(Reprinted from HKCER Letters, Vol. 3, July 1990) 


Sell Public Housing Cheaply?


The Housing Authority is considering a limited program to sell some of its public housing units to current tenants. The consultation process has started. Preliminary press and media reports have indicated two sets of responses. Various grass root groups concerned with public housing have reacted negatively to the proposal. They accuse the government of relinquishing its commitment to house the poor. Public housing tenants, however, are more concerned about the price at which government will sell the units.

The key question for privatization to succeed is the selling price of these units, which in turn depends on their value to the tenants. Since the tenants have little or no choice over the location and other features of the units they are allocated, most of them would value their own units at less than the market prices. For them, the cheap rent is the main, if not the only, attraction.

A recent study by the Centre suggests that, on average, tenants value their units at only 70 percent of their market value. The market value is the highest price some other prospective tenant would place on the unit. An average discount of 30 percent off the market value is the cost of a lack of choice. Clearly, many tenants would welcome the opportunity to trade their units with others tenants. Such a prospect would be made feasible through privatization.

With privatization, the tenant can always sell his unit at the market price, but what can he purchase in return? To the typical public housing tenant, most existing private housing units are beyond his budget. The tenant who wishes to relocate is compelled to choose from other privatized public housing units. If only a small proportion is privatized, then tenants who wish to relocate will have a very limited choice. Most of the tenants will be unable to move. They would be reluctant to pay more than the perceived value for their units. Of course, those who have no intention of relocating will put a higher value on their units.

The Housing Authority cannot know the true intention of each tenant and his reservation price. Consultations and surveys are unlikely to produce much useful information either. If the Housing Authority sets a selling price that gives a 30 percent discount off the market price, many tenants would still find it unattractive. A 30 percent discount is only an average estimate.

For privatization to succeed, public housing has to be sold off cheaply. This is unavoidable because the units are not worth all that much to the tenants. To insist on a high price is pure folly and would delay the creation of a market in public housing.


| Index | Research Projects | HKCER Letters |
| Speaker Program / Conference | Index of Economic Freedom |
The Hong Kong Centre for Economic Research
School of Economics and Finance
The University of Hong Kong
Phone: (852) 2547-8313 Fax: (852) 2548-6319
email: hkcer@econ.hku.hk