The ‘killing’ of the mortgage loan market has worsened inequality for eligible households with low and middle incomes
Not restoring the market for mortgage loans for public sector units in Hong Kong, where housing is so valuable, is criminal
Economic liberty and political equality are two of the most important ideas that define modern civilization.
The free market capitalist industrial economy is founded on the principle of economic liberty based on private property.
The democratic political system is founded on the principle of equal political rights for all men (and women, of course) without privilege from birth.
Yet these two important ideas have long shared an uneasy coexistence – with many believing free markets worsen inequality.
Left-wing radicals, progressives and social liberals have persisted in the belief that free markets should be either abolished (together with private property) or restrained through government regulations to moderate economic inequality and protect political equality.
Even some members of my own tribe of economists believe that free markets worsen inequality and prefer bigger governments and smaller markets. Some have become quite well known through their popular writings – Thomas Piketty, Paul Krugman and Joseph Stiglitz.
Hostility towards markets has led many left-leaning liberals to believe that markets cannot lower inequality and that expanding markets, such as through global economic integration, increases inequality within national economies.
But is the increased inequality a result of growing market integration? Or of skill-biased technological progress that has increased relative wage differentials between skilled and unskilled workers? Or is it the higher incidence of family breakdown among low-income families the source?
Factors like technology and family breakdown have to be tackled separately to reduce inequality. Ending global economic integration would not arrest growing inequality. What other factors could be at play, then? Piketty’s empirical work suggests that rising economic inequality in the industrialised world is largely due to rising property prices and the unequal ownership of housing capital.
In Hong Kong, domestic property prices have risen almost continuously since the early 1980s and housing capital ownership has become the single most important source of inequality and political anguish.
In 2016, 53 per cent of households lived in private housing sector and 47 per cent in public housing. Homeowners in the public sector comprised 15 per cent of all households and the private sector 38 per cent. Since those in the public sector have only limited property rights until their outstanding land premiums are paid to government, this means only 38 per cent of households are bona fide homeowners.
Unless the public housing stock of ownership and rental units is fully privatised, the 47 per cent of households in that sector will not be able to share (at least not fully) in the appreciation of housing wealth as property prices rise. Inequality in housing capital will continue to persist.
At present the government has set the household income eligibility criteria for a family of four to qualify for the Homeownership Scheme at HK$50,500 per month. This qualifies some 80 per cent of all households in Hong Kong.
Singapore similarly aims to have 80 per cent of households live in government-provided Housing Development Board units, of which some 95 per cent are ownership units without a Hong Kong style unpaid land premium. The difference is that Singapore has met its target in full while Hong Kong delivers only 47 per cent (and these are not the same type of units).
Unsurprisingly, the Hong Kong public is frustrated. There is political unhappiness in particular among the middle echelons, who are vocal and active and blame their condition on a political system they perceive to be dominated by a closed elitist establishment.
For not only are prices high, but the mortgage market prevents them from having access to capital.
Before 1991, prospective homeowners could get a mortgage with a 10 per cent down payment. This started rising in 1991 out of fear of a bubble in the property market and now at least a 50 per cent down payment is required.
Raising the loan to value ratio for mortgage loans may have its rationale, but the result today is that the home mortgage loan market is available only to those who have saved up a huge down payment.
This ‘killing’ of the mortgage loan market has worsened inequality by breaking the housing ladder and illustrates vividly that free markets do not worsen inequality; rather, their absence worsens inequality.
The government could easily restore the market for mortgage loans for eligible households with low and middle incomes by becoming a creditor for unpaid land premiums and capping the premiums at their original values for public ownership units. This would go a long way towards alleviating inequality and arresting political polarisation to the benefit of all, especially if most new public sector units are offered for ownership and the existing public rental stock is privatised.
Not restoring the market for mortgage loans for public sector units in Hong Kong, where housing is so valuable, is criminal. Vive le marché!