It has been reiterated that the People’s Republic of China (PRC) and Hong Kong, China are under different economic systems. The PRC is basically socialism with more planned economy features, while Hong Kong, China is basically capitalism with more free market features. Reflecting on this “one nation, two systems” doctrine, my forthcoming ADBI working paper on the housing markets in the PRC and Hong Kong, China reveals that such distinction tends to be obscured when looking at their housing policies: there are more social welfare elements in Hong Kong, China and more market competitive elements in the PRC. A comparison of the major housing policies implemented in the PRC and Hong Kong, China indicates, however, that policies encouraging private and high income housing (i.e., mortgage interest rate reductions) tend to be more effective than policies favoring public or low income housing (i.e., housing subsidies) in meeting housing provision targets. Policies influencing market demand (i.e., restrictions of purchase) tend to be more effective than policies influencing market supply (i.e., downgrading of living standards) in stabilizing housing prices.
One nation, two systems
Housing market development in the PRC and Hong Kong, China is at different stages. Hong Kong, China has experienced a complete property cycle, while housing prices in the PRC still seem unbeaten. Hong Kong, China has a housing shortage problem, while in the PRC an oversupply of housing is pushing up vacancy rates. Hong Kong, China has abandoned property and inheritance taxes, while the PRC endeavors to promote both. Hong Kong, China has established a public rental housing system to accommodate over 30% of its total population, while in the PRC the role of the rental housing sector is limited. Hong Kong, China has been entirely urbanized while the urbanization ratio of the PRC remains low compared to most developed economies. Above all these differences, both markets face housing affordability problems due to the limited supply of land. Hong Kong, China has adopted a “railway plus property” development model in compacted urban areas, but has left greenbelts and wild islands underdeveloped. The PRC government pledges to maintain a minimum level of basic farmland, although this is often compromised by local governments’ fiscal constraints and growth concerns. Rapid urbanization has relieved the local fiscal dilemma, but increased the uneven distribution of housing wealth between the more affluent and the poor.
Despite various differences, the two markets have a number of features in common, i.e., high dependency on the real estate sector to stimulate economic growth, densely populated urban areas with increasing high-rise buildings, deteriorating housing affordability over the last decade, cultural consensus on the nexus between marriage and homeownership, and rising inequality in housing assets. With the primary common goal of bringing down housing prices and increasing housing supply, the targets and outcomes of the housing policies in the two markets are in line with their respective social welfare systems: Hong Kong, China favors the elderly and the poor (i.e., lower costs of medical services and a higher minimum wage, but higher costs of education and lower tax rates for lower income bands), thus housing policies tend to support the lower income band (i.e., public housing, housing subsidies, and the “85,000 Plan,” which has the target of providing an annual 85,000 units of private ownership housing). The PRC focuses on the young and the rich (i.e., lower costs of primary education and labor, but higher costs of medical services and higher tax rates for lower income bands). Hence, most regulative housing policies on the higher income band (i.e., experimental taxes on luxurious housing/villas and the 70/90 Policy) are unsuccessful.
The main policies in the PRC are mortgage interest rate reduction (i.e., the Housing Provident Fund), downgrading of the living standard (i.e., the “70/90 Policy,” which requires at least 70% of newly built housing to be below 90 square meters), loan-to-value and debt-to-income regulations (i.e., restrictions on real estate loans), restrictions of new purchases in the owner-occupied market, as well as rent control in the rental market. The main policies in Hong Kong, China include housing subsidies, mortgage interest rate deductions, and property taxes on housing purchases (so-called “spicy measures”) in the owner-occupied market, as well as public housing in the rental market. A number of policies implemented have deviated from their expected outcomes. Empirical evidence reveals that the wrong timing of policy implementation is a major cause of enlarged market fluctuation: One example from Hong Kong, China was the 85,000 Plan, which was intended to increase housing supply but ended up depressing already fatigue housing prices. Comparing Hong Kong, China and the PRC, restrictive housing policies seem to be more effective under the system of a more traditionally planned economy than one that is market economy oriented: “spicy measures,” a series of restrictive measures to cool down the overheated property market, were unsuccessful in Hong Kong, China. On the contrary, the PRC has successfully adopted restrictions on new purchases to prevent housing prices from going up too quickly.
While most housing programs (i.e., the Home Ownership Scheme, Tenants Purchase Scheme, Home Purchase Loan Scheme, Home Starter Loan Scheme, Sandwich Class Housing Scheme) in Hong Kong, China aim at assisting public housing tenants to become private home owners, the goal is far from being achieved, mainly because these policies provide different forms of housing subsidies—a least effective method to stimulate owner occupied housing. Similarly, the Economic and Comfortable Housing (ECH) scheme has failed to increase home owners in the PRC. Indeed, the success of the Housing Provident Fund (HPF) in providing mortgage interest rate reductions, a most effective measure to encourage homeownership attainment, mainly accounts for the high homeownership rate in the PRC.