Finding $3.

336 Trillions of
Housing Capital
By YueChim Richard On 2014/09/03 ∙ Add Comment ∙ 382 views

(This essay was published in Hong Kong Economic

Journal on 3 September 2014)

In 2013, the total value of housing capital in Hong Kong

was estimated to be $6.80 trillion dollars or 320 percent
of GDP. This is the net value of the total stock of private
residential housing evaluated at market prices. It is based
on the gross market value minus the total value of
outstanding mortgage loans on private residential
housing. Total mortgage loans were a modest $900 billion
– a mere 11.8 percent of the gross market value.

French economist, Thomas Piketty in his book Capital in

the Twenty-First Century , obtained similar figures
internationally. He estimated housing capital to be worth
371 percent of GDP for France, 300 percent for the United
Kingdom, 236 percent for Germany, 208 percent for
Canada, and 182 percent for the United States in the year
2010.

But private residential housing only accommodates about

half the population in Hong Kong. The other half is in
government-provided public rental housing units and
subsidized ownership units, mainly Tenant Purchase
Scheme (TPS) units and Homeownership Scheme (HOS)
units.

Unlock Public Housing Capital

The total market value of such government-provided

housing is very substantial, but because there are
extremely severe restrictions limiting their use either as
rental property or as assets for sale on the open market,
their values are highly discounted. When the use of these
assets is limited almost entirely to providing shelter for
the original occupants, they cannot be considered as
housing capital. As such, they are marginal to the market
economy and measured GDP.

The owner-occupants of the TPS and HOS units can

bequeath the units to their children. However, the units
can only be sold on the open market if the government-
subsidized portion of the land premium has been paid off.
This dampens the incentive to sell these units so the
market for them is relatively illiquid. It is also not clear
how these units can be redeveloped in future when the
building ages.

If the restriction on selling TPS and HOS units on the open

market were removed or the unpaid land premiums
substantially lowered, then an active market would
appear. The occupant would be able to realize a
substantial gain therefrom. The TPS and HOS units would
then become an important source of new housing capital
and not just a physical shelter.

Regulatory Controls Depress Prices

Tenants of public rental housing units face even more

restrictions because they do not have ownership rights
over the units they occupy. When tenants leave, for
example, upon death, the units are returned to the
Housing Authority and cannot be passed onto their
children. But if these units were sold to the sitting tenant
at an attractive price without any unpaid land premiums
to hold back resale, then the units could become a new
source of housing capital and not mere physical shelter.
Privatization of public rental units and deregulation of
sale restrictions for ownership units, on the other hand,
would substantially enhance the market value of
government housing. What would be their market value if
such steps were taken?

Based on open market transaction prices on HOS and TPS

units (see Table 1, Column III), I have estimated the total
gross market value of public rental housing units at $2.45
trillion, TPS units at $0.41 trillion, and HOS units at $1.56
trillion. The total market value of government subsidized
housing units is therefore $4.42 trillion, equal to 208% of
GDP.

The open market transaction prices on TPS and HOS units

are likely to be underestimated. Unlike private housing
units, current TPS and HOS units are traded at a discount
because they have limited redevelopment potential. In
Singapore, Housing Development Board housing units can
be traded on the market among residents, but are denied
redevelopment rights. This, too, reduces their market
value.

Partial Deregulation in the Secondary Market

TPS units are located in public rental blocks where many

of the units are still occupied by public sector tenants.
Such a mixed state of tenure, where government is part
landlord, limits privately-initiated redevelopment
potential.

Since the majority of the present owners of HOS units

have not repaid the unpaid land premium, their
redevelopment potential is also limited. With ownership
rights partly held by government, any privately-initiated
redevelopment prospects become highly uncertain, if not
impossible.

But what will be the economic gain to society of

privatizing public rental housing and waiving or
substantially lowering the unpaid land premiums?

Note that the market values of existing TPS and HOS units
under the current sales restrictions are already realized
as part of housing capital. Owners can trade them on the
“secondary market” among eligible purchasers, although
these transacted prices do not include the unpaid land
premium.

I have estimated their total value under sales restrictions

to be $173 billion for the stock of TPS units and $908
billion for the HOS units (see Table 1, Column II), or $1.08
trillion in total. This is equivalent to 50.9% of GDP. It is
worth noting that this is the gain society realized when
the “secondary market” for HOS units was created in
1997. Creating the “secondary market” was one of the
most benign policies of the Tung Chee-Hwa administration
and the Housing Authority.

Unfettered Circulation Releases Full Value

Let me digress a little to explain the concept of capital in

a market economy. Imagine that at this year’s Moon
Festival you received a gift of a box of lotus seed moon
cakes, whose market price is $150. Did you receive $150
worth of value? Not necessarily!

If you do not like moon cakes, or that specific variety or

brand, you may only be willing to pay $50 for the brand
that you received. So a gift worth $150 on the market is
only worth one-third of its value to you.
But wait a minute. Isn’t it true that if you don’t like lotus
seed moon cakes, you can still give it away to another
person as a gift who likes it? Indeed, a lot of moon cakes
get recycled during holiday season. And people only keep
those gifts that they like. The unwanted moon cakes
simply become quasi-cash-equivalent gifts in circulation.

Unfortunately, public rental housing units, TPS units and

HOS units cannot be circulated, at least not very easily.
They are often held by the initial occupant forever.
Therefore, unlike the lotus seed moon cakes, this is not a
commodity with sufficient circulation.

Given that, we can see that the current government’s

housing program effectively evaporates the value of
public housing capital by imposing restrictions on its
circulation. Privatization and deregulation would establish
private property rights of these units so they could be put
back into circulation for others to use. As an asset, these
units would be more valuable because they would have
more than one use: as shelter, for sale, for rent, and for
refinancing.

I estimate that the gain in housing capital from

privatization and deregulation would be $3.336 trillion,
equivalent to 156.9% of GDP (see Table 1, Column IV). The
gain is significantly larger in magnitude than the
“secondary market” deregulation in 1998.

To get a manageable feel of what this benefit would

mean, it helps to break it down to the average gain per
housing unit. The average public rental housing unit would
add $3.36 million to housing capital, the average TPS unit
would add $1.96 million, and the average HOS unit would
add $2.05 million (see Table 1, Column V).
With privatization and deregulation, the total value of
private and public housing stock would easily amount to
$11.24 trillion or 528% of GDP. To put this percentage into
perspective, consider Piketty’s estimates of the total
value of all forms of capital (and not just housing capital)
as a percentage of GDP. He found this to be 617% in
France, 543% in the United Kingdom, 418% in Germany,
417% in Canada, and 456% in the United States. France
and Germany also have large stocks of public housing so
their percentages would increase if their public housing
stocks were privatized.

Hong Kong could be a very capital rich city if only we

removed the restrictions on our government housing
units, and not only by an additional $3.36 trillion in
circulation.

Benefits of Releasing Full Housing Value

First, half the population of Hong Kong would be happier

because the gap between the rich and the poor would be
reduced in a very material way in one fell scoop. Society
would become much less divided, which has been an
unfortunate development in recent decades as property
prices have risen much faster than incomes.

Second, the pressure on government expenditures to

finance rising health care expenditures, old age social
welfare payments, education spending, and even housing
investment would be indirectly alleviated, as many
underutilized public housing units would become
unlocked and return to market circulation. Capitalizing
$3.336 trillion would empower a lot of families to pay for
these expenditures by themselves, according to their own
free choice.
Third, new economic activity at the grassroots level
would be spawned. A major deterrent to entrepreneurial
activity among the enterprising poor is the difficulty of
getting loans. Banks are seldom interested in lending to
the poor. The decline of family size has also made
borrowing from close relatives more difficult. Mortgaging
parents’ homes is often the most important form of
raising capital among those without credit rating.

Fourth, mortgaging parents’ homes would also provide an

important source of upward intergenerational mobility,
both in providing human capital investments to children
and making down payments for their home purchases.

Fifth, these benefits would come at no one’s expense. The

government would not even need to raise taxes.

These are five reasons, and more, for freeing up our public
housing sector and allowing this capital injection into our
economy.

Table 1: Estimates of the Value of Public Housing Capital

after Privatization and Deregulation

I II III IV V

Estimated
Estimated Total Estimated Increase in
Value of Housing Increase in Value of
Units at TPS and Estimated Total Value of Housing
HOS Value of Housing Housing Capital per
Number of “Secondary Units at Open Capital (Col. Unit (Col.
Housing Market” Market III – IV ÷
Units (1000s) Prices ($billion) Prices ($billion) II) ($billion) I) ($million)
Public
RentalHousing
Units 728 0 2,448 2,448 3.36

Tenant
Purchase Scheme
Units 123 173 414 241 1.96

Homeownership
Scheme Units 316 908 1,555 647 2.05

Total
Government Unit
s 1167 1,081 4,417 3,336 2.86

Total Estimated
Value as Percent
of GDP 50.9% 207.8% 156.9%