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Will Public Housing Reform Undermine the Private Housing Market?

By Michael Wong, Alex Ngau, Yun-wing Sung

August 21, 2025 · 《Ming Pao》

The authors have analysed in previous articles in this column that, in 2002, the government’s nine market-rescue measures in response to the Asian financial crisis (halting the sale of PRH, halting the sale and construction of HOS flats, and abolishing land auctions, among others) were an over-correction. The result was more than two decades of persistent residential housing shortage in Hong Kong, which lengthened PRH waiting times, sharply lowered the success rate of the HOS ballot, and pushed private housing prices ever higher.

The authors have previously argued that the shortage of HOS flats is in fact even more serious than that of PRH, obstructing young people’s upward mobility on the home-ownership ladder, spawning a host of problems, indirectly encouraging people to reduce their work effort in order to qualify for the PRH waiting list, and undermining long-term economic development. For this reason, the authors advocate that the government should implement comprehensive housing reform: substantially increasing the supply of subsidised-sale housing (including expanding HOS and launching an optimised Tenant Purchase Scheme), and enhancing the liquidity of the subsidised-sale secondary market (for example, by increasing the White Form Secondary Market quota).

Hong Kong’s property market is currently weak, and many commentators fear that increasing the supply of subsidised-sale flats will collapse the private housing market. This article draws on economic theory and empirical data to argue that, in the long run, fears that building more subsidised housing and increasing its liquidity will cause property prices to fall sharply are excessive. Such concerns urgently need to be replaced by rational analysis.

1. Public Housing Policy Has Failed, Private Small-Unit Prices Soar

Although private housing prices have recently pulled back by almost 30% from their 2021 highs, buying private housing still far exceeds most residents’ ability to pay. According to the international survey report published this year by Demographia, an international public-policy consultancy, Hong Kong remains the world’s least affordable housing market: in the third quarter of 2024, the city’s price-to-income ratio stood at 14.4, meaning that the median property price is 14.4 times the median annual income. The “International Housing Affordability” survey has included Hong Kong since 2011, and the city has topped the “Least Affordable City” ranking for 15 consecutive years (2011 to 2025).

To be fair, nearly half of Hong Kong’s population lives in public housing (including PRH and HOS). For them, public housing rents or prices are not unaffordable. But for young people, who generally are not PRH tenants and have little chance of winning an HOS ballot, home ownership is extremely difficult. Although the younger generation is the future backbone of Hong Kong, they have been the most tragic victims of soaring private housing prices: the proportion of young owners under 35 in Hong Kong fell sharply from 22.1% in 1997 to 7.6% in 2019. High property prices obstruct their marriage, childbearing, social mobility, and entrepreneurship, and also hinder Hong Kong’s ability to attract outside talent; some young people have even reduced their work effort — “lying flat” — in order to qualify for the PRH waiting list, with serious consequences for Hong Kong’s competitiveness and economic growth.

According to government statistics, over the past 20 years (from June 2005 to June this year) the residential property price index surged from 92.9 to 286.7, a rise of 208%. The price increase for small units far exceeded that of large units: the price index for small units (Class A) jumped by about 257%, far above the roughly 95% rise for large units (Class E).

The disproportionate surge in small-unit prices stems from the long-term failure of public housing policy. The government halted the construction of HOS and other subsidised-sale housing from 2002 onwards, leaving an entire generation of Hong Kong people unable to use the subsidised housing ladder to “move up” and trade for larger units, with purchasing power compressed into the small-unit market. At the same time, the well-off tenant policy for PRH was previously too lax, and a portion of PRH flats were occupied by middle-class families, forcing large numbers of low-income households to squeeze into small rental units or subdivided flats. The result was unusually strong demand for small living space, in both the sales and rental markets.

Distorted high prices for small units have, over the past 10 years, driven developers to build large numbers of “nano flats”, and private flat owners have also been eager to “subdivide” their units for rent, to meet the explosive demand from low-income households for cheap small units.

Soaring property prices have pushed the home-ownership threshold sharply higher. The data show that between 2002 and 2008, Hong Kong’s household home-ownership rate still held steady at 53% to 53.6%; but after 2008 it fell continuously, reaching only about 50.4% in 2024 — a decline of roughly 3 percentage points. Although the downward trend has eased somewhat in recent years, many young people still find it hard to realise the dream of home ownership.

2. The Impact of Public Housing Reform on the Private Housing Market

The authors will now analyse the impact on the private housing market of two proposals: increasing the liquidity of the public housing secondary market, and increasing the supply of subsidised-sale flats.

Relaxing the transfer restrictions on the subsidised-sale housing secondary market is intended to enhance market liquidity, allowing existing HOS owners to sell their flats more flexibly and improve their living environment, while making it easier for more eligible residents (especially White Form applicants) to “get on the ladder”. Residents can also relocate according to work or children’s education needs, reducing distortions in the labour market and benefiting economic development and social stability.

Relaxing secondary-market restrictions is in essence similar to reducing transaction taxes (such as stamp duty); its main effect is to revitalise transactions in the existing stock market, with little impact on overall property prices. Academic research (such as Professor Hu Rong’s analysis) shows that transaction taxes (such as stamp duty) have very little effect on property prices. For example, a year after Hong Kong introduced the Special Stamp Duty (SSD), both primary and secondary market prices rose rather than fell. Likewise, after the government removed the “cooling measures” at the end of February last year, the property price index briefly rebounded by about 2.5%, but by mid-year had largely returned to its pre-removal level — proving that transfer restrictions cannot change the underlying market trend.

Increasing liquidity will help set the “flat-for-flat” chain in motion. More HOS owners constrained by quotas will be able to sell their flats and upgrade to private housing (especially larger units); at the same time, the HOS flats vacated will make it easier for waiting-list youth to “get on the ladder”, and may also release the small units they had previously been renting.

This process will raise the prices and rents of large units while easing the increase in small-unit prices and rents, helping to correct the private market’s distortion of focusing on “nano units”.

3. Public Housing Reform: Both Supply and Demand Will Increase

The authors’ second proposal is to build more subsidised-sale flats (including HOS, Starter Homes, and the launch of an optimised Tenant Purchase Scheme). The huge social demand for home ownership is clear: between 2014 and 2024, Green Form HOS applications were oversubscribed by nearly 12 times, and White Form applications by as much as 63 times. To fundamentally reverse the supply-demand imbalance, the government must substantially increase subsidised-sale flats.

Our proposed public housing reform will not only increase the supply of subsidised-sale flats, but will also increase housing demand in many ways. First, there is a serious resource mismatch in Hong Kong’s public housing stock, and reform can release the hidden value of these properties, thereby increasing social wealth and aggregate demand, including demand for housing. Professor Wang Xinyi’s research points out that the mainland originally misallocated state-owned housing (similar to public housing) to wealthier groups, suppressing private housing demand; the subsequent launch of the “housing reform” (privatisation) released demand, raising prices by an average of about 7.5%.

In addition, the authors have repeatedly pointed out in this column that Hong Kong’s rigid public housing system obstructs economic growth in many respects and damages economic competitiveness and social stability; in the long run, public housing reform will stimulate Hong Kong’s economic growth, thereby increasing private housing demand.

4. Greater Bay Area Integration Will Greatly Increase Housing Demand

Against the backdrop of cross-border integration, Hong Kong’s private housing supply must meet not only the needs of the local population, but also the huge demand from outside talent, imported workers, and the large number of mainland investors interested in Hong Kong property. The government is currently actively “competing for talent” and “competing for enterprises”, and has even proposed the vision of developing a “ten-million-population metropolis”. In the long run, private housing demand is likely to increase rather than decrease.

Over the past 40 years, Shenzhen has successfully absorbed the very elastic housing demand from massive migration by sharply increasing supply. The same logic applies to Hong Kong today — as Hong Kong accelerates its integration into the Greater Bay Area and the broader national development framework, cross-border living and working will become increasingly convenient, and Hong Kong’s housing demand (especially from new arrivals) will not only continue to grow, but will be highly elastic. Against this background, increasing supply will mainly translate into population growth and greater economic vitality, with only a mild dampening effect on overall property prices — and may even provide support as the economy improves.

5. Conclusion: Set Aside Needless Fear and Push Rational Reform

In summary, Hong Kong’s rigid public housing system has broken the housing ladder: large numbers of residents are trapped in PRH and find it hard to move up to HOS, while HOS owners also find it hard to sell their HOS flats to trade up to private housing. Among young people, generally only those with family help can get on the property ladder; the narrow base of young customers in the private housing market is very detrimental to its long-term development. Once housing reform is implemented, a smoothly functioning housing ladder will release enormous economic potential, raise competitiveness, and stimulate economic growth, thereby increasing private housing demand.

A healthy structural shift will take place in the private housing market — the currently prevalent “nano flats” will gradually be replaced by HOS, and developers will focus on building more spacious, high-quality units to meet residents’ desire to “live larger” and “live better”. Moreover, Hong Kong has already successfully attracted a large group of outside professionals, whose demand for high-quality private housing will only grow. Focusing on building high-quality luxury homes will help attract world-class talent.

The widespread Hong Kong fear of housing “oversupply” is unsupported by evidence and is based on a misjudgement of market dynamics. In order to break the housing impasse, release economic potential, and safeguard the long-term stability of society, these needless concerns that obstruct reform must be replaced by rational analysis and empirical data. The government should show greater resolve and push the necessary reforms to the public housing system.

(Translation supported by AI)

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