Too much policy meddling trashes HK housing market 20230804

The SAR government’s launches of new housing policies have reached fever pitch in recent years: from Chief Executive Lee’s “Light Public Housing (LPH)” initiative from his 2022 Policy Address to this year’s resumption of “Private Sector Participation Scheme (PSPS)” that was abandoned in 2002, to the launch of Transitional Housing (TH)… All this begs the question of whether the government has a well laid plan for the long term, or just reacting furiously to show it is doing something to the rising home prices (which has now turned down)?

The stronger the price rises, the bigger the temptation to interfere

Your correspondent has charted all the major public housing initiatives of the past 60 years so as to demonstrate cause and effect, and to illustrate the motives and timing of their launches. The result is clear: whenever major tinkering is made to housing policies, it is often after sharp surges (see brown arrows in Chart 1) or falls (green arrows) in home prices, for example:

a)      The introduction in 1977 of the Home Ownership Scheme (HOS) / PSPS (brown arrow A) was after some 133% rise in home prices between 1971 and 1976 (see dotted line 1 on the property price line); this was followed by

b)      The Middle Income Housing launch in 1980 coinciding with the end of another period of strong price increases (dotted line 2), but then hastily cancelled in 1984 (green arrow B) when the upcycle turned downwards after a final surge towards the 1981 peak (dotted line 3); likewise,

Chart 1: A timeline of Hong Kong’s major public housing schemes changes

a)      The continued home price surge between 1985 and 1994, catalysed several further housing schemes (Home Purchase Loan Scheme, Sandwich Class Housing, see brown arrows C-D), as well as the final blast to mark the peak: the Tenants Purchase Scheme, Buy or Rent Option, and even Mortgage Subsidy (arrow E), all launched before the bubble burst in 1997 (dotted line 5);

d)      It was only after the 70% the collapse in home prices around the SARS bottom that the government hurriedly withdrew as many as five housing interventions (green arrow F)!

New up cycles, new intervention temptations

Since the 2003 lows, the return of a housing upcycle (dotted lines 6+7) yet again lured the authorities to launch several rounds of new measures in an attempt to be seen as ‘doing something about affordability’, these included My Home Purchase and the so called ‘practical but not extravagant’ new variety of HOS  (brown arrows G+H)… go figure the multitude of nuances in all these fancy layers of welfare!

Sadly for the mandarins in charge, the global zero interest rate environment pushed property prices to even loftier heights, to finally reach a triple top in 2019-2022. This unacceptable situation had to be stopped, so in a flurry of new initiatives, we saw Green Form HOS, White Form Secondary Market, followed by LPH/ Private Sales Subsidised Sale Flat Pilot Scheme/TH amongst others (brown arrow I). All this illustrates is how confusing and short-sighted our housing policy has been, with disappointing absence of logical philosophy on housing welfare provision.

Recent months, the increasing intensity and proliferation of initiatives echoes the same panic last saw in the 1997 peak, presaging that another major top may be in place for this cycle (cf arrow E vs arrow I): at the time of writing, prices have fallen by 12% from the September 2021 highs. Your correspondent fears that in another year or two, there may be a repeat of policy U turns saw at the last major bottom (ie green arrow F vs arrow J)…

In order to illustrate the point on this predictable cycle, we plotted the cause of policy actions (i.e. private home prices, see the blue line in Chart 2) against the symptoms as expressed through the political pressure (quantified by say the PRH waiting time, see green line), and then the result being the number of government interventions (red line). There is an eery correlation of the three:

Chart 2: Home prices leads PRH waiting time, which impacts the intensity of government’s meddling in the housing market

The general pattern seems to be that the number of public housing schemes (i.e. the frequency of market interventions) fluctuates with the length of PRH waiting time; and the latter reflects of the swing between greed and fear as property price fluctuates. The blue line in Chart 2, being a lead indicator, suggests that as the decline in property prices continues, average waiting time will also recede, to be followed by the phasing out of various government schemes around 2025-7 (ie red line will turn down too).

What the above chart also suggests is that government policies are always too little too late, what the various recent interventions/initiatives are already 3-4 years too late, and the drop in home prices will mean that these policies are yet again pro-cyclical, ie increasing price/demand volatility rather than solving the root cause of the problem.

Simple is beautiful – learn from Shenzhen?

Hong Kong’s housing welfare policy/administration has long been held hostage by various vested interest groups, leading to endless proliferation of conflicting policies which only complicate and confuse the people. But across the Shenzhen River, our neighbour has a much simpler public housing set up, with only three layers and minimal overlap with the private market. This enables much more focused welfare delivery with less wastage – a real breath of fresh air indeed:

Chart 3: A timeline of Shenzhen’s major public housing schemes changes

Even though housing policies in Shenzhen seem to be driven strong property price moves just like in Hong Kong (see arrows a-c), but changes to old schemes are accompanied by abolition of obsolete schemes that no longer work. This is strong contrast to the dazzling array of overlapping complexities that typify Hong Kong’s set up.

As a further example, Shenzhen plans to supply/allocate 80,000 welfare housing units (c. 4 million square metres in gross floor area) and 60,000 private units (c. 6 million square meters) in 2023. This translates to a public : private unit and floor area ratio of 4:3 and 4:6 respectively; compared with Hong Kong's overkill target ratio of 7:3, Shenzhen appears to have a freer housing market!

Policy back to basics: abolish HOS, reduce PRH

Since 1965, Hong Kong has launched a total of 18 public housing schemes, of which 10 are still in force (Chart 1), but the housing problem has only worsened. Not only has public housing policy been widely criticised for exacerbating housing shortage, but has had the adverse effect of HOS breeding more of the “poor” and the “lazy”; this is detrimental to social mobility, but also wastes vast amounts of social and monetary resources.

In view of this quagmire, the government should radically reform as soon as possible:

a)      to make available all HOS stock to the private market, this will immediately enlarge supply and can rapidly bring property prices back to more affordable levels; and

b)      limit scope of PRH to the most needy, vulnerable group in society (rather than the current 35% of all population!); by releasing land to the private leasing market, even the high rents we see now stand a chance of moderating, thus lessening the pressure on the government to engage in counterproductive market interference.

Chart 4: existing housing benefits a sore sight of complete mess

Chart 5: rationalised housing benefits led by private sector removes need for intervention 

If only the government would allow the invisible hand to allocate supply/demand and prices in housing like so many other commodities are permitted to, then the reason for the existence of such a mess and policy nightmare as shown in Chart 4 vanishes. When returned back to basics, the government’s role will shrink to operating a basic safety net (red area in Chart 5) of physical shelter provision, and perhaps as a transition into the private market, a limited extension into rental vouchers but limited to say 10% of population. This way, even the voucher recipients get freedom of choice in finding the right homes in the right districts, and at the right prices according to the welfare beneficiary. Such an elegant solution will also forever eliminate the endless expansion of bureaucracies, sluggish liquidity/mobility in the housing market, and of course the constant exploitation of an unfair welfare system – a blessing for Hong Kong from every angle one views.

A truly flexible, effective and fair proportion of housing provision by the public sector should be as low as possible, and by no means the 7:3 ratio under current policies (as indicated by the red arrow in Chart 6), by providing low-level safety net physical housing (green arrow) coupled with monetary subsidy for the next poorest group. If Hong Kong continues to imitate badly what Singapore does for its own specific social political reasons, it will only be further left in the dust by a younger, more dynamic neighbour in Shenzhen!

Chart 6: The proportion of public housing is surging again, bad news for future freedom of Hongkongers…

For a revision of some of your correspondent’s past analyses on Hong Kong’s housing welfare, here are the links to recent publications for your reference:

HK’s Ever Ballooning Public Housing Addiction Cycle 11/2021 (Web, Blog, LinkedIn)

as well as some earlier writings in Chinese:

《居屋政策 好心做壞事 2014年7月》English Google translation (Web, Blog)

《公屋改革面面觀─租金偏離市場2014年9月》English Google translation (Web, Blog)

《公屋改革面面觀─結構性自我膨脹 2014年9月》English Google translation (Web, Blog)

《公屋改革面面觀─公屋「豪宅化」2014年10月》English Google translation (Blog)

 

The author would like to thank Alice Yurong Zeng from the Chinese University of Hong Kong majoring in International Business and Chinese Enterprise for assisting in data collection, analysis, and drafting this article.

 

HK’s Ever Ballooning Public Housing Addiction Cycle 20211113

 ​This article is also published on StandNews here: https://www.thestandnews.com/society/hks-ever-ballooning-public-housing-addiction-cycle

HK’s Ever Ballooning Public Housing Addiction Cycle

In 2018, the HKSAR government announced six new initiatives on housing aimed at ‘rebuilding the housing ladder’. But with the introduction of the “Starter Homes (SH)” pilot project, the already bulging number of steps on the ladder increased to five. Not only this, the qualifying income limits for various housing welfare strata continued to be increased, for example, the income threshold for Public Rental Housing (PRH) with a 3-member household has crept from HK$22k to HK$24k.

With the ever widening net trapping more potential customers, is it any wonder that sensationalist headlines like “waiting time for public housing …the longest ever”, “waiting time …almost double the Housing Authority’s three-year service pledge” are everywhere in the media, and that the public has now been conditioned to equate “severe shortage in public housing supply” whenever housing policy is being mentioned?

The truth of the matter, sadly, is not what it seems as claimed by all the proponents of more public housing provision. In this article, we explore the real causes of the housing problems, contrary to the widespread misunderstanding permeating policy debate on this subject…

Lowering thresholds leads to perpetual shortage in housing welfare

The reality has been that the government has been constantly enlarging the pie for welfare housing, by repeatedly raising income and asset thresholds towards the upper echelons of the society, resulting well paid and asset rich citizens inadvertently sucked into the catchment of housing welfare trap. As shown in Chart 1, each of the main public housing ladders have income thresholds that are massively higher than the median income of the target population: PRH threshold is 36% higher (red arrow), Home Ownership Scheme (HOS) thresholds are a jaw dropping premium of 154% above the median income of its target population (orange arrow), and the newly launched SH scheme has an astronomically vast premium in its income threshold above even median private housing resident incomes (green arrow)!

Chart 1：Cumulative household numbers by income strata – current thresholds (Q2 21 data)

In essense, the larger the catchment of housing welfare (ie the higher the income thresholds), the more entitled applicants there will be who do not need such welfare. We should not be surprised to see therefore that the whole society is turned into lottery buying hopefuls when state freebies are so freely available to so many – and highly paid rent seekers crowding out the genuine low income needy applicants! This mentality will cut an otherwise naturally upward flowing trade-up ladder by diverting all demand into the benefits strata, destroying an otherwise free and dynamic private market.

Drastic cure: cut income limits, halt all public housing building

The only way to reverse the vicious cycle of ever rising income/asset thresholds creating ever more demand, which feeds in ever grander public housing construction programmes, is to set the income thresholds by reference to certain percentages of the population, instead of allowing that percentage to permanently march towards 100%.

One easy way to achieve such manageable entitlement limits is by reference to median household incomes in each of the housing stratum, such as:

1) PRH income threshold @ median PRH household income, or HK$17,900 (red dotted line);

2) HOS income threshold @ median HOS household income, or HK$26,000 (orange dotted line);

3) SH income threshold @ median private residential household income, or HK$36,500 (green dotted line).

Chart 2：Cumulative household numbers by income strata – proposed thresholds

This approach can also introduce huge administrative flexibility, allowing the government to set the thresholds at any percentiles (median being 50 percentile) of various housing strata, and progressively reduce chronic dependence on welfare housing, while freeing up more land for the private market. As more land is sold on the private market, supply there will increase, thereby lowering the market price which will reverse the pressure for the government to interfere. As the private market becomes the dominant segment liquidity and efficiency of the entire housing market is improved. (For more discussion on these aspects please see your author’s other pieces: 公屋改革面面觀─公屋「豪宅化」(Chinese only) and “Property 101: Misguided policies push up home prices”).

Wanton lifting of welfare thresholds crowds out private market

There are currently 0.84m PRH units, which already take up over a third of all households in the city, and should be absolutely sufficient to cater to the low end of the housing ladder. By the same token, HOS (0.43m units) and SH building should also terminate, so as to unleash on the private market sufficient supply both to provide choice to those who can afford private housing already, and more importantly, to restrain, if not reverse the rising private home prices.

But just how can we prove that the lengthening waiting list is a game of smoke and mirrors, scripted, directed, and played by the government for show? Here are three clues:

1) HOS income threshold (green line in Chart 3) has majorly exceeded since 2015 the 75 percentile income in all of HK, thus becoming the main competitor of luxury housing markets! During the 90s the HOS threshold was largely tracking the 75th percentile, but all pretences were shed after the resumption of HOS sale from 2013 onwards, with the magnitude of premium over 75 percentile enlarging every year – if this is not aiding and abetting the rich to buy what should be welfare housing, what else can qualify as such?

Chart 3：comparing public housing income threshold & median income bands

2) PRH income threshold (red line) used to closely hug the overall median income levels, but has now also abandoned any façade of being a form of low-end welfare, and is fiercely competing with the private sector for high income customers!

3) The well intended policies yet again pave the roads to hell – by increasing the income thresholds more near peaks (1997, 2019) while reducing the thresholds more at market bottoms (2003) – this is procyclical, meaning more people are made eligible for public welfare at the peak (so buyers end up buying at top and lose more money), while fewer are being let in at the bottom (when they should be given the chance to purchase cheaper)… perfect irony of how ivory tower originated administrative policies always backfire!

Pro-cyclical policies amplify market risks

We now look at this phenomenon of pushing the population to buy at market tops and then shutting them out at the troughs. The premium of income thresholds over median incomes set by the mandarins always increases as prices reach peaks – eg surging from 60% in 2012 to 154% in 2020 (red arrows on right side of Chart 4) just when prices start to fall in 2019/20 (green arrows in right side). Proof again that government policies are encouraging home buyers most when prices are just about to fall.

Similar idiotic policies were also practised in the 90s – eg the mad prices rises of the early 90s (green arrows on left side) coincided precisely with the big increases in income threshold premium above median household incomes (red arrows on right side). Yet, when the prices collapsed after the Asian Crisis (green arrow in middle left), the government also shrunk the income threshold premium to a discount (red arrow in middle left).

Chart 4：Income threshold premium vs home price cycles

On a longer time perspective, the inertial encroachment into the private housing market is independent of cycles – be it income threshold for HOS or PRH, the premium over overall income has been steadily rising (as demonstrated by the red and blue dotted lines above). This is why HK’s housing market is so sickly, and the government coffers much less abundant than it could have been (or our tax rates lower than they are now).

The only quarters that have benefited from this nationalisation of what is essentially a private asset class, has been the various vested interest groups – from bureaucrats running the housing policy, to monopolistic quangos carrying out various aspects of this unhealthy policy, to even academics or welfare groups which live off this ecosystem. Not the people of Hong Kong.

Major paradigm shift needed

All the foregoing discussion amply illustrate how the current system is creating unfairness, while distorting the free market. Your author suggested a framework above (referring to Chart 2) setting eligibility thresholds with reference to median household income percentiles. This has the advantages of:

1) Removing well to do applicants from the eligibility queue, and catering truly to only those most in need of such welfare;

2) Give people the ability to look after themselves – allowing the people of HK to decide themselves whether, or where to buy or rent their homes, rather than having to defer to the arbitrary decisions of gatekeeping bureaucrats, who’s scope and magnitude of power over people’s housing decisions seem to be increasing by the day;

3) Liberate the vitality of the private market, which is far more capable of providing what people need, when they need it, and lifting general living standards (eg ease of moving close to where work/family are located, vastly cutting commuting time); and

4) Majorly boost government coffer intakes – not only will there be no more emergency fundings needed to keep ailing quangos on lifelines, there will be significantly more stamp duty / profit tax, and land sale revenues for deploying in other more worthy public services.

By adopting the framework outlined in Chart 2 in setting the eligibility of public housing, we could save as many as 0.92million units of potential demand for HOS units (green highlight in Chart 5), while eliminating the need to build another 0.3million HOS units in the coming years (Chart 6). In fact, if the govt has lowered from 1998 the PRH eligibility to the same level as PRH median household income, almost all applicants over the past 20 years would have been allocated their homes (ie red line in Chart 6 being mostly under zero), and there would not have even been a ‘housing crisis’.

Chart 5：Eligible households who have not been awarded HOS

Chart 6：Eligible households who have not been awarded PRH

Such a beneficial operating model may of course undermine a few vested interest groups, but under the current executively dominant new governance environment, we are facing a golden opportunity to fully and properly cure the disease that is HK housing policy.

The author would like to thank Andy LO Tuen Yin of The Chinese University of HK and John Poon of The University of Hong Kong for assisting in data collection, analysis, and drafting of this article.