Why divorce and remarriage rates matter for housing demand in Hong Kong
HK's high rate of marriage break-up leaves forecasters of housing demand stumbling in the dark, especially with reliance on a flawed 'sharing' ratio
The prices of small housing units are showing signs of moving up again, suggesting that underlying demand is still strong. Home prices in Hong Kong have escalated since the 1980s not only because of regulatory inertia that is slowing down new supply but also because both the government and the market have underestimated demand growth.
A commonly used measure of the gap between home demand and supply is the "degree of sharing", the inverse of the ratio of permanent housing units to domestic households. The ratio was 0.79 in 1971 and rose steadily to 1.09 in 1991 (see the first chart). It has since remained within the range of 1.08 to 1.12 despite considerable variations in supply and demand conditions.
The very low ratios before 1991 were the result of the massive influx of immigrants that entered Hong Kong between 1945 and 1951, causing the population to rise from 600,000 to 2.3 million. Multiple families were often crammed into a single domestic premises. Housing construction targets in the wake of that influx aimed to raise the ratio to above one and allow some margin for turnover.
Remarried couples have become a new source of housing demand
Given that this target was reached in the early 1990s and has remained stable, one could conclude there is no housing shortage as the "degree of sharing" has not worsened!
Unfortunately, the "degree of sharing" has ceased to be a good indicator of a housing shortage for two reasons. First, from the 1990s, the divorce rate in Hong Kong began to climb and increased more than threefold from 6,295 in 1991 to reach 21,125 in 2012 (see second chart). Divorce became a driver of housing demand as ex-partners moved out into new homes.
Most of those who divorce are from low-income households. This has fuelled the demand for "subdivided" housing units concentrated in older buildings in the old urban areas. As units have become subdivided, the supply of whole units has reduced and contributed to housing market tightness.
Remarried couples have become a new source of housing demand, as they relinquish the "subdivided" housing units they previously occupied.
A second reason why the "degree of sharing" has become uninformative of underlying demand is that some divorced individuals move back to their parents' household or live with other relatives. As family members living under a shared roof, they become part of the household. But such members could remarry and then move out.
Forecasting divorce and remarriage patterns and their effects on housing demand has not yet become a regular exercise in the housing market studies of our policymakers. It should, because Hong Kong's divorce rates are among the top 10 in the world. Moreover, our remarriage rates must be leading the world with a wider pool of options from across the border.
Looking ahead, in 20 years or so, as the baby boomers age, many of their housing units will begin to recirculate into the housing market. Unfortunately, these long cycles are very far from the planning calculus of policymakers, whose discount rates are usually very high.
For now, the 20-year horizon is a long way off and can be ignored at any reasonable discount rate. But this will not be the case in 10 years' time. Better that policymakers start grappling now with this long-term issue.
