2. Housing Market and Macroeconomic Performances

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1. Introduction

Over the last few years, prices and rents of the housing estates have been rising continuously¹, different stakeholders from Hong Kong have voiced their opinions.

Although there are diverse thoughts on the prices, different parties all agree with the fact that the present housing prices have been too high. The HKSAR Government has also acknowledged this problem. It has stated in the Policy Address 2013 that

“Many families have to move into smaller or older flats, or even factory buildings.

Tens of thousands of Hong Kong citizens have no choice but to opt for caged homes, cubical apartments and sub-divided flats.”

We will hereby conduct an analysis in the following steps. First, we have to explore the housing market in recent years, its economic characteristics, as well as its relationship with the macroeconomic conditions. Second, we will move on to review a handful of important housing policies in the past decades. Third, we will analyse and evaluate two policies available to the HKSAR Government in adjusting the supply of domestic housing market. We conclude that for the sake of increasing land resources for housing development via releasing land for private developers, HOS (House Ownership Scheme) or PRH units will result in different economic and welfare consequences.

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2. Housing Market and Macroeconomic Performances

The housing market influences Hong Kong’s economy through a number of channels. In particular, we will explore the relationships between the housing market and consumers, banks, government as well as the general price level.

2.1. Wealth Effect

 Increasing housing prices will create a positive wealth effect. It leads to a higher amount of consumption by consumers. Since properties are parts of personal wealth, an increase in the property price will add to the wealth of property owners. Property owners can then spend more on non-housing items when they realize that their net wealth is increased. Hence, such wealth effects due to the increase in property value will positively influence the consumption expenditure of the aggregate demand.

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2.2. Effects of Property Price Fluctuations on

Macroeconomic Performances through Financial Market

 Financial institutions provide loans to property owners through different refinancing schemes.² Property owners can spend money through refinancing schemes when the property price is rising. Hence, it has a positive impact on the consumption component in its aggregate demand.

 In the monthly residential mortgage survey published by the Hong Kong Monetary Authority (HKMA), we notice that the market of refinancing is specially active when the housing market is performing well. In Table 2-1, between 2007 and 2012, the loans of refinancing makes up the biggest share in new loans approved during the month at around 20%.

 Residential property market³ was the most active in 2010. Meanwhile, the value of refinancing reached the highest level in the same year.

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Table 2-1 The Values of New Loans Approved and Refinancing During the Year and the Total Consideration of Residential Property Market from 2007 to 2012 (HKD Million)

Year Value of New Loans Approved

Value of Refinancing

The Percentage of Refinancing on Mortgage (%)

(new loans approved during

the year)

Total Consideration of Residential

Market⁴

2007 213,884 34,669 16.2 434,031

2008 224,287 36,643 16.3 343,825

2009 302,042 42,880 14.2 425,838

2010 413,863 86,144 20.8 560,686

2011 270,300 49,607 18.4 442,523

2012 256,890 30,256 11.8 452,276

Source: Residential Mortgage Survey, Hong Kong Monetary Authority, The Land Registry

4 Same as 3.

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2.3. Bank Balance Sheet Effect

 To maximise the amount of loans a borrower can acquire from the bank, many small to medium size enterprises use their commercial or personal properties as securities or collateral. Banks rely on securities to reduce the risk of money lending because the borrowers often have better information about their ability to repay their loans (i.e. the problem of asymmetric information exists). Higher valuation of the secured properties has two effects. First, it increases the amount of loans that the enterprises can acquire. Second, it raises the bank’s ability to lend. In turn, the enterprises can use the borrowed money for investment. This will bring about a positive effect on the component of investment in the aggregate demand.

 Table 2-2 shows that there are four banks in Hong Kong with close to 70% of loans which are secured.

Table 2-2 Percentage of Secured Advances in Advances to Customers by Industry Sectors for Selected Hong Kong’s Banks in 2012 Bank % of Secured Advances

in Industrial, Commercial and Financial⁵

% of Secured Advances in Individuals Loans⁶

% of Secured Advances in Total Loans for Use

in Hong Kong The Bank of

East Asia 72.3 83.1 75.8

Hang Seng

Bank 67.1 82.2 74.0

Bank of China (Hong Kong)

50.3 91.7 69.9

HSBC 52.2 83.0 66.6

Source: 2012 annual reports of The Bank of East Asia, Hang Seng Bank, Bank of China (Hong Kong) and HSBC

 In Table 2-3, according to the statistics provided by HKMA, the share of the

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listed in their balance sheets, a bank’s financial position is directly linked to the secured properties. Hence, any fluctuations in the property prices may destabilize the financial market in Hong Kong⁷.

Table 2-3 Percentage Share of Loans and Advances for the Purchase of Other Residential Properties in Total Loans and Advances by Authorised Institutions in

Hong Kong⁸ from 2007 to 2012 (HKD Million)

Year Loans and Advances for Use in Hong Kong

Loans and Advances for the Purchase of Other Residential Properties

Percentage Share of Loans and Advances for

the Purchase of Other Residential Properties (%)

2007 2,274,284 564,127 24.8

2008 2,524,085 592,980 23.5

2009 2,471,402 646,056 26.2

2010 2,988,375 745,169 24.1

2011 3,360,874 804,625 23.9

2012 3,597,996 872,589 24.3

Source: Hong Kong Monetary Authority

7 Example: Subprime mortgage crisis in 2008, bubble of the US housing market busted, which is followed by a rapid falling of price of housing prices, the financial position of the banks hence significantly weakened; in addition the banks cannot determine borrowers’ repayment ability, they can only stop lending or charge a very high interest rate to reduce the risk of bad debt. Hence, it will decrease the investment component of the aggregate demand.

8 Loans and advances do not include housing units purchase of “Home Ownership Scheme”, “Private Sector Participation Scheme” and “Tenants Purchase Schemes”.

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2.4. Government Financial Position

 The financial position of a government depends heavily on her income and expenditure. The government can also influence the economy by changing the pattern of its expenditure and taxation policies. For example, when the economy is slowing down, the government can increase its expenditure or relieve taxpayers’ burden to stimulate the economy.

 According to the Basic Law “Chapter V: Economy” Article 107, “The Hong Kong Special Administrative Region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.”

 In the financial year of 2011/2012, the HKSAR Government’s revenue generated from the land premium and property stamp duty were 62 billion and 15.4 billion.

The two figures accounted for 16.5% and 4.1% of the total annual income respectively. Similarly, the HKSAR Government had revenue from land premium and property stamp duty in the financial year of 2012/2013 too. 62 billion and 15.4 billion, which amounted 15.4% and 3.8% to the total annual income respectively, were generated. Therefore, the financial position of the HKSAR Government is strongly related to the sale of land and the condition of property market.⁹

 According to the information above, it is not hard to see that when the housing market is doing well, the relevant HKSAR Government revenues will be higher, allowing the HKSAR Government to spend more on aspects that may stimulate the aggregate demand of the macro economy.

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2.5. Inflation

 Change in Aggregate Demand

 From the discussion earlier, an increase in property price can lead to a higher private consumption, investment and government expenditure through the positive wealth effect, bank balance sheet effect and stronger government financial position. All these items will boost the aggregate demand of the economy, resulting in a higher quantity demanded for good and services and a higher overall price level (i.e. inflation).¹⁰

Figure 2-1 The Effect of an Increase in Aggregated Demand on General Price Level and Real GDP

10 In Figure 2-1, after the shift of aggregate demand curve to the right, price level increases from P1 to P2, and Real GDP increases from Y1 to Y2

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 Change in Aggregate Supply

 If the property prices increase continuously, the general public will revise their expectations on inflation and ask for higher salaries so as to cover the increased cost of living. Assuming that the AD curve remains unchanged, the aggregate supply curve (AS) will shift to the left, which results in inflation¹¹ (Williamson 2002).

Figure 2-2 The Effect of a decrease in Aggregated Supply on General Price Level and Real GDP

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2.6. Relationship between Housing Price, Rent and Inflation

 Investors may invest in real estates and other products, such as stocks. Rental incomes from the investment in housing should be comparable to the returns of other investment vehicles after adjusting for the differences in investment risks.

 Suppose property price increases but rent remains unchanged, rental yield will become lower when compared to other investment returns. Hence, investors will raise the rent in order to maintain the value of housing investments.

 Tenants will have to accept a higher rental payment because they may not be able to find other alternatives for accommodation in the near term¹²(Wang, Zhang and Dai 2013).

 Since the Hong Kong Consumer Price Index¹³ includes consumption on housing in the formula of calculation, inflation rate increases when rent increases.

Table 2-4 Share of “Housing” in Hong Kong Consumer Price Index in 2012

Types of Consumer Price Index Share of “Housing” in percentage (%)

Composite 31.7

Type A 32.2

Type B 31.4

Type C 31.4

Source: Hong Kong Census and Statistics Department, Annual Report on the Consumer Price Index 2012

12 Housing supply takes time, for details please refer to Section 3.

13 Housing types include rentals for private housing, rentals for public housing, management fee and other housing fee. Additionally, CPI (C)’s housing types does not include rentals for public housing (HKCSD 2012).

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3. Economic Characteristics of Housing Market

Real estate is different from other goods and services in many aspects. In particular, it takes time for the property developers to build houses and flats. And thus, the market cycle of real estate and the economic cycle often do not synchronise. Additionally, since every housing unit is uniquely located in different areas, the “search cost” in housing market is higher when compared to other markets. Furthermore, developers are generally more informed than the buyers concerning the whole development project. Hence, information available to the buyers in the housing market is limited. HKSAR Government then has to impose regulations in order to protect public interest and welfare.

3.1. Real Estate Cycle

 In Figure 3-1, when the scale of economy is expanding, household income increases, which in turn leads to an increase in their housing demand. However, since property stocks might not be able to catch up with the newly added demand, the property price will increase in a short run. To respond to the increased demand, property developers will increase their construction of new houses. Yet, construction of properties takes time and the current expanding economy will eventually reach another recession. Hence, even though the market is going to have an abundant supply of properties, there will not be enough demand for housing when recession arrives. As a result, a surplus in housing will be resulted, making the property prices fall eventually.

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Figure 3-3 Business Cycle and Real Estate Cycle

3.2. Real Estate Cycle Characteristics

 The increase in housing supply takes a long period of time to realize while the stock also has a very slow depreciation rate.

 Changes of demand are faster than changes in supply.

 Real estate cycle and business cycle are desynchronised as a result of the supply time lag.

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3.3. Imperfect Information

 Each flat or housing estate is heterogeneous: They are built in different landscapes and uniquely located, which increases the information cost from the buyer’s prospective. Potential buyers of real estate have to spend more time evaluating a house. Agencies thus research on housing for pairing up buyers and sellers. This helps reduce the transaction costs, raising buyers’ incentives in trading.

3.4. Highly Regulated by the Government

 In the housing market, property owners or developers are often better informed than property buyers. This phenomenon is so called information asymmetry. To protect public interest, the HKSAR Government has imposed a number of regulations.

 “Town Planning Ordinance” requires developers to submit application to the committees for permission in building, which is to consider the external effects of their development projects. One example would be “Walled Building” which may create problems in air circulation in the real estates nearby, by altering the original landscape. The HKSAR Government has imposed tougher regulations in tackling the “Walled Building”, which in some way has limited the developers from supplying more houses.¹⁴

 Developers had been providing sales information for buyers that might misinform the flats’ saleable area, price, facilities and other essential information in recent years. The HKSAR Government has implemented the “Residential Properties (First-hand Sales) Ordinance” ¹⁵ to ensure the context of the sales brochure is correctly presented and thus buyers can be fully protected.

4. Microeconomics: Demand and Supply

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supply model assumes a perfect market. In the following sections, we will use the standard supply and demand model to explore variables that are influencing the property price.

Figure 4-4 Demand and Supply Curves

 In the housing market, quantity demanded will fall as price increases. Therefore, the demand curve slopes downwards.

 In a short run, it is difficult for developers to increase the supply of real estate.

The current supply of housing depends on the existing stock of that in the market. Short run supply curve appears to be inelastic.

 In a long run, developers can increase housing supply in many ways. Therefore, the long-term quantity of properties supplied increases with the price. The supply curve will therefore be upward-sloping.

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4.1. Factors Affecting Housing Demand

 Demography

 Including: population, sex, age, birth rate and divorce rate (McKenzie, Betts and Jensen 2010)

 As population increases, household demand for housing also increases.

 Local statistics reveal that from 1996, the number of Hong Kong single parents has increased from around 42,000, to 81,000 in 2011,¹⁶ which has almost doubled.¹⁷ The effect of this may have contributed to the increase in demand for small housing units.

 Income

 Normally, housing demand increases with income (McKenzie, Betts and Jensen 2010).

o When the household income increases, the demand for housing also increases (McKenzie, Betts and Jensen 2010). Residents living in the developing cities nearby will be attracted to migrate to a more developed region, such as Hong Kong. In recent years, the mainland economy has been blooming.¹⁸ As the income of mainland citizens increases, they can choose to migrate by investment in housing or other permitted industries under the “Capital Investment Entrant Scheme”.¹⁹ Also, there are mainland residents purchasing housing properties in Hong Kong purely for investment’s sake, leading to an overall increase in the demand for housing in Hong Kong.

 Although Hong Kong has experienced a substantial economic growth over the past few decades and the majority of Hong Kong population has

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become wealthier, a demand for more affordable but often unsafe or poorly conditioned housing remains. Despite the prosperity of Hong Kong housing market since 2009, the supply of subdivided flats is still on a rise.

o According to the recent governmental study conducted by Policy 21 titled “Survey of Subdivided Units in Hong Kong” in June 2013 ²⁰, it was estimated that there were around 66,900 households living in Sub- divided Units (SDU). It was also estimated that there were 171,300 persons living in SDU, accounting for 2.4% of the total population in Hong Kong.²¹

o In 2011, Hong Kong’s Gini Coefficient²² has risen from 0.525 to 0.537 over ten years, even though income of the lowest earning groups has increased.²³ Hence, the widening income disparity may contribute to the increasing demand of SDU.

20 Survey of Subdivided Units in Hong Kong (2013)

21 According to the report, “SDU (sub-divided units) is commonly used in the community where a domestic quarter is subdivided into two or more smaller units for rent. Generally, the original non-structural partition walls are removed while the new ones are erected; new toilet and kitchens are installed, and internal drains are added or altered.”

22 Gini Coefficient: A summary measuring if the extent to which the actual distribution of income differs from a hypothetical distribution in which each person receives an identical shares (HKCSD 2012).

23 According to HKCSD 2001 Population Census thematic report Household Income Distribution in Hong Kong, it shows that the lowest decile group who receives the lowest income has only seen their media income raised by merely 2.3%, even though the highest income decile group has seen their income increased by 22.2%

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o A research by Caritas Youth and Community Service shows that most of the residents of subdivided units are from the grassroots level as they are still queuing up for public housing. Due to various reasons, subdivided flats are their only affordable choices.

 Finance

 Since most property buyers have to rely on external sources of money other than their own income, the availability of financing in the market can affect the buyers’ demand for housing (McKenzie, Betts and Jensen 2010).

 Credit availability (Loan-to-value ratio,²⁴): HKMA would control the loan-to- value ratio to manage the risk that the banks are facing. So if the loan-to- value ratio decreases, potential buyers will find it difficult to finance housing purchases.

 Interest rate (Prime rate,²⁵): Interest payment is a part of the mortgage repayment and the amount depends on the level of interest rate. A contractionary monetary policy will increase interest rate, and thereby mortgage payers will have to bear a larger amount of interest payment, possibly lowering their demand for property.

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 HKSAR Government Regulations

 The HKSAR Government is responsible for introducing a clear, fair and transparent platform for transactions of residential properties.²⁶

 The HKSAR Government can also restrict or relax the housing market conditions in accordance to the market conditions by imposing different regulations.

 The HKSAR Government has imposed a Special Stamp Duty on housing property investors. As the cost of investment increases, the demand for properties from investors decreases.

Table 4-5 Timetable of HKSAR Government Imposing or Increasing the Stamp Duty

Date Ad Valorem Stamp Duty

Special Stamp Duty

Buyer’s Stamp Duty 1 April 2010 Increased from the

old rates 20 November 2010

–

26 October 2012

Started to levy (Stage 1)

27 October 2012 Adjusted to Stage

2

Started to levy 23 February 2013 Announced for a

further adjustment

Source: GovHK Stamp Duty Rates, Inland Revenue Department: FAQ on Special Stamp Duty and Buyer’s Stamp Duty

26 From the Sales of First-hand Residential Properties Authority, welcome message (2013) “To further enhance the transparency and fairness of the sales arrangement and transactions of first-hand residential properties … The objectives of the Ordinance are to create a clear, fair, balanced, practical and efficient mechanism to regulate the sales of first-hand residential properties, and to protect the interest of residential property buyers through enhancing transparency and making contravention on the mandatory requirements criminal offences.

Also, the Ordinance provides a level playing field for vendors of first-hand residential properties.”

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4.2. Factors Affecting Housing Supply

 Supply of Factors of Production

 Factors of production refer to inputs used in making the final goods and services. These include land, labour, capital (i.e. plant and machine), and such. (McKenzie, Betts and Jensen 2010)

 As mentioned in the Policy Address 2013, “Hong Kong is hilly and surrounded by water. Land is a scarce resource”. Thus, shortage of available land for development in the long run can raise the price of land, decreasing the housing supply.²⁷

 HKSAR Government Legislations and Regulations

 The HKSAR Government also has responsibility to make the building environment safe and healthy by enforcing or imposing safety, health and environmental standards for buildings. ²⁸

 “The Building Ordinance” lays out clearly the standard of quality and construction techniques developers have to follow. To meet the criteria laid out in the relevant regulations, developers are obliged not to cut corners.

Hence, as the costs of construction increase, the supply of housing will decrease.

 Policy Risk

 Real estate construction often takes time. When developers plan to build real estates, they will consider the policies of the HKSAR Government in the near future so as to make adjustments over the volume of real estate construction.

For example, Special Stamp Duty is imposed on the selling of a property by

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Developers may delay releasing new residential properties for sale to cause a decrease in supply in the market.

 Price of Factors of Production

 The price of factors of production will directly affect the quantity supplied by the developers, and the increase or decrease in production cost is reflected on the supply curve shifts.

 Skilled construction workers are in shortage in Hong Kong. Cheung Kin- chung, Secretary of Labour and Welfare Bureau, had pointed out in the Legislative Council, “At present, the unemployment rate of the construction industry stands at 4.9% and the underemployment rate at 7.4%. The current manpower situation is not as severe as that during the peak period of the Airport Core Programme, with the unemployment rate at 2%. While continual investment in infrastructure as well as public and private housing construction will create more opportunities for the construction industry, it will add further pressure to the manpower situation.”²⁹ (Official Record or Proceeding on 6/2/2013, LegCo)

 As a result, developers have to offer higher salaries to attract more construction workers. This will increase the cost of production, lowering the supply of housing units.

29 Record of proceeding (6/2/2013 Wednesday)

http://www.legco.gov.hk/yr12-13/english/counmtg/hansard/cm0206-translate-e.pdf

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5. Relevant Data on Housing Market in Hong Kong

We now move on to investigate the development of housing market in Hong Kong using local market data.

5.1. Housing Price

Figure 5-5 Hong Kong Private Domestic Property Price Index by Class from 1990 to 2012 (1990 as base year)

Source: Property Market Statistics, Review Monthly Supplement, Rating and Valuation Department

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 According to the data provided by Rating and Valuation Department’s (RVD), local private domestic property price index ³⁰ has significant changes. The three types of housing units of different sizes were at their lowest in 1990, and the peak in 2012. From 2010, the price index of Type A housing ³¹ units has a higher price index than that of Type C.

Figure 5-6 Hong Kong Private Domestic Property Rental Index by Class from 1990 to 2012 (1999 as base year)

 As for the rental index³², there were also significant changes throughout the period. Type A price index has moved beyond Type C from 2007 onwards.

Three types of housing unit price indices were at their lowest in 2004, and their peak in 2012.

30 The rental and price indices are derived from the same data that are used to compile average rents and prices. The indices measure value changes by reference to the factor of rent or price divided by ratable value of the subject properties rather than by reference to the rent or price per square meter of floor area.

31 Private Domestic units are defined as independent dwellings with separate cooking facilities and bathroom (and/or lavatory). They are sub-divided by reference to floor area as follows: Class A - saleable area less than 40 m2; Class B - saleable area of 40 m2 to 69.9 m2; Class C - saleable area of 70 m2 to 99.9 m2; Class D - saleable area of 100 m2 to 159.9 m2; Class E - saleable area of 160 m2 or above

32 See 30.

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Figure 5-7 Hong Kong Private Domestic Property Rental Index by Class and CPI (C) from 1999 to 2012 (1999 as base year)

19992000200120022003200420052006200720082009201020112012 0.0

20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0

A(less than 40m2) B (40-69.9m2) C (70-99.9m2) CPI (C)

 Between 1999 and 2012, the rental index had fallen to the lowest level in 2003, but it then started to keep rising. Particularly between 2009 and 2012, the magnitude was far larger than the increase in CPI(C).

5.2. Housing Supply

Figure 5-8 Hong Kong Private Domestic Property Stock by Class from 1985 to 2012

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Source: Property Market Statistics, Review Monthly Supplement, Rating and Valuation Department³³

 From the data of private domestic property stock between 1985 to 2012, Type B housing unit stock has the largest amount of increase, which is followed by Type A. Type C has the smallest amount of increase.

Figure 5-9 Index of Hong Kong Private Domestic Property Stock by Class from 2003 to 2012 (2003 as base year)

33 The figures from 2003 have been adjusted as the original figures from 2003 onwards exclude village houses in the source.

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Source: Property Market Statistics, Review Monthly Supplement, Rating and Valuation Department³⁴

 However, if we take 2003 as the base year (turning the index into 100 in 2003), another pattern emerges. Compared to our previous observations, Type C housing units had the largest percentage change, which was followed by Type B. The smallest percentage change was of Type A.

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Figure 5-10 Cumulative Number of Flats under Home Ownership Scheme from 1980 to 2002

Source: Hong Kong Housing Authority

 According to the Housing Authority, Home Ownership Scheme’s (HOS) annual (use year of completion as standard) cumulative number of sale showed a steady increase from 1980 to 2002.

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Figure 5-11 Total Number of Completion of Flats under Home Ownership Scheme from 1980 to 2002

 If we separate the cumulative numbers of HOS sold with the annual numbers sold, the numbers show a lot of fluctuations.

 From the above diagrams, the number of properties sold under HOS was increasing cumulatively. However, the HKSAR Government did not set a fixed policy for the supply of HOS flats.

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Figure 5-12 Stock of Public Rental Flats in 2002, 2007 and 2012

 From 2002 to 2012, Hong Kong’s public housing stock had been growing continuously, from 680,000 units in 2002 to 760,000 units in 2012.

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Figure 5-13 Actual Public Rental Housing Production from FY 2002/03 to 2011/12

 However, a very different result emerges by observing the annual stock of completed public housing. Although in year 04/05, there was a large amount of completed housing units which amounted to around 25,000, there was a significant decrease to around 7,000 units in the fiscal year of 06/07. ³⁵ From 07/08 onwards, there was an increase in the stock of public housing, but it decreased again in 09/10. By comparing the figures above, the completion of public housing stock has fluctuated much, as the HKSAR Government had no fixed policies regarding the supply of PRH units to be completed in each year.

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5.3. Household income and distribution of types of housing

Table 5-6 Number of Hong Kong Domestic Household by Type of Housing in 2001, 2006 and 2011

Year

Type of Housing

2001 2006 2011

Number % Number % Number %

Public Rental

Housing³⁶ 627,339 30.6 690,788 31.0 720,892 30.4

Subsidized Home Ownership Housing

320,122 15.6 362,439 16.3 377,615 15.9

Private Permanent Housing

1,071,881 52.2 1,149,952 51.6 1,242,982 52.5

Others³⁷ 34,070 1.6 23,367 1.0 27,307 1.2

Total 2,053,412 100.0 2,226,546 100.0 2,368,796 100.0

Source: HK Census and Statistics Department, 2011 Population Census

 According to 2011 Population Census conducted by HKCSD, around 30.4% of domestic household lives in public housing units, around 15.9% lives in Subsidized Home Ownership Housing units, and 52.5% lives in private permanent housing units. The composition has not changed much when we compare censuses in 2001 and 2006.

Figure 5-14 Distribution of Hong Kong Domestic Households by Tenure of Accommodation in 2011

36 Including all public rental housing units (HKCSD 2011).

37 Others include non-domestic quarters and temporary housing (HKCSD 2011).

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30.40%

15.90%

36.20%

16.30%

1.20%

Public Rental Housing Home Ownership Scheme Flats Pirvate Permanent Housing (Owner-occupiers)

Private Permanent Housing (Rent - ing)

Others

 Figure 5-10 depicts the distribution of Hong Kong domestic household by tenure of accommodation, based on figures of “Domestic Households by Tenure of Accommodation” in 2011 census. Around 36.14% of household were the living in private housing units (occupier owner),³⁸whereas 16.3% were living in rented private permanent housing. At the same time period, 15.9% of households were living in Home Ownership Scheme (HOS) flats, while 30.4% of the household were living in public housing unit (renting).

Table 5-7 Median Monthly Domestic Household Rent and Median Rent to Income

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Type of housing

1

Public Rental Housing

Units

1,30 0

1,390 1,210 12,50 0

10,29 6

11,41 5

10.4 13.5 10.6

Private Permanent

Housing

5,30 0

5,100 7,500 19,41 3

20,23 8

29,18 2

27.3 25.2 25.7

 The median monthly domestic household income levels³⁹ in 2001, 2006 and 2011 showed significant changes. Residents of public rental housing have lower household income than the residents of private housing. Growth of income has stagnated over the past ten years. The income of residents in public estates, if compared to 2001, has actually decreased.⁴⁰ Meanwhile, the income of residents of private housing units has increased consistently.⁴¹

39 Median monthly domestic household income refers to the average monthly domestic household income so calculated that 50% of the total number of domestic households had incomes above that figure and the other 50% had incomes below it (HKCSD 2011).

40 Median Monthly domestic household income for residents of public rental housing units: 2001: $12,500; 2006:

$10,296; 2011: $11,415

41 Median Monthly domestic household income for residents of private permanent housing: 2001: $19,413;

2006: $20,238; 2011: $29,182

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 Although the income of private housing households was two times higher than that of the public housing households, the rent for private housing was significantly higher. If we refer to the median monthly domestic household rent for discussion,⁴² the private housing rent had increased from $5,300 in 2001 to

$7,500 in 2011. Yet, the public housing rent had decreased from $1,300 in 2001 to $1,200 in 2011.

 Median Rent to Income Ratio ⁴³ can reflect the relatively bigger burden of expenses towards private housing households. Throughout the last ten years of censuses conducted, private housing households had a ratio ranging from 25%

to 27%. Public housing households’ ratio, however, had been fluctuating between 10% and 13%

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5.4. Summary

 According to the Composite Consumer Price Index, there has been a very significant increase in the expenses of housing in recent years.⁴⁴ Households with the slowest income growth (e.g. tier one Working Population Income) ⁴⁵ has to cut down other expenses in order to balance out the rising cost of housing, which may affect their quality of living.

 The slow increase in housing supply causes the housing supply to fall far behind from the already-steadily increasing housing demand. Among the private housing properties, Type C’s (i.e. the relatively larger sized housing units) supply has the largest increase, but the general public finds them hardly affordable.

 The change of Hong Kong’s demography may also change the demand for housing.

 An increase in average income has also strengthened the public’s willingness to pay for housing, which in turn stimulates the demand for the real estate market.

 In recent years, the demand for sub-divided flats from grassroots families has been increasing. There are at least two key reasons behind this phenomenon:

First, it shows that the real income growth may not be able to catch up with the growth of housing price. Second, it slows that public housing and those relatively cheaper flats are in shortage. Lower income groups have no choice but to live in the more affordable, yet ill-conditioned sub-divided flats.

6. History of Housing Market in Hong Kong

The landscape of housing in Hong Kong has experienced phases of changes.

The following table introduces the history of the Hong Kong housing market and relevant housing policies briefly.

44 Within the CPI Index 2012, housing has an increase of 7.2% (HKCSD 2012).

45 In 2011 Census, section of Household Income distribution, CSD has categorise households into twelve decile groups, the lowest group’s income is lower than $2,000 (Table 2.2, 2011 Population Census – Thematic Report Household Income Distribution in Hong Kong, HKCSD 2011).

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6.1. Before the Handover in 1997

Year Historical Events Policies/ Policies aims 1950s-1960s Large influx of refugees

Poor hill side shelter

On the 25^th of December 1953, a major fire destroyed the Shek Kip Mei squatter areas

 Emergence public shelters

 Provisional Resettlement units

 Emergency Housing

 Basic Living environment, PRH by HK Government

1970s – 80s As Hong Kong’s economy blooms, the public start to demand for permanent and quality housing units

Ten years housing programme: New towns, House Ownership Scheme (HOS), Private Sector Participation Scheme (PPS)

Promotion of Home ownership

Freezing out the numbers of

squatters through a HK Government conducted registry scheme, squatters are only allowed before the land it built on is required for public purposes. ⁴⁶

Source: Hong Kong Housing Authority, City University of Hong Kong: Hong Kong Housing Homepage, Consultation Document on Long Term Housing Strategy

6.2. After the Handover

Year Historical Events Policies/ Policies aims

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 Expectation of housing is also rising with growing prosperity.

(After 1997)

 Asian Financial Crisis, bursting of housing market bubble.

Some of Mr Suen Ming Yeung’s polices during that time (孫九招) :

Regular land auctions and the Application List System were stopped and suspended until the end of 2003. New supply of land would be applied by real estate developers from the Application List.

Suspension of sale of HOS and PSPS .⁴⁹

47 A New, Long Term Development Framework for Hong Kong: A Response to Change and Challenges, A consultative Digest on the Review 1996 Territorial Development Strategy.

48 http://www.cityu.edu.hk/hkhousing/pdoc/1998_%20LTHS-c.pdf 49 http://www.legco.gov.hk/yr03-04/chinese/sec/library/0304fs01c.pdf

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(Continue with the table)

Year Historical events Policies

2010 – present  Shortages of land supply and housing units have resulted in high housing price. This makes housing more

unaffordable than ever.⁵⁰

The HKSAR Government has increased ad valorem stamp duty as well as levied special and buyer’s stamp duty due to high prices of housing.⁵¹

Target of 470,000 flats in ten years (The ratio of public housing to private housing as 60:40). ⁵²

Increasing the land supply by exploring opportunity to develop lands in N.T.

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7. Economic Model of Housing

Let us consider an economic model for the analysis of housing market in Hong Kong. The model attempts to describe the interactions of different layers of markets of flats in the public and private sectors, which can be a rental market or a buy and sell market. Then, we attempt to study the effects of HKSAR Government policies on these markets. To do so, we employed a linear supply and demand model for our exposition.

 It is important to be reminded that a household values a flat according to its consumption and investment values. It therefore follows that the maximum amount of money a household is willing to spend on a flat or to accept to sell a flat depends on:

 The subjective value of housing services yielded, and

 The rate of monetary return of the flat (i.e. rents) as an investment asset.

 A key assumption that will be applied for the whole presentation: An individual household who needs a flat demands only ONE unit of flat.

7.1. Overview of Housing Market

 A salient feature of the housing market in Hong Kong is the unique role of means-tests of income for the eligibility of public housing application.

 The feature explicitly segments the overall housing market into independent, but inter-related, public and private markets.

 For illustration purpose, consider a starting hypothetical point that the selling prices of flats are zero in both the private and public housing markets.

 And there are 2,000 demanders of private flats at price zero. Among them:

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Figure 7-15 Components of Demand for Housing Market

1000

600 400

Private housing

Eligible for HOS but not PRH Eligible for PRH only

 1,000 demanders have income lower than the threshold to be eligible for application of public home ownership (HOS) flats.

 Among these 1,000 demanders, 600 have income level eligible for application for public rental housing (PRH), which has a tighter restriction for application than for the HOS flats.

 It is assumed that these demanders will first bid for a new flat in the private market. If the bidding is not successful, then the residual demanders will move to the second-hand private market to search for a flat. And yet, if they are unsuccessful in obtaining a flat in the new and second-hand market, then they will move on to the rental market. There are high and low end rental markets for flats. The near-lowest band of markets will be the subdivided flats market.

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 Hence, the residual demanders who are left empty handed from the private sell and buy market and those who are left empty handed from the public market will meet in the private rental market. To satisfy the diversity of residual demand, the rental market has different layers to accommodate these residual demanders for their housing needs at different costs.

Figure 7-16 Overview of Housing Market Analysis

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7.2. Private Primary Flats Markets

 In the private primary flats market, for simplicity, it is assumed that an inelastic supply of flats prevails in the market.

 The demand for private primary flats is mainly determined by the willingness to pay for flats by the individual demanders. The wealthier individuals can afford to bid for a new flat at a higher price.

 Market price is then determined by the force of supply and demand. The resulting unmet demand in this market will move to the private secondary flat market for buying opportunities.

Figure 7-17 Private Primary Flats Market

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 Supply is fixed at 200

 Under the fixed supply of 200 flats, equilibrium price will be 4.5 million dollars, hence residual demand is 1,800 buyers who cannot buy a first-hand flat.

7.3. Private Secondary Flat Market

 The supply curve is more elastic, due to the fact that individual sellers of secondary flats have different values for their flats.

 The demand is then made up of the residual demanders from the primary flats, making up a downward sloping demand curve.

 An equilibrium price in the private secondary market is formed based on the force of supply and demand.

 The residual unmet demand should seek opportunities in the rental market.

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Figure 7-18 Private Secondary Flats Market

 In this market, the equilibrium price is 4 million dollars, and quantity demanded will be 200 units. 1,600 buyers who fail to buy a private second-hand flat (1,800- 200) will move into the private rental market.

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7.4. Public Flats Market—Home Ownership Scheme

 Home Ownership Scheme (HOS) and public flats can only be chosen by residents who pass through the means-tests of income.

 In the public housing market, the Housing Authority is the sole supplier of HOS flats for the people in need who pass the means-tests of income.

 Eligible flats demanders who demand public HOS flats also face an inelastic supply.

Figure 7-19 Public HOS Market

 Since HOS flats are sold at the regulated price, there will be an excess demand for the HOS flats.

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 An effective price cap per flat in work, i.e. 3 million dollars as shown in the above figure. A rationing mechanism works by waiting time or random assignment.

 Among 1,000 demanders, only 75 can acquire a HOS unit.

7.5. Public Rental Housing Market

 Although public rental housing will absorb some of the residual demanders, who fail to obtain HOS flats and yet pass a tighter means-test. Given the heavily subsidized rental rate, there will be an excess demand, resulting in a long waiting list.

 Finally, those who fail to obtain a flat from the public market will eventually seek for private rental flats. But by default, this group of demanders will seek for private rental flats at the lower end, forming the demand for the subdivided accommodation units.

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Figure 7-20 Public PRH Market

 One characteristic of public housing: Public housing is subsidied abundantly by the HKSAR Government, rationing mechanism by waiting time in work.

 Among the 600 public housing applicants, only 200 will be allocated a unit. Other residual (600 – 200) 400 households can only move down to the private rental housing market to find a flat.

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7.6. Private Rental Flat Markets

 In the private rental flats market, there are three levels of quality of flats: high, middle and low quality flats are rented at different costs.

 The mix of potential renters includes people who cannot afford the down payment and the people who can afford down payment but fail to buy private flats, due to high market prices.

 Due to the fact that individual potential renters have different values over the housing services, the annual rent at which renters are willing to pay is different.

 Concerning the supply of rental flats, owners of flats will ask for different levels of rent to lease their flats. The housing model therefore shows that the rise of the subdivided units in the flats in the private market is to house the residual demanders from the other markets:

 Those who cannot find anything in both the normal private selling and rental markets, and

 Those who are not yet housed by the public market.

 The residual flats demanders will seek opportunities from the private rental market of high quality flats. Equilibrium rent will emerge and some flat demanders will fail to be housed. The residual demanders will seek in the rental market of middle quality flats. Similarly, equilibrium rent for middle quality flats will emerge and some flat demanders will fail to be housed. Then, some residual demanders from the middle market will seek out opportunities in the lower end rental market.

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7.7. Private High Quality Flats Rental Markets

Figure 7-21 Private High Quality Flats Rental Markets

 In private housing market and public housing market, there are 675 people who have successfully acquired a flat, hence in this rent market there is a residual demand of (2,000 - 675) 1,325.

 The market equilibrium rent (annual) will be under $280,000, 401 renters will successfully acquire a high quality housing unit, hence the residual (1,325 - 401) 924 households will move into the middle quality housing market for flats.

7.8. Private Middle Quality Flats Rental Market

Figure 7-22 Private Middle Quality Flats Rental Markets

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 The market equilibrium rent (annual) will be under $180,000, 350 renters will successfully acquire private middle quality housing flats, hence the residual (924 - 350) 574 households will move into the middle rental housing market for flats.

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 The market equilibrium rent (annual) will be under $3,000, 170 renters will successfully acquire a subdivided unit, hence the residual (574 - 170) 404 households cannot find a housing unit in the market, they may stay where they live, or become homeless.

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7.10. Summary

 Three key observations from the above analysis:

 The private market will not fully cover the need of housing demand.

 There will be excess demand in the subsidized public flat market.

 Private rental market provides tiers of rental flats to meet the demand, including subdivided rental units.

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8. Policy Analysis and Evaluation

8.1. Policy Under Consideration: An Increase in Land Supply in Private Market

 If more land resources are released for private flats development, the supply of flats in the private primary flat market will increase. This will create pressure on the price of new flats, causing a fall in price of new flats. Yet, the quantity of flats traded will be increased, meaning more flat demanders will be satisfied. As a result, the residual demand for secondary flats in the private market may shrink, resulting in a decrease in price of secondary flats. And the quantity of flats traded in the secondary market will also be lowered. Similarly, less residual demand for rental flats in the private market in different levels will be caused.

Equilibrium rent will fall and the number of rented flats will also be decreased.

 Note that the policy does not have a direct effect on the public housing sector. It is because there is a means-test in work, which separates the public and private sectors. Also, demanders eligible for HOS or PRH flats are more unlikely to afford down payment for buying a new primary flat. Therefore, the policy is unlikely to benefit them directly. They may be benefited because of the lower rent in the private rental market. However, such effect may also be small because they belong to the lower end rental flat users.

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Figure 8-24 Private Primary Flats Market

 As land supply increases, quantity of private primary flats also increases, shifting the supply curve to the right. Holding demand constant, the equilibrium quantity will increase from 200 to 400 units, hence residual demand will decrease from 1,800 buyers to the present (2,000 – 400) 1,600 buyers.

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Figure 8-25 Private Secondary Flats Market

 In the private secondary flats market, demand decreases to 1,600 buyers, hence demand curve shifts to the left. Equilibrium price also decreases, as well as quantity demanded.

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Figure 8-26 Public HOS Market

 As for public housing market, the newly added land supply will not invovle in this usage, HOS and public housing supply remain unchanged. Under the current fixed price (i.e. 3 million dollars per flat indicated in the figure above), only 75 demanders will be able to acquire a unit, the residual flat demanders will head to other markets for a flat.

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Figure 8-27 Public PRH Market

 In the public rental housing market, only 600 applicants can qualify for PRH.

However, there are only 200 PRH units of supply, the residual 400 households will have to look for their flats in other housing markets.

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Figure 8-28 Private High Quality Rental Flats Markets

 Residual demand from the above will reduce to (2,000 – 855) 1,145 ⁵³ renters, demand curve shifts to the left. Hence the market equilibrium rent decreases, and quantity demanded decreases to 370 units.

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 As shown in the above, the residual demanders will become (1,145 – 370) 775, the demand curve shifts to the left, hence the market equilibrium rent decreases, quantity demanded also decreases to 300 units.

Figure 8-30 Private Subdivided Units Rental Market

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 Demanders who cannot find a flat in two of the above markets will continue their search in the subdivided flat market. Currently there are (775 – 300) 475 demanders, demand curve shifts to the left. Hence the equilibrium rent decreases, quantity demanded also decreases to 150 units.

 The residual (475 – 150) 325 demanders, not only can they not find flats in private housing market, but also they cannot find flats in the public housing market; hence they have no choice but to stay in their current place or become homeless.

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 Policy evaluation: Will increasing land supply for private flats improve the living conditions for the grass root households?

 First, the welfare of grass root households may be improved due to a lower rent of private rental units. However, the effect may not be significant.

Second, the welfare effect may also depend on the room it creates in the rental market for renters to move upstream from the lowest tier market. Yet, the unmet demand in the lowest tier quality market still exists. The people who cannot move upstream may be due to low income and/or deposit constrained.

8.2. Policy Under Consideration: An Increase in Land Supply in Public Market

 If more land resources are provided for public housing development, the supply of HOS flats will increase. The quantity of HOS flats traded will be increased, meaning more HOS flat demanders will be satisfied. However, the effect of the regulated price for HOS flats will be negligible. Normally, it is the current PRH flat users who have the given priority to move into the HOS flats. Then, more PRH flats may be made available for awaiting applicants. As a result, the residual demand for rental flats in the private market, especially the demand for the subdivided units, will be lowered. Equilibrium rent for lower ranked rental market will fall and the number of rented flats will also be decreased.

 Price for new and secondary units may also be adjusted downward in the long run in the private sector.

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Figure 8-31 HOS Flats and Subdivided Units Rental Markets

 HOS supply has increased from 75 units to 250 units, meaning more HOS applicants can be allocated a flat. Hence, middle quality private housing demand will decrease, leading to the equilibrium rent to decrease as well.

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Figure 8-32 PRH Flats and Subdivided Units Rental Markets

 As shown in the above, public rent houing supply increases from 200 units to 400 units, residual applicants has been reduced, leading to a decrease in demand for subdivided units, hence subdivided units’ equilibrium rent and quantity demanded also decrease.

Figure 8-33 Private Primary Flats and Private Secondary Flats Markets

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 Note that this policy would have a non-trivial direct effect on the private buy and sell market. It is because when private flat rental rate falls, the rate of monetary return of flats is reduced. As a result, the buying value for the first and second- hand flats will also be adjusted. To restore an equilibrium point in terms of the different rate of returns of housing assets, market prices for first-hand properties and second-hand properties will fall.

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8.3. Summary: Effects of Land Supply Policy

 Increase land supply policies in either the private or the public sectors may:

 result in a lower price and rent of flats in private markets

 reduce quantity of flats rented in private markets

 reduce the number of homeless people, people living in caged homes and young people with housing needs.

8.4. Policy Evaluation Questions

 Will increasing land supply for HOS improve the living conditions for the grass root households?

 Answer: Yes, an increase in HOS can increase the number of the people who are currently living in PRH to move upstream in the accommodation ladder, and thereby free up PRH resources to accommodate the applicants in line, and thus improve the grass root household’s living condition. Again, the living costs of the grass root households may be reduced as they may pay lower rents for the lowest tier housing (i.e. the subdivided units).

 Will increasing land for PRH improve the living conditions for the grass root households?

 Answer: Yes, it can improve the applicant’s living condition by moving them into the newly developed PRH flats. By paying a subsidized rent, their quality of life will also be improved. In addition, the living costs of the grass root households may be reduced as these households may pay lower rents for the lowest tier housing (i.e. the subdivided units).

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 Which one is a better policy if a policy objective is to raise the living conditions of the grass root households?

 Answer: Increasing the land supply for HOS has an effect to create an upstream accommodation ladder, but increasing the land supply for PRH does not. Both policies will improve the living conditions of some grass root households by moving them into the PRH flats. However, the former policy is more dynamic and has the potential to improve the living conditions of those who are currently living in PRHs but wish to own a HOS flat, and thereby freeing up resources.

2. Housing Market and Macroeconomic Performances

Contents

1. Introduction

2. Housing Market and Macroeconomic Performances

2.1. Wealth Effect

2.2. Effects of Property Price Fluctuations on

Macroeconomic Performances through Financial Market

2.3. Bank Balance Sheet Effect

2.4. Government Financial Position

2.5. Inflation

2.6. Relationship between Housing Price, Rent and Inflation

3. Economic Characteristics of Housing Market

3.1. Real Estate Cycle

3.2. Real Estate Cycle Characteristics

3.3. Imperfect Information

3.4. Highly Regulated by the Government

4. Microeconomics: Demand and Supply

4.1. Factors Affecting Housing Demand

4.2. Factors Affecting Housing Supply

5. Relevant Data on Housing Market in Hong Kong

5.1. Housing Price

5.2. Housing Supply

5.3. Household income and distribution of types of housing

5.4. Summary

6. History of Housing Market in Hong Kong

6.1. Before the Handover in 1997

6.2. After the Handover

7. Economic Model of Housing

7.1. Overview of Housing Market

7.2. Private Primary Flats Markets

7.3. Private Secondary Flat Market

7.4. Public Flats Market—Home Ownership Scheme

7.5. Public Rental Housing Market

7.6. Private Rental Flat Markets

7.7. Private High Quality Flats Rental Markets

7.8. Private Middle Quality Flats Rental Market

7.10. Summary

8. Policy Analysis and Evaluation

8.1. Policy Under Consideration: An Increase in Land Supply in Private Market

8.2. Policy Under Consideration: An Increase in Land Supply in Public Market

8.3. Summary: Effects of Land Supply Policy

8.4. Policy Evaluation Questions