Measuring affordability in public housing from economic principles: Case study of Hong Kong

Affordability is a dominant and controversial issue in housing policy all over the world. Hong Kong is no exception. In 1987, the government took a notable shift in its housing policy toward a more market-oriented system. As such, the notion of affordability overrode the notion of need. Like the United States and the United Kingdom, Hong Kong uses the median rent-to-income ratio as an affordability yardstick for rent setting. However, this approach suffers serious criticisms for its arbitrary benchmarking. This paper aims to examine the "affordability" issue among public rental housing tenants in Hong Kong. It takes a broader view by analyzing both their housing and nonhousing consumption patterns using economic first principles. It starts with an overview of conventional concepts of affordability and their shortcomings. It then applies the economic first principles to measure household affordability and test the "reasonableness" of using the median rent-to-income ratio as a benchmark. Rather interestingly, the findings suggest that the easy-to-use median rent-to-income ratio currently adopted by the Hong Kong Housing Authority cannot reflect the affordability of public rental housing tenants. This paper argues that household affordability could be gauged more correctly by adopting economic first principles, which render a better operational definition in housing resource allocation.
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