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The most important issue in designing public housing policy is to have a functioning market that allows households to choose housing tenure, between tenancy and homeownership. This is especially important in developing economies with weak institutions that are experiencing rapid urbanization and industrialization, because the choice of housing tenure matters on both economic and social grounds.

A crucial question in the discussion on housing is whether most households in the public housing sector are on the whole poorer than those in the private sector. Or, does the distribution of household income among public housing occupants and private housing occupants overlap significantly or minimally? A well-known result from the economics of housing demand is that households with higher incomes prefer or demand bigger homes, and the size of accommodation is expected to be positively related with income. Given the large difference in the median size of the housing units between the private and public housing sectors (about 40%), an efficient or optimal housing arrangement would require that there be very different income levels between the occupants of these two sectors.

How do we know the proportion of unsatisfied households is very large? The answer is in the inequity of the public housing program. The distribution of household income between public and private renters overlaps enormously. The housing demands of many public housing tenants cannot be substantially lower than those of private renters. Policymakers in Hong Kong simply fail to appreciate this absolutely important fact. Their ideas about public housing are based on gross misunderstanding. Since public housing tenants are not allowed to exercise choice over their housing units, the value they attach to their units must be lower than the true worth of their unit or its worth to another person. The only way you can get a well-off person to accept or tolerate a small unit is to offer a huge discount. The housing unit is only undervalued to the person who is occupying it. If a market exists and the occupant can rent out this unit to anyone on the market, its true value would be realized.

Chapter 2 considers how Hong Kong got to where it is today. The history of Hong Kong’s housing strategy in the postwar era—and the one we still pursue—is best described as a massive attempt by government to provide rental shelter and homeownership for the population. Most people in Hong Kong are so accustomed to this provision that they hardly stop to think about what the government’s role in housing should be. The author believes that Hong Kong’s long-term housing goal should be to provide a mixture of public and private units so that at least 80% of permanent residents can become bona fide homeowners.

Every person who grew up in Hong Kong has been taught that, after a 1953 Boxing Day fire in Shek Kip Mei, which left 53,000 immigrants homeless, the government initiated a policy to develop Resettlement Estates to house these stranded people. The program continued until eventually more than 200,000 such units were built. It is easy to conclude that a Christmas fire triggered the greatest humanitarian policy initiative in postwar Hong Kong. This is, of course, part of the urban myth we all grew up with. At the very most, the Christmas fire was only one of many relevant reasons for this building program.

Both public rental housing and HOS housing in Hong Kong are financed through monetizing part of the land values of the HOS units. The land values are not fully monetized because part of the land premium is still unpaid and not wholly settled with the Housing Authority. It would make good sense today to develop a single subsidized housing program so the units are available for both rent and purchase, tenants having the option of renting first and purchasing later, as in the case of Singapore’s public housing scheme. Our low-income households would be more than willing to purchase these units if they were priced at an affordable level for them. As long as they are priced to cover at least full development costs, the government would be able to finance the entire cost of providing subsidized housing through monetizing land values. These low-income households would be able to benefit at nobody else’s expense. This would drive government spending on housing down to zero and would help reduce government spending pressure enormously, making scarce government revenues available for other uses.

Public pressure on government to reintroduce the HOS reappeared after 2010. When the US Federal Reserve announced a policy of quantitative easing to jumpstart the US economy. American funds flowed into the emerging economies in the world, and in Hong Kong rising home prices in the private market reignited concern among middle-income households that their aspirations for homeownership were being frustrated. It is obvious there is an enormous desire within this community for people to own their own homes. The past 30 years have convinced the people of Hong Kong that property prices are highly volatile but will rise, and those caught without a flat to call their own will have much to regret later in life.

People today see property as more than a form of shelter. They desire to own property as an asset to insure against an insecure future, yet they know that a private sector home is unaffordable for many of them. That is why they try to climb through the PRH and HOS public housing ladder. But here their aspiration is constrained, because that ladder leads only to a compromised future of partial and incomplete property ownership, where they cannot sell their unit on the open market without paying the exorbitant land premium. Should this be the ultimate prize that the people of Hong Kong have to look forward to? More importantly, can Hong Kong afford to allow this situation to continue?

Both Singapore and Hong Kong have massive public sector housing programs on a scale that is unprecedented in free market capitalist economies. Approximately four-fifths of Singaporeans and half of Hong Kong residents live in government-provided subsidized housing. But the two programs are critically different because of their different policies on homeownership and tenancy rights. Singapore has allowed for the establishment of an active market in public sector housing for rental and for purchase and sale. But in Hong Kong, restrictions have made the market for such units nonexistent and nonfunctional, with grave consequences for matters beyond housing issues. To consider a way out of this morass, it is useful to study the case of Singapore.

There was no compelling reason to believe the market was failing or that government intervention to curb speculation was warranted. Speculative activities improve economic efficiency. A better appreciation of the mechanism behind the presale arrangements would lead to a more enlightened view about regulating the market for presale housing units. However, this has not happened. In the past 20 years the government has repeatedly intervened in the market to curb speculation whenever there is a public outcry against property price surges.

Reforming public sector housing will go a long way towards reviving the natural ebb and flow of life of half the city’s population. It will make inhabitants freer and less frustrated, encourage people to move around, and reactivate their natural economic instincts to build and create. It will end the labeling effect of living in the public housing sector. At the very least, the place they now live in will become a community that they will call their home and start investing in rather than treat as a public asset they do not own. A population policy that seeks to attract more talent to Hong Kong can only be beneficial for all if economic growth results from dynamic externalities produced by human capital. To date, there has been more talk than substance. With an aging population knocking on the door, we clearly should be planning for a much larger and better population mix and seek to attract migrants and contracted non-local workers based on their capacity to produce and innovate, rather than merely the assets or spending power they command.