(This essay was published in South China Morning Post on 29 April 2015.)
In almost every discussion of what ails Hong Kong, housing rents and property prices turn up as the number one concern. Yet Hong Kong is not alone in this problem.
A recent cover story in The Economist (April 4-10 issue) entitled “Space and the city” testified to the growing recognition among economists that high property prices and housing rents are a universal problem in all economically successful cities in the world.
There are two simple reasons for this: fast-growing demand and slow-growing supply.
The fast-growing demand was caused by the forces underlying globalization. Economic recovery and population growth after World War II increased housing demand in many large cities around the world. Then in the 1980s, the advances in information technology sparked a boom in idea industries, attracted workers to cities that had these industries, and thereby pushed up demand for property and housing.
Land in these cities – ranging from old metropolitan areas like New York and London to new places like Austin and Bangalore – became scarce. Hong Kong also attracted knowledge workers from all over the world as China opened up and reformed its economy.
But in the face of rapid growth in demand, these great cities responded by slowing down supply through regulation.
There is of course a rationale for limiting urban development to control crime, disease, and filthy air and water. But regulations have progressed from green belts and zoning rules, to conservation, environmental protection, heritage preservation and a myriad of “not-in-my-back-yard” concerns. Lobbying by property owners keen to protect their property values has also become a factor.
The most recent regulations limited building height and density, which has constrained supply and inflated prices. These regulations were estimated to have inflated the price of office space in the City of London by about 450% in the early 2000s and in San Francisco and Manhattan by about 50% in 1998.
This effect has been dubbed the “shadow tax” on property and housing costs by Professors Edward Glaeser and Joseph Gyourko, who first reported on it in 2002.
My own estimate is that the average “shadow tax” due to rising regulatory costs in Hong Kong increased by about 75% between the periods of 1980-1989 and 1992-2014 (see Figure 1).
Regulation ultimately delays development. Economists estimate that lifting all barriers to urban growth imposed in the US since the 1960s could raise GDP by as much as 6.5%-13.5%, or US$1-2 trillion.
In Hong Kong, I estimate that lifting just one regulation – so as to allow the privatizing of the public rental housing stock – would have increased GDP by between 0.5% to 1% each year since the mid-1970s. When compounded over 40 years, Hong Kong’s GDP today would have been 21% to 47% larger, equivalent to an additional HK$430-$950 billion. If the existing public rental housing stock were privatized today, it would create HK$2.5 trillion simply by restoring value. This would not only have an impact on the economy, but also reduce inequality.
Twenty years ago I started urging Hong Kong to (1) sell public rental housing to sitting tenants at affordable prices, (2) reduce the unpaid land premium on Homeownership Scheme (HOS) units, and (3) build subsidized homeownership units for eligible households instead of rental units.
I believe these measures can help to arrest growing inequalities in income and wealth, but originally I saw the problem only within the context of our own peculiar local situation. Now it has emerged in other rich economies, too.
Regulatory costs contribute significantly to greater inequality, less social upward mobility, slower economic innovation, and greater political divisiveness. It is time Hong Kong revisited our subsidized housing policies and zoning and building regulations. Otherwise, our future will remain hostage to these “shadow taxes.”