(This essay was published in Hong Kong Economic Journal on 16 September 2015.)
Most people in Hong Kong think of the public renter housing program as a government subsidy to provide access to shelter to households without means. They expect most of the inhabitants in these housing estates to be predominantly very low-income households.
This was not how the program was initially envisioned. Back in 1953, the government introduced a resettlement program to house squatters cleared from the land they had occupied without permission. Means tests were not required because the purpose of the program was resettlement and not poverty alleviation.
The resettlement policy not surprisingly created powerful incentives for individuals to turn themselves into squatters in order to be rehoused. In 1954 the estimated number of squatters was only 300,000, but eventually more than a million squatters were resettled. All of these were admitted into the public renter housing program without a means test; so many were not poor.
By the 1970s, the vision changed. The government hoped and believed that the city could (1) house the poor in heavily-subsidized public renter units first, (2) assist those who had then become better-off to move into subsidized Homeownership Scheme units, and (3) eventually allow the more successful to elevate themselves into more expensive private housing residences. This was the famous housing ladder that government planners thought would support upward mobility.
But by the 1980s they belatedly realized this vision was faltering as a large proportion of the residents in public renter housing units were not low-income households. In 1984, the Housing Authority published A Review of Public Housing Allocation Policies, proposing to recover renter units from well-off tenants in order to make room for a long queue of low-income households on the waiting list. This was also an attempt to rationalize the allocation of scarce resources and to control escalating public housing expenditures. Eventually rents were raised to encourage well-off tenants to surrender their units.
The figures below show this goal was met although, as I will explain, not as a result of government policy.
In 1976, the proportion of public renter housing households with incomes in the lowest and second lowest income quartile was 24.5% and 28.8% respectively (see Figure 1). This breakdown was not very different from the rest of the population living in private or other types of accommodation, except that rents were lower because of the subsidy. A popular perception that public housing estates 30 or 40 years ago were providing accommodation for the poor was seriously mistaken.
The situation has now changed. Today public renter housing tenants are genuinely poor. The proportion of them from the lowest income quartile has increased from an estimated 24.5% in 1976 to 48.4% in 2011, and the proportion below the median household income rose from 53.3% in 1976 to 80.0% in 2011. Not surprisingly, the highest income quartile earners have mostly disappeared from public renter housing, decreasing from 18.3% in 1976 to 3.3% in 2011.
This remarkable transformation did not happen because of government policy but rather because global prosperity took a giant step forward in the last quarter of the 20th century in a new wave of trade, investment, and financial market liberalization. China also opened up and reformed. It was an era when fortunes were made in the city, property prices reached stratospheric levels, manufacturing migrated northwards, and cross-border romances, marriages, and remarriages flourished.
But prosperity was unequally shared. As inequality worsened, impoverished inhabitants reappeared in the city. They could only afford to live in public housing estates. The housing planner’s dream for a housing ladder supporting upward mobility became wishful thinking.
In an open economic city like Hong Kong, the promise of public housing became akin to sand castles on the beach that melted away as the tide rose. With the wealth produced by globalization and China’s opening, property prices in the private sector shot through the roof making it pretty difficult for most households in the public housing sector to move out to the private sector. The public renter-housing sector increasingly became a place where poor elderly retired households and low-income single parent households were concentrated.
Consider that the percentage of households with heads aged 20-65 living in public renter housing declined from 36.3% in 1976 to 27.4% in 2011 (see Figure 2). By contrast, the percentage of elderly households with heads aged above 65 increased from 30.9% in 1976 to 48.3% in 2011. The number of public renter households whose head was above the age of 65 was 237,000 in 2011, which was very high compared to the 528,000 aged 20-65.
Unlike 30 or 40 years ago, most public housing estate tenants today are poor families living on welfare or elderly retired individuals. These are not exciting role models for children to look up to. Many of the newer public housing estates are also located in distant areas in the New Territories, and children growing up in these fairly isolated communities seldom visit the city center.
Many of today’s successful businessmen and professionals were raised in public housing estates. The physical conditions of those estates was much worse compared to today, but the inhabitants were younger, energetic, and better provided for by parents who were not poor. The situation has since reversed. The physical conditions of the buildings have improved greatly, but the inhabitants are more handicapped. If one’s views of public housing neighborhoods come only from memories of the past, then they are likely to be very out of focus.
With almost half of elderly households now living in public housing estates, it seems obvious that old age support should naturally focus on selling our public housing estates to sitting tenants at an affordable price. This would allow the elderly to immediately and cheaply acquire an asset that could provide for their old age support. It would go a long way to addressing the problems of elderly poverty support in Hong Kong.
At present, elderly homeowners have an opportunity to mortgage their homes in exchange for an annuity to provide a constant stream of monthly income support for the rest of their lives. Upon passing away the property will then be inherited by their designated heirs, who have the option of (1) taking ownership of the property and assuming repayment of the outstanding mortgage loan, or (2) receiving the net value of the property after repaying the outstanding loan to the mortgage corporation.
Using land to finance old age retirement and to benefit the next generation has been a tradition in many civilizations long before the modern world made governments the preferred provider of those in need of support. In pre-modern times, children would till the land of their parents, support them in old age, and finally inherit the land when their parents pass away.
Non-government agencies were involved, too. The Catholic Church administered a variety of services to widows who had inherited land but had no children, and the land would pass to the Church when they passed away. In Islamic civilization, families with property would establish trusts known as waqfs to hold land in perpetuity to be managed by heirs to produce income in support of old age and future generations.
Would today’s NGOs who service the elderly poor be motivated to provide a better service if they had a chance to inherit property from their clients? This would in effect have them behave like ancient religious institutions and perform the institutional role of intergeneration contracting.
Privatizing the public renter housing estates would create a very large client pool of elderly homeowners willing to take advantage of mortgage backed annuity schemes in the era of modern finance. This would create better opportunities for diversifying risks associated with the uncertainty of life expectancy. A bigger market could lead to better terms to the benefit of all participants. And if the elderly poor in our public housing estates became homeowners, perhaps their children too would pay them more attention.
In principle, recurrent government funding is not required as it would be financed by land that currently has no market value because public renter housing units are non-traded assets. The value of the public renter housing stock, according to my estimate, would be in the magnitude of $2.5 trillion if it were privatized. Selling public renter housing units to sitting tenants would restore the market value of a non-traded asset that could provide old age support for the elderly.
This is not the only use to which land as wealth could be put to use for the benefit of elderly public housing tenants. There are the poor who are not elderly. But public housing expenditures that are saved by government could also be transferred to other needs. Society as a whole would benefit if only we could unlock the value of public housing wealth.