Understanding Hong Kong’s Housing Woes
1. Housing availability in Hong Kong
Hong Kong’s current housing system is inherited from the 1960s-1980s, when economic conditions were equivalent to those of a developing economy. At that time, incomes were relatively low, and modest living requirements enabled Hong Kong’s then Colonial Government to provide a good standard of low-price public housing at a small cost. When Hong Kong’s economic status was raised to that of a high-income region towards the end of the 1980s, rapid population growth and the demand for a higher living standard (including better housing) significantly increased the fiscal requirements for adequate coverage of public housing. At the same time, the Hong Kong Government’s monopoly control over the supply of land had set the clearing price in the housing market at a consistently higher level than that of any other geographical region with a similar man-land ratio. Correspondingly, when the growth in Hong Kong’s public housing system began to shrink in the late 1980s, the emergent boom in private housing actually worsened the domestic homeownership gap. By the end of 2019, Hong Kong had about 2.9 million flats (Hong Kong Yearbook, 2020), which provided the equivalent of 0.6 rooms per person (13.3 square meter per person) – far less than the OECD average (1.8 rooms per person). This is the background to the major shortage which Hong Kong today faces in its housing sector.
2. Models for Public Housing and Hong Kong’s Woes
Among high-income economies, there are three principal sustainable models for public housing provision.
a) Governments with high spending levels intervene in both public and private housing sectors in an effort to provide good-quality housing that is widely available to the population (e.g., Germany). This model promises to have a major positive impact on housing provision for lower- and middle-income families. The disadvantage however is that it incurs high social welfare spending that imposes a heavy fiscal burden on the government. In addition, large-scale provision of public housing constrains the expansion of the private housing sector, in turn, depressing housing finance in the capital market.
b) Governments with medium spending levels offer satisfactory coverage of subsidised public housing, but without interfering excessively in domestic private housing markets (e.g. UK and US). By focusing exclusively on subsidising low-income groups, this model can significantly reduce government social welfare spending. However, without careful government intervention, housing affordability pressures on middle-income earners – especially lower-middle income recipients – can easily intensify when prices in the private housing sector rise, reducing aggregate social purchasing power.
c) Small governments with limited fiscal capacity provide rent subsidies and/or offer government-built flats by way of delivering affordable public housing to targeted residential groups (e.g., Singapore). This approach may be viewed as a partial extension of “Right-to-Buy” public housing in the UK, involving the sale of government-financed housing to residents. For small governments, it offers a way of resolving the tension between the lack of affordable housing and the fiscal burden of provisioning such housing.
Out of these three models, emerges two main policy instruments:
i) subsidization of public housing and rent reduction;
ii) comprehensive increase in the domestic homeownership rate.
In practical terms, the use of both instruments – large subsidies and high homeownership rates – generates unnecessary fiscal waste: that is, generous government’s housing subsidies made available to large numbers of people will discourage residents from buying and owning properties.
Hence, high-income economies usually prioritize only one of the objectives:
EITHER high housing subsidies with low homeownership rates;
OR low government fiscal spending on public housing rentals alongside a high level of home-ownership.
However, the current housing situation in Hong Kong is characterized by two “lows” – low subsidies and low home-ownership. In short, it demonstrates the worst of all worlds.
3. Hong Kong’s Housing Model: Some Thoughts
Many attribute Hong Kong’s housing deficiencies to improper government interventions that have pushed the housing market towards extremes: on the one hand, the government lacks the ability to control prices of private rentals and sales; on the other hand, government revenue has been heavily reliant on its monopolistic sale of land to the private housing sector (e.g. about one-quarter of revenue came from this source in fiscal 2019-2020). Hong Kong’s limited welfare expenditure on public housing has increased the average waiting time for low-income applicants of such housing; at the same time, for those belonging to the so-called “sandwich class” (jiaxin jieceng) whose income exceeds the eligibility threshold for public assistance, uncontrolled increases in private property prices have made it impossible for them to get their feet on the private housing ladder. The consistently high cost of living has further worsened Hong Kong families’ financial position. This “limited welfare” housing model combined with the government’s monopolistic control over land prices have artificially inflated the clearing prices of Hong Kong real estate, making living conditions in Hong Kong generally inferior to those of other developed economies.
Hong Kong vs. Singapore
As in Singapore – another city-economy – if Hong Kong seeks to fulfil its housing goals at a relatively low cost, intervention must take account of the Hong Kong Government’s limited fiscal capacity and the peculiarities of Hong Kong’s current housing market structure.
Unlike the situation in Singapore, where private housing is mostly targeted at foreign buyers (and a small number of wealthy local residents), Hong Kong’s private housing is mainly intended to meet the needs of local middle-income residents. As a result, Hong Kong’s middle-class homeowners, who have no wish to see a decline in housing prices, have become major stakeholders in the private housing market. Because the market classification of public and private housing in Hong Kong is not well segmented whether in terms of income or nationalities, the pricing model for public housing resale transactions in Hong Kong has failed to effectively separate itself from transactions in the private housing market. Thus, if the Hong Kong government attempts to raise the supply of public housing, as it temporarily did immediately after the 1997 handover, private property prices may be readily affected by public housing policies. Conflicts of interest between current homeowners and the wider public have made the housing impasse a major political obstacle for the Hong Kong Government in its efforts to reduce private housing prices and/or to increase the supply of public housing. In short, in implementing new development schemes the Hong Kong Government needs to unambiguously define and identify the boundary between the two housing markets, in order to avoid the negative impact of new public projects on private property prices.
Hong Kong vs. UK
Hong Kong also does not satisfy the conditions that would enable it to imitate the British “Thatcherite” model: when the Thatcher Government began privatizing the public housing stock, its scale (i.e., the number of “council houses”) was very large. Thus, the sale of “council housing” had no effect on public housing provision to low-income recipients in the UK. If, however, Hong Kong were to attempt to emulate the UK and sell government-financed flats to tenants at low prices, the Hong Kong Government would require much greater fiscal funding for new development to meet minimum public housing needs. A further question is whether the money raised by the sales would be sufficient to cover the cost of land and meet other fiscal requirements to build more housing. If not, it would be incumbent on the Hong Kong Government to satisfactorily balance the needs of new public housing developments and the limits of its fiscal capacity, in such a way as to avoid exacerbating the current shortage of public housing and precipitating a serious fiscal deficit for the Hong Kong Government. Lying behind this reasoning is recognition that when Hong Kong achieved high-income status, its Government’s housing policies failed to make the appropriate adjustments.
At the current stage of Hong Kong’s development, the financial sector remains the core of its economy. In recent years, mortgage loans constituted around 80-90 percent of total household debt in Hong Kong, equivalent to approximately three-quarters of Hong Kong’s GDP – far exceeding that of Europe, the US, and mainland China. Investors, property developers and local residents who own private properties are all stakeholders in Hong Kong’s real estate market. If government intervention quickly increases Hong Kong’s public housing stock, the increase in supply threatens to increase the default risk in housing finance, which in turn would fundamentally affect Hong Kong’s socio-economic stability. The failure of the housing system to meet social needs is one of the factors that has contributed to the pervasive sense of anxiety now characterising Hong Kong.
The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.
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