Hong Kong’ housing problem has long been framed as one of government failure to plan and construct sufficient units to meet increasing demand. Efforts and discussions have focused on the construction pipeline of public housing and key performance indicators for various government departments, such as waiting time for public rental housing. Less examined is the role and function of public housing policy in Hong Kong. This paper discusses what public housing policy can do for Hong Kong to maintain its competitive edge.

The first part of this paper reviews the history of public housing policy and how it helped Hong Kong’s development. The second part introduces two principles of recalibrating future public housing policy: productivism and allocative efficiency. The third part employs statistics to illustrate the potential gain from addressing resource misallocation, and provides policy suggestions. Finally, it discusses the integration of public housing into the Great Bay Area in the medium term.

The development of public housing policy

Colonial public housing policy

Hong Kong’s first public housing estate was built to house victims of a fire at a squatter settlement. At that time, the influx of emigrants from mainland China was substantial. With limited residential housing and inflexible supply in the short run, these emigrants began to live in crowded squatter houses with bad hygiene conditions with few facilities. The colonial government took a laissez-faire approach and allowed the squatter houses to proliferate. In the 1950s, an estimated 190,000 victims lost their home in squatter fires (Smart 2006). For example, the famous Shek Kip Mei fire which broke out on Christmas Day of 1953 alone displaced 58,000 settlers. This led to the first chapter of public housing policy in Hong Kong: the resettlement of squatters. 

The second chapter was the “big bang” era of social welfare, which included a major expansion of the public housing program. The 1967 riots forced the government to confront intense social tensions. The state response to the political turmoil was ­to improve living standards. The goal of improving living standards was driven by both social and political considerations (Scott 1989, 153; Hong Kong Legislative Council 1972). The government’s narrative changed from “laissez-faire” to “positive non-interventionism.” By claiming that the housing problem was a “market failure” (Tang 1998), the government justified its market intervention. In addition to introducing nine-years of compulsory education, constructing the Mass Transit Railway, and increasing the provision of social services, one of the most notable moves was the Ten-year Housing Programme that began in 1972 with the aim of alleviating housing problems.

At the same time, the government took steps to form a ‘housing ladder’ to increase home ownership rates. Murray MacLehose, the Governor from 1971 to 1982, mentioned in a speech to the Legislative Council, that the “promotion of home ownership is such a desirable social objective.” (Hong Kong Legislative Council 1976) The subsequent Home Ownership Scheme made its first sales in 1978. Though the government failed to meet the target of housing 1.8 million people between 1973 and 1983, by 1980s, the public housing sector in Hong Kong was the second largest in the world; the ‘housing ladder’ mentality became institutionally entrenched and continues to this day.

The post-handover continuity of the ‘housing ladder’ philosophy

At the time of Hong Kong’s handover to China, house prices were unaffordable and waiting times for public housing were long (See Figure 1). Insufficient supply to meet demand essentially broke the housing ladder to public rental housing and home ownership. Tung Chee-hwa, the first Chief Executive (CE), reiterated homeownership as an overall objective. He wanted to see 70% of total domestic households being owner-occupiers within 10 years (Chief Executive 1997), up from 46% in 1996, according to Census and Statistics Department. To achieve that goal, Tung announced a plan to supply 85,000 units annually. But the plan was halted abruptly due to the Asian Financial Crisis (AFC) and the subsequent plunge in house prices.

The AFC triggered a burst of the housing bubble causing a 70% peak-to-trough drop in house prices. Waiting times for public housing dropped from over 6 years to about 2 years in 2002–2011. Administratively, allocation of housing would take roughly one year, so supply of public housing was adequate. Some overbuilt subsidized housing for home ownership was converted to public rental housing.

Figure 1 Waiting times of public rental housing (years)

Source: Housing Authority

Little wonder why Tung’s successor, Donald Tsang, pushed for a “re-positioned housing policy” and allowed land supply to be market driven, in order to “rebuild people’s confidence in the property market, solve the over-supply problem and allow the property market to resume development and vitality.” (Chief Executive 2008) His administration supplied public housing units by a conservative 15,000 per year on average during his two office terms, a huge reduction from an annual average of 42,000 units in the 1990s, and halted the Home Ownership Scheme indefinitely.

Problems began to emerge after 2008 as house prices picked up again. Having neglected to build a land bank for future use, the government reduced its own capacity to meet rising housing demand. Both subsequent chief executives, Leung Chun-ying and Carrie Lam, stipulated in their policy addresses the ambition to rebuild a housing ladder. However, limited land availability for housing construction and various regulatory constraints in development had led to insufficient supply of housing.

The establishment believed that the unaffordable house prices and the lack of social mobility were the causes of social movements in 2014 and 2019. This thinking was similar to MacLehose, the former Governor of Hong Kong, who concluded, ‘the inadequacy and scarcity of housing and all that this implies, and the harsh situations that result from it, is one of the major and most constant sources of friction and unhappiness between the Government and the population.’ (Hong Kong Legislative Council 1972) Xia Baolong, the Director of the Hong Kong and Macao Affairs Office of the State Council, made it clear that the priority was to resolve housing problem in Hong Kong. The government responded with an aggressive plan to develop the Northern Metropolis to house more than 900,000 people, alongside the already-announced Lantau reclamation project. Fifty years after MacLehose’s tenure, we might be seeing another big bang phase of housing expansion, similarly initiated by social unrest.

Supplying housing in Hong Kong is no easy task. Identification of suitable land, planning, and fabrication of land could take a decade. Given that more land has been identified and the Northern Metropolis project is underway, greater supply capacity can be expected within 10 years. But in the short run, little can be done to speed up supply as construction projects have long and inflexible timelines. Eliminating bureaucratic inefficiencies can reduce production delays, but will not speed up supply dramatically.

Given the hard short-term supply constraints, it would be beneficial to think beyond supply. One key consideration is allocation. With 30% of the Hong Kong population living in public housing, improving allocation of this resource can go a long way in improving livelihoods. But the principle of allocation depends on what is envisioned and prioritized for the future Hong Kong. Is housing policy merely welfare provision, or an investment to make Hong Kong more productive and competitive?

Two principles: productivism and allocative efficiency

Productivist vs. welfarist approach of public housing

It is again useful to study the existing system. Hong Kong was never a welfare state (or if it was, never a typical one) given its positive non-interventionist approach. In productivist states, “social goals are subordinated to the domains of productivity growth” (Fitzpatrick 2004, 215). The expansion of welfare policies in the MacLehose era was a productivist one. There is unevenness across different areas of social spending in Hong Kong. The government finances universal education and health care but refrains from providing generous social security. For example, public housing estates were built neighboring industrial buildings. This strategy helped subsidize wages for the export-oriented manufacturing industry. Public housing had historically complemented Hong Kong’s economic development.

After decades of development, the public housing system has shifted from being productivist to welfarist. Thousands of families of the older generation, now in their 60s and 70s, had climbed the housing ladder and proceeded from being a tenant in public housing estate to owning a subsidized flat or a private property. They eventually accumulated good amount of wealth to become middle class. However, public housing has increasingly become more welfarist over time, serving more people at the lower income quartiles after 2000s (Figure 2). About one-third of the elderly today live in public housing, representing an important old-age welfare. The lack of subsidized flats for sale also stunted the housing ladder and reduced social mobility.

Figure 2 Income quartiles of household head (aged 20-65) in public housing (1976-2016)

Source: Census and Statistics Department

In view of an ageing labor force, low fertility, and a brain drain from Hong Kong in the current tide of emigration since 2019, it is important to reestablish productivism as the principle in designing future housing strategy, and then incrementally steer the policy implementation toward this goal. One way to operationalize this productivist principle in the public housing system is the allocation mechanism.

More efficient allocation of public housing units for economically active households

According to existing public housing policies, tenants cannot relocate within public housing estates unless for reasons such as elderly care, overcrowding, major clearance or renovation of the estate, and special reasons on social and medical grounds. Under-occupied households may also be asked to move to small units. Outside of these exceptions, the vast majority of households stay in the same units indefinitely until they leave the public rental housing system. Incoming tenants are only allocated vacant units. In the year of 2021-2022, only 0.75% of the total public rental housing stock was reallocated due to clearance rehousing and other kinds of transfer (The Hong Kong Housing Authority 2022), showing the limited flexibility given to the tenants. 

The rigidity of the public housing system creates important efficiency loss (Wong and Liu 1988). A key source is the misallocation of the tenants and the units. For reasons discussed above, public housing tenants are less mobile and less likely to live near their workplace than private housing tenants (Lui and Suen 2011). From 2016 by-census data, only 10% of households then living in public housing had moved over the last five years (mainly new tenants), whereas the fraction for tenants living in other types of housing who had moved over the same period was much higher, at 57%. This clearly indicates the extent of misallocation of public housing.

The misallocation of resource leads to lower welfare yielded from each unit of public rental housing. For instance, a worker who lives in public housing in Tin Shui Wai and works as a security guard in Aberdeen may find it costly and time-consuming to commute to work (a one-way trip would take around 1.5 hours and cost about $40). Under the existing system, there is no provision to swap public housing across different districts for this reason. Given the low rent, the household is unwilling to give up the unit. Long commuting time reduces workers’ productivity and job opportunities and discourages the working population from joining the labour force. Worse still, some more well-off tenants may choose to leave the unit vacant without giving it back and live in another place closer to the workplace. This leads to public resources being wasted.

Not surprisingly, jobs are highly concentrated in urban areas, but less so for public rental housing units. As shown in Table 1, 66% of jobs were located in urban areas in 2016, compared to 48% of public housing units, an 18% discrepancy. At the same time, about one-fourth of the households living in urban areas were economically inactive. This indicates potential for reallocating working households to urban and extended urban areas to reduce commuting distances.

Table 1 Distribution of jobs, public housing units, and percentage of economic inactive households in public rental housing.

Source: Hong Kong by-census 2016

Note: Urban includes Hong Kong Island and Kowloon; Extended Urban includes Island (North Lantau), Sha Tin, Ma On Shan, Tseung Kwan O, Tsuen Wan, Kwai Chung and Tsing Yi; The New Territories include Tuen Mun, Yuen Long, Tin Shui Wai, Sheung Shui, Fanling and Tai Po; The Islands refers to Islands (Other areas). Jobs are reported fixed workplaces.

According to existing policy, normal public rental housing applicants cannot choose urban areas for allocation. However, elderly who are eligible to apply via the Single Elderly Persons Priority Scheme and the Elderly Persons Priority Scheme can choose urban areas. This is a mismatch as a matter of productivity. It suggests the current philosophy is not a productivity-enhancing one and is not driven by efficiency considerations.

Ample gains in shortening commuting cost

To gauge the potential efficiency gain from better allocation of public rental housing, a hypothetical allocation exercise is conducted.[1] In essence, I consider an alternative public rental housing allocation that is the “best” for households. Then I compare this allocation with the current allocation. The “best” algorithm uses the following criteria:

1. The highest earner in the household should work and live in the same district;
2. If (1) is not possible, the highest earner in the household should live in a district with the next nearest commuting distance to workplace.

After running the algorithm, 69% of the highest earning member could live and commute in the same district, contrasting with the current 22%, showing enormous potential for reallocation to improve efficiency.

There is also sizable improvement in commuting distance, time, and transport fare. Data of commuting distance, time, and fare by shortest route of each district pairs are collected using approximation from Google Maps. Assuming zero within-district transport, the total commuting distance after reallocation can be reduced by 72% of the original allocation; commuting time is reduced by 64%, and transport fare by 64%.

What is the total efficiency gained by reducing misallocation? Assume that a worker works 22 days a month in a fixed job location, the highest possible time and transport fare saved in commuting for all highest household earners in public rental housing combined are 113 million of hours and $1.9 billion per year (Table 2). If some modifications are made in the existing system to improve the current status such that even just 5% of the possible gain can be reaped, that’s still a total of 5.6 million hours and $96 million saved — a huge gain in productivity or leisure, both of which are good for residents’ livelihoods.

Table 2 Projected gain in commuting time and fare in the whole public rental housing population per year

Note: Based on an estimation using a 5% sample of 2016 Hong Kong by-census.

Table 3 puts it in perspective. On average, each working person in the model can save 54 minutes and $15 per work day. If we compute total monthly savings to be the hours saved multiplied by the minimum wage rate plus fare saved, it is a gain of $1075. If we follow the sample average wage rate, it amounts to $2193 per month—a substantial portion of the rent of the public rental housing and representing 7% and 14% of the average income of the highest household earner in the sample.

Table 3 Before and after-reallocation commuting time and fare and saving per person

Of course, the exercise above relies on many simplifying assumptions. For example, there are district preferences other than commuting distance of the highest earners, such as preference of the secondary earners, living near relatives within the local community, school catchment area, size of the unit, age of the housing estate, or simply unwillingness to move. These preferences are not observable, thus no allocation system, which relies on observable traits, can perfectly optimize. Even if all preferences are observable and known, there has to be a system to reallocate, and that system will not be as efficient as the market. Another point from which I abstract is that the current job location of the highest earner in the household may be endogenous to the location of their public rental housing. Despite these complications, the bottom line is that reducing misallocation can make a big difference.

Policy suggestions to improve misallocation and enhance productivity in the existing system

There are multiple ways to incrementally improve the misallocation in the existing system. First, on allocating new applicants, households with only persons aged 60 or above, and economically inactive households, could be allocated to units in remote areas. This would free up space for households with working-age members in urban areas, to encourage the latter to take up better jobs and do more productive work. Second, the existing system does not allow home-moving unless for reasons accepted under existing transfer schemes and other special reasons. This practice can be relaxed if a worker can provide proof of long-term employment, and a worker may choose to live in a unit nearer to their workplace. For example, a transfer scheme can be set up for this kind of transfer. Third, any transfers and rehousing should consider the working and economic activity of the household for the location. Fourth, an official unit exchange system can be hosted for tenants to exchange units at their convenience to increase the utility of public rental housing units. Once approved, this would be a permanent change of the household registration in public housing estates. Because the public rental housing is designed to house people in need, the suggestions above do not interfere with the waiting list for public rental housing. 

Releasing housing places by integrating into the Greater Bay Area in the medium term

The discussion of housing strategy in the medium term may not center in Hong Kong alone. Under the 14th Five-Year Plan (2021-2025), there will be new development opportunities in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). The closer cooperation and economic integration between Hong Kong, Macao and nine cities within Guangdong province presents further possibilities to improve allocation efficiency of public housing, which will in turn address Hong Kong’s housing shortage problem.

Non-working households may be drawn to live in the GBA because of lower living costs and a more spacious living environment. Some households have close relatives living in GBA cities or permanent jobs there and may want to stay on the mainland. This aligns with the spirit of the Guangdong Scheme and Fujian Scheme, which allow the elderly to reside outside of Hong Kong according to their preference and also receiving social assistance from the Hong Kong government. At the same time, it will free up valuable housing units in Hong Kong for those who need them.

In the 2016 by-census sample, 1.3% of working public rental tenants worked on the mainland and in Macao; 2.3% of students in public rental housing studied on the mainland and in Macao. Among all tenants, 1.9% moved from the mainland and Macao to public rental housing in Hong Kong in the past 5 years; 13% of all tenants had resided in Hong Kong for 10 or fewer years. These people may have a strong connection with the mainland or Macao and may opt to live there. When asked of their whereabouts at a random reference point (3 a.m. on 30 June 2016), 3% of the public rental housing tenants replied that they were either on the mainland or in Macao.

If these numbers translate to demand from 1% of the households in public rental housing to live in the GBA, this amounts to 7,600 households; 2% would mean 15,000 households. These numbers are already the size of a few housing estates in Hong Kong.

Furthermore, nearly half of the public housing tenants were not working, studying, or had a fixed work or study place in Hong Kong. These people may not need to live in Hong Kong as much as people who have fixed work or study places in Hong Kong. Adhering to the principles of productivism and allocative efficiency, there is great prospect for these people to move to the GBA and let the most productive and talented workers to take up residence in Hong Kong.

Better retirement lives in the Greater Bay Area

For retired households, access to elderly care and health care is an important consideration. Currently, there is a shortage of care workers in Hong Kong. The shortage of care workers and high land rent mean that elderly care is expensive, and quality of service is sometimes undesirable. The crowded environment and lack of personal space in local elderly homes also has negative effects on mental health.

Again, the GBA may provide a solution to improve welfare by making allocation more efficient. For example, Zhuhai has been developing as a quality retirement hub with a booming healthcare industry. Elderly homes in GBA only cost RMB 2,000–6,000 (吳泇鋑 and 方玉輝 2019), far cheaper than local private ones. With the Guangdong Scheme, seniors can enjoy better-quality elderly home in terms of both services and the environment. If Hong Kong lacks the factors of production for such provision, outsourcing it to the GBA, and establishing “silver estates” for the elderly to build their own communities may be a better choice. In the 2016 by-census sample, around one-fifth of public rental households consisted entirely of retired persons. Moving to the GBA could be an upgrade to some of their retirement lives. The occupied units are then freed up and reallocated to the labor force of Hong Kong, enhancing overall productivity.

References

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[1] A 5% sample of 2016 by-census is used.