Misallocation of housing under subsidized homeownership

Abstract

Subsidized homeownership is a key area of interest for many policymakers. Most studies tend to focus on its social benefits, with little regard to its social costs. This study aims to examine how the shared equity approach of subsidized homeownership distorts residential mobility through imposing resale restrictions on assisted homeowners. We develop a framework based on Glaeser and Luttmer’s (2003) theory to examine the social costs arising from a shared equity approach in Hong Kong. Our empirical analysis reveals that misallocation losses, in the form of spatial mismatch, are created in addition to the welfare losses of supply. Compared to private homeowners, assisted ones are found to have a higher opportunity cost to move as if they were ‘locked-in’. Moreover, our findings trigger us to re-think a fundamental policy question. Is subsidized homeownership: 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)?