1998.


To get a manageable feel of what this benefit would mean, it helps to break it down to the average gain per housing unit. The average public rental housing unit would add $3.36 million to housing capital, the average TPS unit would add $1.96 million, and the average HOS unit would add $2.05 million (see Table 1, Column V).


With privatization and deregulation, the total value of private and public housing stock would easily amount to $11.24 trillion or 528% of GDP. To put this percentage into perspective, consider Piketty’s estimates of the total value of all forms of capital (and not just housing capital) as a percentage of GDP. He found this to be 617% in France, 543% in the United Kingdom, 418% in Germany, 417% in Canada, and 456% in the United States. France and Germany also have large stocks of public housing so their percentages would increase if their public housing stocks were privatized.


Hong Kong could be a very capital rich city if only we removed the restrictions on our government housing units, and not only by an additional $3.36 trillion in circulation.


Benefits of Releasing Full Housing Value


First, half the population of Hong Kong would be happier because the gap between the rich and the poor would be reduced in a very material way in one fell scoop. Society would become much less divided, which has been an unfortunate development in recent decades as property prices have risen much faster than incomes.


Second, the pressure on government expenditures to finance rising health care expenditures, old age social welfare payments, education spending, and even housing investment would be indirectly alleviated, as many underutilized public housing units would become unlocked and return to market circulation. Capitalizing $3.336 trillion would empower a lot of families to pay for these expenditures by themselves, according to their own free choice.


Third, new economic activity at the grassroots level would be spawned. A major deterrent to entrepreneurial activity among the enterprising poor is the difficulty of getting loans. Banks are seldom interested in lending to the poor. The decline of family size has also made borrowing from close relatives more difficult. Mortgaging parents’ homes is often the most important form of raising capital among those without credit rating.


Fourth, mortgaging parents’ homes would also provide an important source of upward intergenerational mobility, both in providing human capital investments to children and making down payments for their home purchases.


Fifth, these benefits would come at no one’s expense. The government would not even need to raise taxes.


These are five reasons, and more, for freeing up our public housing sector and allowing this capital injection into our economy.


Table 1: Estimates of the Value of Public Housing Capital after Privatization and Deregulation


  Number of Housing Units  (1000s) Estimated Total Value of Housing Units at TPS and HOS “Secondary Market” Prices   ($billion) Estimated Total Value of Housing Units at Open Market Prices  ($billion) Estimated Increase in Value of Housing Capital   (Col. III – II)   ($billion) Estimated Increase in Value of Housing Capital per Unit       (Col. IV ÷ I)  ($million)
Public Rental Housing Units 728 0 2,448 2,448 3.36
Tenant Purchase Scheme Units 123 173 414 241 1.96
Homeownership Scheme Units 316 908 1,555 647 2.05
Total Government Units 1167 1,081 4,417 3,336 2.86
Total Estimated Value as Percent of GDP 50.9% 207.8% 156.9%
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