Ricard Green on Housing in Hong Kong, Singapore, and Korea

+ Paul Romer

Paul Romer: The latest post in our E-seminar series of contributions from economists and other experts comes from Richard Green, Director and Chair of the Lusk Center for Real Estate at USC.

Hong Kong, Singapore and Korea experienced great economic success: all have per capita GDPthat is at least seven times higher than in 1960 (see Penn World Table for more information). All three economies also came to be relatively well housed. While we cannot draw a uniform lesson from their experiences, it is worthwhile to examine each case for clues about successful housing development.

Hong Kong’s early housing policy is peculiar because it was the diametric opposite of its economic policy. The Hong Kong government generally took a laissez-faire approach to the economy, maintaining unusually open trade and capital flows. But beginning with the Shek Kip Mei fire of 1953, the government intervened considerably in the housing market, clearing slums and building high-rise public housing. The government did a number of things that are generally anathema to economists: it constructed buildings and heavily subsidized both rents and home purchases for low-income people.

The construction program was ambitious – about half of all dwelling units in Hong Kong are public – and it ran into considerable criticism. Like all subsidized housing schemes, the benefits are not necessarily well-targeted, and production was prone to locational and physical inefficiencies. Yu-chim Richard Wong, an expert on housing in Hong Kong, argues that efficiency ratios, the ratio of benefit to cost, in public housing lie between 50 and 70 percent. He also notes that the distributional benefits of public housing in Hong Kong are slightly skewed: the bottom 10 percent of the income distribution almost always consumes less than 10 percent of the public housing there.

Despite these inefficiencies, housing conditions in Hong Kong improved dramatically in a short period of time. The city saw a sharp increase in both the share of people living in adequate housing and average dwelling space per capita.

To say Singapore is a unique economic and housing success story is an understatement. The city offers a rare case of a thriving centrally managed economy. Despite its one party rule, Singapore is ranked by Transparency International as the fourth least corrupt country in the world. While Singapore cannot teach us everything about housing development, it does offer a few lessons – lessons the Chinese have learned.

Public ownership of land is pervasive in Singapore. According to Hwang (2008), around 85 percent of households live in housing units built on government owned land. Most households own their units, and the units are traded actively in the secondary market.

The quality of housing in Singapore is generally good. Much like Hong Kong, Singapore developed a substantial amount of its housing through government agencies. The transformation of the housing stock was remarkable: in 1965, more than 160,000 people lived in squatter settlements in Chinatown, an area with less than one square mile of land. Within 20 years, Singapore became one of the most livable and beautiful cities in the world.

The Singaporean housing program had three components: government owned land, the Housing Development Board, and the Central Provident Fund. The Housing Development Board built housing, and then, similar to Hong Kong, sold and rented the housing at a substantial discount. Government involvement produced some locational inefficiencies – currently, 40,000 new flats in Singapore remain vacant. But the government also utilized economies of scale and standardization of flats to reduce construction costs. The absence of corruption undoubtedly helped to reduce costs as well.

Unlike Singapore and Hong Kong, Korea’s housing development lagged economic development. In the early 1990s, while on the verge of becoming an OECD country, the ratio of households to housing units in Seoul was nearly 2 to 1.

The lack of supply in the face of increasing affluence put Korean policymakers in a bind. Housing became very expensive in Korea, with price to income ratios as high as 10 in Seoul. The government released very limited amounts of land for new housing in the decades after the Korean War. As a result, Korea’s supply of land for development remained inelastic and shifted out a little bit from year to year. One of the reasons for the limited land supply was the government’s desire to steer capital towards plant and equipment investment in export-oriented manufacturing.

Once the government decided to improve housing conditions, it allowed the supply of land for development to become more elastic, even though this would hurt the wealth position of existing homeowners and therefore seemed politically problematic. Nevertheless, the government decided to move forward. The results were striking: floor area per capita doubled within 20 years, and the share of units with an interior flush toilet rose from 18 percent to 87 percent (see Seong-Kyu Ha, The Urban Poor and Housing Regeneration in Seoul, working paper).

How did this happen? Rather than explicit government programs, the Korean government repealed distortions, even though such removals risked alienating some constituencies. The housing market was also allowed to function freely once the country as a whole was fairly affluent.

Economists might prefer this more market-driven Korean model in which housing development followed from economic development. The primary difference between Korea on the one hand and Singapore and Hong Kong on the other was the number of households residing in modern housing units in the early stages of economic development.

The disastrous experience with public housing in the United States should give us pause about its implementation elsewhere. One can also find examples of public housing becoming sinkholes of corruption in African countries. Yet there is no gainsaying the fundamental success of Hong Kong and Singapore.

Tile image by Wisconsin School of Business.

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