(This essay was published in Hong Kong Economic Journal on 27 December 2017.)
Everyone in Hong Kong knows that there is a huge shortage of housing in the city. The government has been working very hard to increase supply and manage (or suppress) demand. The effort has not yielded much success so far. Property prices and rents in the private sector have continued to soar. The waiting list to get into public housing gets ever longer.
The past decade has been a fascinating opportunity for students of economics to observe how a housing market adjusts to extreme shortage. Hong Kong’s experience is particularly valuable because it has both a private housing market and a non-market public housing sector that adjusts to excess demand in different and opposite ways.
Renters and homeowners are present in both the private and public sectors. In the public sector rents and property prices are subsidized, but not in the private sector. The response to shortage has been very different not only between the two sectors but between renters and homeowners.
Interestingly, the average household size of private sector homeowners decreased from 2.83 in 2006 to 2.73 in 2016, while subsidized public sector homeowner households decreased from 3.19 to 2.92 (see Figure 1). The average household size of private sector tenants increased from 2.42 in 2006 to 2.48 in 2016, while that of subsidized public sector tenants decreased from 3.03 to 2.73.
In the period 2006-2016, when housing shortages were rising rapidly, many private sector homeowners and tenants responded by using the residential space in their housing premises more intensely to economize on high property prices and rents. By contrast, many public sector homeowners and tenants responded by downsizing their household size, which implied using their residential space less intensively.
Public tenants have few incentives to economize on residential space since their rents are controlled and subsidized. In addition, some well-off tenants could avoid paying double rent if their working adult children moved out. This not only increased the demand for private rental housing but also the demand for public rental housing. The waiting list for public rental housing naturally grew longer and longer.
The double rent policy was originally introduced to encourage the efficient use of public housing resources by making well-off tenants pay more. But this has turned out to be totally ineffective because there was an almost perfect counter-response that perversely increased the inefficient use of public housing resources.
Similarly, adult working children from subsidized homeownership units also moved out of their parents’ premises into the private rental-housing sector. And they too have similarly helped to make the waiting list for public rental housing longer. When new Homeownership units are available for sale some also take part in the lottery to try their luck.
Clearly, the behavior of public housing sector occupants differs from those in the private housing sector. For an economist this comes as no surprise because they face different incentives.
Within the public housing sector the behavior of subsidized homeowners is also different from public renters. The percentage share of one-person households was significantly higher among public renters than subsidized owners throughout the period 1986-2016 (see Figure 2). In 2016, one-person households constituted 20.2 per cent of all public renter households, but were only 11.2 per cent of all subsidized owners.
By contrast, the percentage share of households with three or more people households was mostly lower among public renters than subsidized owners in the period 1986-2016. In 2016, these households constituted 53.7 per cent of all public renter households, but were 62.4 per cent of all subsidized owners. Part of the reason why public renter households have a higher proportion of smaller-sized households is due to the heavier concentration of elderly households in the public rental-housing sector. This is the result of a selection rule that favors the elderly.
Alternatively, we can examine the distribution of households with one person and three or more people among those aged 40-59. The percentage share of one-person households was still significantly higher among public renters than subsidized owners throughout the period 1986-2016 (see Figure 3). In 2016, one-person households constituted 14.5 per cent of all public renter households, but were only 8.8 per cent of all subsidized owners.
The percentage share of households with three or more people was uniformly lower among public renters than subsidized owners in the period 1986-2016. In 2016, these households constituted 63.4 per cent of all public renter households, but were 69.9 per cent of all subsidized owners.
Another reason why there are more small-sized households among public rental-housing households is their higher divorce rate. Among households age 20-59, the percentage share of divorced individuals was disproportionately higher in the public rental-housing sector throughout the period 1986-2016 (see Figure 4). In 2016, 41.6 per cent of divorced individuals lived in the public rental-housing sector even though the percentage share of public rental households was only 25.4 per cent.
It is well known that the demand for housing increases with marriage as new households are formed, but then it also increases with divorce as households break up. The higher proportion of smaller-sized households in the public rental-housing sector is partly a result of their higher divorce rate. Public housing renters who break up face no housing allocation disincentive, as their eligibility for public rental housing is unaffected.
Subsidized homeowners, by contrast, face a different set of incentives in terms of family break up because the subsidized housing asset will have to be shared or lost in the divorce settlement. For this reason, it is not surprising to find that the percentage of divorced individuals are generally significantly lower among subsidized homeowner households than public renter households.
In 2016, among households age 20-59, 12.2 per cent of divorced individuals lived in subsidized ownership housing when the percentage share of subsidized households was 14.8 per cent.
The numbers and percentages discussed here demonstrate that the private housing market has been more efficient in adapting to rising housing shortages by accommodating more people in limited residential space compared with the public housing sector. And within the public housing sector, subsidized ownership housing has accommodated the shortage more effectively than public rental housing.
Is it surprising that once again the presence of markets and property ownership have triumphed over the non-market public housing sector in adjusting to housing shortages? It is certainly time to rethink the future of our public housing policy commitment – rental versus ownership.