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

Affordability is a dominant and controversial issue in housing policy all o ver the world. Hong Kong is no exception. In 1987, the government took a no table shift in its housing policy toward a more market-oriented system. As such, the notion of affordability overrode the notion of need. Like the Uni ted States and the United Kingdom. Hong Kong uses the median rent-to-income ratio as an affordability yardstick for rent setting, However, this approa ch suffers serious criticisms for its arbitrary benchmarking, This paper ai ms 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 shortc omings. It then applies the economic first principles to measure household affordability and test the "reasonableness" of using the median tent-to-inc ome ratio as a benchmark. Rather interestingly, the findings suggest that t he easy-to-use median rent-to-income ratio currently adopted by the Hong Ko ng Housing Authority cannot reflect the affordability of public rental hous ing tenants. This paper argues that household affordability could be gauged more correctly by adopting economic first principles, which render a bette r operational definition in housing resource allocation.