The View

Hong Kong’s rigid public rental housing system adds to unemployment in outlying areas

Study fails to show any significant positive effect of access to mass transit

PUBLISHED : Tuesday, 19 April, 2016, 10:31am
UPDATED : Tuesday, 19 April, 2016, 10:31am

Urban housing is one of the most important issues in economic development. How society chooses to supply housing to meet the needs of both existing residents and new migrants has enormous long-term consequences for every facet of economic, social and political life.

Over the past half-century, Hong Kong’s primary response to this issue has been to develop a public housing programme. Today, almost half the population lives in publicly provided housing, making the programme one of the largest in the world per capita.

There is, however, a price to pay for this achievement. Because of the increasing scarcity of urban land, many public housing estates are now found in satellite towns in outlying areas. Families are attracted by the low rents but the long, costly commute between home and work has reduced their ability to find and hold jobs in other parts of the city, or even to participate in the labour market at all.

Moreover, the rigidity in Hong Kong’s public rental housing requirements means they are likely to stay in the same unit permanently – even when moving to another district might make better sense, for example, to capture labour market opportunities there. Public rental housing residents are therefore far less mobile than private renters.

The share of urban dwellers in Hong Kong plunged from 91 per cent in 1976 to 58 per cent in 2011

Owners of public housing units sold through the government’s Home Ownership Scheme (HOS) and Tenants Purchase Scheme (TPS) also face serious restrictions on their mobility because they have to pay the unpaid land premium when selling their units. This is assessed at the time of repayment, meaning they are unable to capture the fully appreciated value of their property.

There is evidence that workers are living farther from jobs. The urban core of Hong Kong Island and Kowloon Peninsula has consistently accounted for about 75 per cent of total job opportunities for decades, even as the share of urban dwellers in Hong Kong plunged from 91 per cent in 1976 to 58 per cent in 2011.

There are consequences of this on economic efficiency. My colleague William Chan and I recently completed a study quantifying the impact of public housing tenancy on labour force participation and unemployment.

Working with data from the census and by-census surveys from 1996 to 2011 and the general household surveys (GHS) from 1993 to 2012, we found male heads of households who were public renters had a 2.38 per cent to 2.8 per cent lower participation rate in the labour force compared to private renters (the figures vary somewhat between the two surveys).

Among those who had not moved residence in the previous five years, the difference was 3.3 per cent.

Male renters also had a consistently higher unemployment rate – 1.2 percentage points higher in the census data after controlling for other observable characteristics and 2.4 percentage points higher in the GHS data. Considering the average unemployment rate was 3.5 per cent, the magnitude of this effect is very substantial.

Hong Kong has a reputation as the “best city in the world for commuters”. Yet tenancy in public housing is associated with significantly reduced labour force participation and increased unemployment – a problem that we believe is partly due to the rigid public rental system that means public tenants are basically stuck in their assigned units over time.

Partly to tackle this problem, the government has introduced a transport subsidy scheme for low-income workers and is constantly expanding coverage of the mass transit system. These initiatives are meant to facilitate access to jobs even as the population continues to migrate out of urban areas, but our results do not show any significant positive effect of access to mass transit.

If the heart of the problem lies with the inflexibility of the public housing system, then a more direct remedy would be to allow greater mobility within that system.

The government will not allow a bona fide market in public rental housing. However, I believe privatising the public housing system would reduce the wastage and inefficiencies it has created in labour markets. Think of a retired public housing tenant who could rent out his unit in an urban area where jobs are located and rent another unit in a more remote location.

Combining the consumption inefficiencies of public rental housing with the labour market inefficiencies adds up to a staggering cost for society. Privatising the public rental housing stock alone would easily add 1 to 2 percentage points to gross domestic product, and the present discounted value of this would be trillions of dollars.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong