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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

The new approach above not only removes the artificially long waiting list queues, but can also directly target those with the lowest income and thus most in need of public help – by cutting PRH catchment by 24% to 0.94m households (still a vast number!), HOS catchment also shrinks a sizable 41%, and the SH sector will no longer cover a laughable 90% of total population…

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
  1. 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!
  2. 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
Figure 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.