Housing squeeze writ large in strategy

| Ryan Ip and Iris Poon 16 Apr 2019

To address Hong Kong's housing problem realistically, we can start by correcting the underestimation of demand, rather than raising public supply at the expense of the private sector.

Although the surge in prices eased in the past few months, our flats are still the most expensive in the world. The Long Term Housing Strategy's 2018 report throws light on how to address the issues.

For a start, supply targets were revised. For the decade starting 2019-20, it was reduced from 460,000 to 450,000, or 45,000 a year. However, the forecast was based on historic trends, yet there is evidence pointing to serious pent-up demand, suggesting clear underestimation.

Balancing public/private housing supply

According to the report, the public/private supply ratio of newly completed units will be revised from 60/40 to 70/30. While the target supply of public units will rise by 12.5 percent per year from 28,000 to 31,500, private units will be reduced by 25 percent from 18,000 to just 13,500. It is noteworthy that the report also categorized flats from the subsidized scheme for local first-time homebuyers as private housing units. This means supply available from private developers will be lower than the figures suggest.

With people having to wait 5 years on average for public housing, we welcome the move to increase the ratio. However, it is just a case of "robbing Peter to pay Paul."

Demand has long been underestimated

It is ironic how the report has lowered its supply target, despite long queues for public housing and mushrooming subdivided flats. Compared with 2014, the 2018 report lowered its 10-year supply target from 480,000 to 450,000, mainly as a result of its lowered forecast of growth of households. The report forecasted falling demand, but is that really the case?

In coming to its supply target, the report relies on the Census and Statistics Department's forecast of household growth. That, however, is derived from dividing the forecast of population growth by the past average number of residents per household, thus failing to adequately reflect the reality.

Squeezing private housing tenants into shoeboxes

Between 2006 and 2016, while only 120,000 private units were completed, there was an increase of 510,000 people living in them. This means each unit housed 4.25 residents, more than 50 percent higher than the average of 2.8 per household. The average number of residents in owner-occupied flats had not risen significantly, so it is private rental flats that had to accommodate more tenants. In fact, the average size of each rental household rose from 3.09 in 2006 to 3.47 in 2016, up 0.32 per household, or by 12 percent.

These figures point to the harsh reality of how many families are forced to squeeze several generations into tiny flats. The implication is that if the government continues to rely on past trends to forecast demand, then real housing needs will continue to be underestimated.

Demographic events suggest strong pent-up demand

Moreover, if we look at events like marriages, divorces and births, and subtract the number of deaths each year, we will get the net demographic events for demand. In the past 10 years, net demand was about 60,000 annually, similar to the late 1990s, yet during the past 10 years supply was far fewer.

A key measure of whether supply matches demand is the ratio of annual total completions to the number of net demographic events for demand. In the past five years, for each such event, there were only 0.44 completions, much lower than the long-term average of 0.75 units. This illustrates that completions were lower than fundamental demand in the past 10 years, resulting in pent-up demand.

Zero-sum game not the way to address lagging supply

Another method of analyzing pent-up demand also showed how the report was somewhat detached from reality. Since the report was first produced in 2013, the number of completions every year had always been markedly different from its forecast, yet it did not consider the need to catch up on past accumulated shortfall. For example, while the report published its first 10-year supply target of 470,000 units in 2013, actual completions in 2013 were 22,300, yet it did not consider the shortfall in the following year's supply target. Between 2013 and 2017, the shortfall was 99,000 units.

As future demand has been underestimated by supply forecasts, the ideal way to increase public supply is by raising the overall supply target. However, whatever the ratio of public/private housing may be, there is still a shortage of land. The crux of the problem is that as long as the "pie" is not big enough, there will always be clashing views over how it is divided. That is why it is important to make a bigger "pie" by making more land resources available with short-term measures and long-term planning. What is certain is that discussions based on a zero-sum game will not solve Hong Kong's housing problem.

Ryan Ip is the head of land and housing research and Iris Poon is a researcher at Our Hong Kong Foundation

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