The lock-in effects of subsidized homeownership in Hong Kong

Abstract

Subsidized homeownership is a key area of interest for many policymakers. Most of the previous studies tend to focus on the benefits of the policy, with little regard to its social costs. This thesis aims to bridge the gap by establishing the two major costs of subsidized homeownership, namely the lock-in effect on residential mobility and the lock-in effect on housing wealth. Specifically, this study is to examine whether and how the implementation of subsidized homeownership policy will hinder residential mobility and weaken housing wealth effects on consumption.

On residential mobility, the government subsidized housing sector is found to have a much lower turnover rate than its private sector counterpart, even after accounting for the initial resale restriction period. A stay-or-move model is used to show how in-kind transfers of housing subsidies can lock-in the subsidy recipients by increasing their opportunity cost to move. A panel dataset of household and property attributes confirms that the mobility of subsidized homeowners varies inversely with the subsidy level, after controlling for different mismatch variables that may have induced an omitted-variable bias. Moreover, a natural experiment based on an exogenous change in the homeownership policy is conducted, and the results remain robust.

As to the housing wealth effect, this thesis has identified two resale constraints on subsidized homeowners which reduce their ability to cash in the property, hence weakening their propensity to consume relative to private housing owners. The first constraint applies specifically to subsidized homeowners who are not allowed to dispose of their units before sharing the capital gain with the government. Thus, a significant housing wealth effect will exist among private homeowners, but not subsidized homeowners. The second constraint applies to private homeowners whose recourse mortgages go “underwater” – if they resell their units, they will have to repay the outstanding loan to the bank. In this case, the housing wealth effect will become weaker even among private owners. Again the results remain robust after the application of more rigorous sample selection through propensity score matching.

These two lock-in effects of subsidized homeownership particularly that on residential mobility trigger us to re-think a fundamental policy question. Is subsidized housing: 1) an end to the promotion of homeownership per se (i.e., for which low mobility is intended) or 2) a means to enable lower income groups to move into private housing in the future (i.e., for which high mobility is intended)? If the latter is the case, then a property rights solution, which is to let housing subsidy follow the household instead of the housing unit, is proposed to alleviate the residential immobility problem.