Episode 41: Shared-Equity Homeownership with William Cheung and Kelvin Wong

Shane Phillips 0:04
Hello, this is the UCLA Housing Podcast and I'm your host, Shane Phillips. We have two guests this week doctors William Cheung and Kelvin Wong, and we're talking about shared equity and limited equity homeownership programs in the US, UK, Australia, Hong Kong, mainland China, and Norway. Specifically, we're looking at William and Kelvin's work on the concepts of entry affordability, and exit affordability. Shared or limited equity ownership programs provide financial resources to help people buy homes, and as such, they focus on entry affordability. They are about getting people onto the first rung of the homeownership ladder. As we usually envision it, the next step on that ladder is out of government-supported housing and into privately owned unsubsidized housing. But shared equity programs often expect participants to pay back the money that they got to help buy the home, or they have to sell the home to someone else at a reduced below-market price. So that means they have lower exit affordability, and a lot of people who buy homes through shared equity programs can't build up enough equity to buy another home on the private market without support. They end up stuck in place or back on the rental market. As we discussed, there's no easy solution to this problem. Most people haven't even thought far enough into the future of shared equity programs to realize there might be a problem. We're doing that today, and there are a lot of really interesting angles to consider. The Housing Voice Podcast is a production of the UCLA Lewis Center for Regional Policy Studies, with production support from Claudia Bustamante and Jason Sutedja. As always, feedback and show ideas can go to me at Shanephillips@ucla.edu. If you love the show, please give us a five-star rating or review or tell a friend about it. Now let's get to our conversation with Dr. Cheung and Dr. Wong.

Paavo Monkkonen 1:56
Kelvin SK Wong is a professor and head of the department of Real Estate and Construction at Hong Kong University, and Dr. William K. S. Cheung is a Senior Lecturer in Property at the University of Auckland Business School. They're old friends and co-authors so I'm very excited that they're joining us today to talk about shared equity and limited equity homeownership programs from a comparative international perspective including the US. Kelvin and William, welcome to the Housing Voice Podcast!

William Cheung 2:24
Yeah, thanks for having us.

Kelvin Wong 2:25
Thanks. Hello, everyone.

Paavo Monkkonen 2:28
Don't worry, our regular host Shane Phillips is here as well. How's it going?

Shane Phillips 2:32
Hey Paavo.

Paavo Monkkonen 2:33
You're in good hands for this podcast. So Kelvin and William, we start each of our interviews by asking our guests for a tour in a city they know well or just a visit to their favorite spot whether that's their current hometown or somewhere else. So maybe just take a few minutes, you know, I was hoping Kelvin could mention Hong Kong and William could mention something about Auckland. Can you just tell us where you would like to take your friends or colleagues when they visit?

Kelvin Wong 2:59
William? Would you like to start?

William Cheung 3:01
Yeah, I can start first. Well, after my graduation from Hong Kong U, I decided to move here in New Zealand to start my career. And now I'm based in Auckland and that's why I'm talking about this most livable city around the world. I think it ranked to be the most livable city recently on media. Apart from Hong Kong and also L.A., Auckland is one of my most favorite cities that I so far lived in. If you come here to visit me, I can definitely organize some road trip to travel the cities, and it should be a very memorable experience. When people talk about New Zealand, you know, they will quite focus on the South Island; you will have the Aurora or the place here to visit but what a pity that I may not be able to manage myself to visit South Island because of COVID! That's why I still haven't had a chance to go there. But having said that, before COVID, actually Kelvin come to join Pacific Rim Region Conference, a regional conference here in Auckland, and we managed to have a road trip to Lake Tahoe which is a southeastern part of Auckland and that is a very famous natural hot spring area. You can enjoy the hot spring there; that's really fantastic with a hot spring and you can have your dinner even (when) you are having your hot spring. That's a really really good place to go and also in that area, you can also go to visit the Waitomo glow worms caves. You can see the fireflies. You can see all this, it is really uh stunning, with a trip to that cave. Yeah, that's someplace I would recommend.

Shane Phillips 4:51
Can I just jump in and say, I've never been to Australia or New Zealand and we were actually scheduling another interview with someone from Auckland coming up next year. In my head, New Zealand was always like right off the coast of Australia but it's like 1400 miles away, and it's only three hours behind Los Angeles. This was just shocking to me so not a question or anything...

Paavo Monkkonen 5:19
William is talking to us from the future

Shane Phillips 5:22
Yes, 12 hours ahead of us!

William Cheung 5:25
Yeah yeah, that's true!

Shane Phillips 5:26
All right, Kelvin, how about you?

Kelvin Wong 5:28
Right, so if I have to bring my guests to somewhere.. originally, I would like to say, you know, Los Angeles. But now because, you know, Paavo asked me to stay about, you know, something about Hong Kong, and also, Hong Kong is the place I grew up and, you know, emotionally attached to. So I would definitely say, you know, Hong Kong. But I also understand, you know, here, you know, we have a lot of, you know, California US audience. So I would like to say, you know, maybe you have come to Hong Kong or maybe you didn't, it is actually a very small, but densely populated city with a unique mix of Western and Chinese culture. So this is what I really liked a lot. And actually we can make a very good comparison with Los Angeles, like, you know, you have Hollywood and in Hong Kong, we also have some of the best movie stars in the world, in no particular agenda in, (and) in the view of Kung Fu, right? And, you know, like UCLA, right, we also have some of the best universities in the world. So and, you know, maybe next to LA, you know, you have another entertainment center - Las Vegas, and very similar to Hong Kong, right next to us, you know, just one hour away by ferry, we have Macau which is another casino and entertainment, you know, center. So that was meant actually, in a certain sense, you know, L.A and Hong Kong are quite alike. And then, you know, because of all the great features that we commonly have, it is not too difficult to imagine that, you know, people like to come and live, you know, either in LA or in Hong Kong. But that, inevitably, also create some problem like, you know, the topic we are talking about today is housing affordability.

Paavo Monkkonen 7:12
Hmm.. it's too nice!

Shane Phillips 7:15
That is a great transition. The paper we're talking about was published in 2019 in the International Journal of Housing Markets, and it is titled 'Entry and Exit Affordability of Shared Equity Homeownership, and International Comparison'. This is our first time talking about these kinds of programs so this interview will function as both an overview of what these programs do, and a discussion of the specific challenges with them that you're identifying and working with, in your research article. We can start with what shared or limited equity homeownership means, and I think the frames of entry and exit affordability are actually really useful for explaining the purpose of these programs. On the entry side, the goal or a goal of these programs is to get people into homeownership to help them build wealth and improve their housing security because as we all know, renting doesn't usually afford those same benefits. But buying a home often requires a big downpayment, and people can't always pull that together without assistance. So these programs exist to provide resources in some way or another, that reduce the buyers' personal upfront costs. We'll hold off on discussing specific programs or countries for now, except maybe as an illustrative example but tell us, either Kelvin or William, at a high level, how shared equity programs generally handle that initial support, and what strings are often attached to it.

William Cheung 8:43
Well, indeed, if you try to imagine yourself, you would like to buy the first home but you only have a small amount of deposit. One option you could try to do is with the support of a shared equity partner. Well basically, a shared equity arrangement can try to split the costs of financing home purchase into three parts including your down payment, of course, and then your home loan from a bank. And then if your upfront costs is not enough to pay the down payment, then you need someone called an 'equity share partner'. Well, that equity partner basically will support you to finance your home purchase up front, and the share equity partner could be anyone, even your parents. In New Zealand, we say we have a lot of media discussion on the 'Bank of Mum and Dad'. They also tried to become the fifth biggest lender in this country around 22 billion New Zealand dollars being involved in that 'Mom and Dad Bank'.

Shane Phillips 9:41
Wow!

William Cheung 9:41
Well of course, our paper is not focusing on this 'Bank of Mum and Dad', of course! We are more (so) focusing on the government or any institution that helps to take the role of providing that share equity partner. That means, in (the) upfront, the government can try to support the down payment. For instance, the Hong Kong HOS scheme - the Home Ownership Scheme - is an example; well basically, the Hong Kong government tried to build houses, and sell at an initial price discount. Well, like many other subsidy programs, it usually has some constraint of the kind of shared equity arrangement. Maybe your home needs to be sold after a certain period of time, and also you need to sell to someone eligible to meet some annual income threshold - that is to ensure the household could assess their housing or subsidized housing in society as a whole. That's basically how the shared equity functions.

Shane Phillips 10:41
That's super interesting, and I think it's important to distinguish between, you know, the shared equity mortgage or some kind of financial participation. Because I think a lot of times when people think about these kinds of programs, they're associated with a building type or building stock itself, right? So usually, the program is like a publicly built condo that is sold to people with a shared equity relationship but it doesn't have to be. You can just have the government going in and helping people make their first down payment, and then getting some equity at the end if they ever sell it, right?

William Cheung 11:12
Yeah, that's true.

Kelvin Wong 11:14
And just, you know, to respond to Paavo's questions on shared equity mortgages, I think that may be more popular in the US, and people are more familiar with that. So if I understand it correctly, I think there is also one distinction between, you know, share equity ownership and share equity mortgages. So I think William was right, you know, it could be anyone who could, you know, contribute, you know, the equity parts of the downpayment. I think that's fine! It could be the government, it could be the bank, that I think, you know, if it is the bank, then banking is itself a business, right? It is not a charity; it is not something that they want to help the poor, but they have to make a profit. So that would mean, you know, the incentive of banks providing shared equity mortgages would be quite different from, you know, what the government would do for shared equity ownership. So let's say, you know, with the lesson from the subprime crisis in the subprime mortgage crisis back in 2008, I believe now banks generally do not like to take too much real estate risk, that is not their core business anyway. And the problem is real estate risk normally increases with housing price, right? And also affordability problem is more severe when housing prices are high. So then you can imagine, right, when the price is high, actually, the bank, you know, now they are more conservative. They try not to do so much, you know, kind of, in mortgages, especially to, you know, share equity. Why? Because if they do that, they will take on a lot of risk. So that would mean, you know, when we get to a situation where very severe affordability issues, yes, the bank can provide equity but they may not be very willing to do so, you know, unless, you know, they have (and) they can get a very high interest, (and) they can, you know, have a very good, you know, shared equity ratio. Otherwise, you know, normal people, you know, when they have to get finance. I guess, you know at the end of the day, they still have to go to the government, right? So that will make it another, you know, distinction in terms of the background of these two types of similar kind of products.

Shane Phillips 13:25
Yeah, that's helpful. So the government, we are moving past entry affordability, the government has helped you buy a home, which clearly improves the entry side. But there's also an exit side. And for this, the goal of an exit means that people who participate in the program will eventually move from this subsidized housing situation into the private unsubsidized market. Part of the thinking there is that it's good for people to be more self-reliant and fully own their homes rather than sharing part of it with the government effectively, not to mention that it's just simpler and cleaner for them to own it, you know, outright, but it's also beneficial, because if the homeowners move into the private market and repay their subsidies, then that money can be turned around reinvested to help someone else make the same journey from renting to subsidized homeownership to private ownership. But paying back that government support means you have less equity to afford a new home without subsidies. So exit affordability can be a real problem. Basically, selling your home may give you enough cash to pay back the government or whoever gave you that initial support, but not enough so that what's left after repayment can buy you a home on the private market. And that means you're either not going to sell and you're effectively kind of stuck in your home. Even if you know your living situation, your job has changed. Or you sell and you might end up living in lower quality home or less well located homes, you know, at the suburban fringe or something, or you're back to renting, you know, albeit with more wealth than you'd have had otherwise. Is there anything you want to add to that about this dilemma or the trade-offs that homeowners and the people who run these programs are trying to balance.

William Cheung 15:07
Maybe I tried to use, as I said, Hong Kong is one of the examples using shared-equity affordable housing homeownership. That is a great case study to understand how this share equity arrangement having that trade-off. Well, and the whole homeownership scheme (HOS) implemented by Hong Kong government, they tried to sell the new bill unit to some eligible public housing tenants, and with some added eligibility requirements. At a very generous discounted price, usually around 30 to up to 50% of the market rate, and that's a discount for a comparable unit in the private sector. That is the benefit of having this program - helping someone who can really get access to the home ownership. Of course, it's subject to some resale restrictions; at least you need to resell it after like five to 10 years once you live in that unit. That's why that will somehow restrict how you decide or make your decision to move elsewhere. Well, in general, you can imagine in Hong Kong, we have a very prolonged upward trend of property price increases in market, and suppose a lot of homeowners they can't get enough capital gain to move. But in the data that (is) available to us so far, (it) indicates an extremely inactive resource market in those subsidized housing. Only around 1% of total subsidized housing stock being traded in the sector while you can compare with 9%, usually in the private sector.

Shane Phillips 16:44
Wow, big difference!

William Cheung 16:46
Yeah, it's a big difference! And you can see why, even Kelvin and I tried to ask, why so many subsidized units are not being transferred, they remain frozen in the sector. Well, another piece of our research, we tried to advocate or put forward an argument that in terms of those shared equity model, if you need to repay those down payments back to government in proportion, pro rata to the capital gain, over a period of time, well, they are not really affordable to purchase a private housing unit in a private housing sector. That's why you may not be able to make an optimal moving decision making with debt repayment. That's why it will create a lot of 'misallocation' as we named in another piece of work, (and) try to study that misallocation of resources among the subsidized home units.

Shane Phillips 17:37
Can I clarify, you said there's often a sale requirement within five or 10 years?

Paavo Monkkonen 17:42
Like I think he meant you, you can't sell it before within the first five...

Shane Phillips 17:48
Oh, you're restricted from selling it within a certain amount of time. But you're not forced to sell it?

Paavo Monkkonen 17:53
Yeah, I mean, that's the whole thing. Nobody's selling them.

Shane Phillips 17:56
For one, that seems really harsh, and also, yeah, it doesn't square with the fact that so few of these homes are being traded in any given year.

Paavo Monkkonen 18:04
Well, I think I mean, it's such a fascinating conundrum because if you think from the government's perspective, you know, one question that I asked myself is why don't they just give people a bunch of money to purchase a house on the private market, right? And from the government's perspective, they don't want, you know, the idea of the shared equity is when somebody sells that unit, their government is gonna get some of the money back, and they can put it back into building more of these, or they can put it into the public rental sector or do something else with it. However, if nobody's selling them, they're still not getting that money back so effectively, they're giving people a big one-time subsidy, but just the kind of subsidy that keeps them trapped in the same unit for a long time. Is that a correct summary of the problem?

Kelvin Wong 18:49
I think it is. I think you've nicely summarized the key problem of the shared equity model, right? People normally, you know for example in California (as) you have mentioned, you know, the social housing bill. So maybe people are now, you know, very actively discussing how do we get, you know, low-income people to get homeownership. But normally, they don't think, you know, ahead. So maybe after they gain homeownership for 10 years, 15 years, what happens after that? So, you know, do(es) the policy objective wants them to stay there forever? Or do they, you know, want these people to move out, you know, to better places? I think that that is something maybe, you know, at a policymaking level, you know, people need to think more about.

Paavo Monkkonen 19:32
Right. And have you been able to track the sales with different market cycles yet? Because you could imagine, maybe you know, in a down market, things might move differently in the HOS side of things compared to private housing.

Kelvin Wong 19:48
Yes, I think we did. I think in our dataset, we cover you know, maybe down and upcycles on the housing market. So William mentioned - 1% (and) 9%, is just an average situation. Of course, you know, we have different market cycles, the two turnover rate could be different but I think on average, I think, as you know Shannon mentioned, it is a huge gap.

Shane Phillips 20:13
So the purpose of this study was to compare the entry affordability and exit affordability of shared equity ownership programs, and do so in different countries. And the first step of that is just deciding which programs are going to qualify to go into this study. Could you talk about the three criteria you used to decide which programs would be studied, and which kinds of programs in the US actually met those criteria?

William Cheung 20:39
Yeah, these three selection criteria include: (the) first one is the program should have an initial lump sum subsidy for the home owner - potential homeowner, to buy that property as a share equity partner concept that we mentioned. The second criteria is the program will involve some contractual arrangement with the predetermined price formula - how to preserve that affordability for future homebuyer. What I mean is, as I said, there will be some resale restriction period, and also you need to sell it to some eligible income homebuyer. That is something you need to consider in that kind of share equity arrangement program. The final criteria that we try to sell in that paper is we need to have a clear policy objective from that kind of program that is helping some low income family tried to (show) how to progress in the housing ladder. As Jen just mentioned, we need to move from the subsidized housing market to private housing market. That is an important criteria to enable that share equity homeowners to find an affordable access to that program. That's why, in that paper, you will see we didn't include Singapore because Singapore Homeownership Program basically doesn't really intended to establish the housing ladder; the government didn't intend really those homeowners to go into the part of the housing market - (with) over 80% of the population basically living in those public housing settings.

Paavo Monkkonen 22:14
Right, there's not much private market to go into.

William Cheung 22:16
Yeah yeah yeah! That's the three main criteria we set out in our paper to select those countries to compare their affordability.

Shane Phillips 22:25
So there are three types of programs in the US that you identify that meet these criteria: community land trusts, limited equity cooperatives, and resale restricted owner-occupied housing. I'm not going to get into a lot of detail on this. I guess I do want to add, though, that I think another thing that qualifies is downpayment assistance programs that, for example the City of San Francisco has, (and) I believe the State of California actually is doing this as well. My understanding of how it works in San Francisco is basically (that) they will allow a buyer to put down as little as something like 3% of the purchase price, and the city will cover the other, you know, 17 (percent) or whatever it is. And if that 17% downpayment accounts for, you know, 15% of the purchase price or so, then the city is going to take back 15% of the appreciation plus the initial amount when the homeowner sells. And so this is another like, certainly, they're sharing in the equity. And the one other thing I'll add is there are private companies actually that are doing this as well; not necessarily banks but maybe kind of more venture capital funded or whatever. But the terms, of course, are not nearly as generous because they have to account for the risk that the property value goes down. They also just need to make a profit, and so in those cases, it might be more like, you know, they're giving you 17 or 20% for downpayment but they're taking half the appreciation or 70% of the appreciation. It still can be a great deal for a buyer if they otherwise can't afford to buy but those are just some examples. Paavo, did you want to talk about UC faculty as an example too?

Paavo Monkkonen 24:12
The one that I'm most familiar with is there's a canyon north of UCLA that has UCLA faculty housing that is a shared equity arrangement, and I do happen to know a colleague that's lived there for a long time and can't move because their share of the equity isn't enough to afford a house anywhere else in the city of LA. So I know someone, I know a true person stuck and he's living this story yeah.

Shane Phillips 24:36
I do want to talk about nomenclature here for a minute. When I think of things like community land trusts, which are, they're made permanently affordable by public subsidies that never get paid back. With those, my understanding is that they're usually called limited equity homeownership programs and this could just be my misunderstanding but the way they work is even when someone sells their home they have to sell it at a below-market price. But that initial subsidy is never paid back to the government or philanthropy or wherever it came from. To me, shared equity means that whoever gave you that money or discount to buy the home is eventually getting repaid. Usually, whenever they sell - the homeowner sells, and often they'll take a share of any appreciation on the property. And I say whoever here because even though we're talking about government-subsidized programs in this study, there are these private companies doing similar deals. This might be a kind of nitpicky question, but do you agree with that distinction or do you see things differently? Maybe this is just the fact that the shared equity, kind of downpayment assistance programs, aren't as common elsewhere, and these are more government-operated programs,and even government-built and operated housing in most other countries. How do you distinguish between those two different approaches? I feel like there needs to be some kind of distinction between programs that give subsidies to a housing project and require that the home stay affordable indefinitely - which is sort of like how community land trusts work, (and) programs that give subsidies and let homeowners sell at market value eventually, but they require repayment of that subsidy, and so I think a lot of the international programs and these loan programs that I was talking about, for example in San Francisco, that's how they work. And then there are programs that let homeowners sell at market value, but they don't require repayment, and I think those might be kind of rare, but I think they exist in some places.

Paavo Monkkonen 26:35
So wouldn't that just be like downpayment assistance? I mean, if there's no....

Shane Phillips 26:39
sort of agreement, yeah.

William Cheung 26:41
Maybe I tried to answer this first (and) maybe Kelvin, you can supplement your idea as well. My response to Shane's question is, well of course, it really depends, and when you ask us (it is) whether we see that differently I think. In terms of down payments, we have a lot of ways to engineer that downpayment reduction for the home buyer. I would say in terms of the equity arrangement, one thing is very important thing is how the subsidy is informed. I mean, in the Hong Kong HOS case, because the government tried to build a house, and they sell it at the initial price discount. That is basically the land premium of those subsidized housing units, and I would say that kind of subsidy is more in-kind relative to those downpayment assistance schemes where they need to really pay out with cash. I mean, the major differences about what is the form of that kind of subsidy. In terms of government in Hong Kong, they are basically bear much lesser risk because when they just tried to sell their home unit with a discounted price, no matter what, the land is owned by the government. And they could scale up this kind of homeownership scheme with the land they own. Well, that is a major difference between the shared equity arrangement in Hong Kong model, and we resist those down payment mortgage or whatever financial arrangement that Shane you just mentioned.

Kelvin Wong 28:09
Yes, I also think, you know, that these things are mentioned by Shane is actually very important regarding shared qeuity and limited equity. So I think conceptually, I think it is, you know as simple as that. You know, if the government just, you know, gives you money to buy a home, without expecting you to pay back anything; it is a kind of subsidy - it is a grant right? So that would be one arrangement. The second arrangement is that the government gives you some money but expecting you to pay some interest, which is predetermined you know upfront, then that would be more like a loan arrangement; so the government gives you a loan to buy a home. And now I think what we are talking about is equities; if we are talking about equity, then that would mean when you resell the home, the government is expected to take some share of the profits or loss arising from the resale. So that would be what we call the equity approach but I think, you know, a typical questions that you know Shane says is what is the distinction between limited equity and shared equity. I think that's a very good question because I think this is also a question that we raise in the paper is whether, you know, shared equity homeownership would eventually end up with limited equity homeownership if people are not equipped with sufficient access affordability, and we will never get, you know, paid back the subsidies. But then that will become the equivalent, right? When people do not move out then they will always keep the subsidies without paying back and that will be the equivalent to a limited equity approach.

Shane Phillips 29:46
In your study, you need a way to compare entry and exit affordability for these programs between countries, and you rely on the housing price to income ratio, or PIR, and this is a basic measure where you take the median home price in a metro area or state or country, and divide it by the median income for that same location. If the median home price is say $300,000, and the median income is $50,000, you have a ratio of six to one there. The price-income ratio is simple and easy to compare between different jurisdictions but you also point out that it can obscure important differences based on taxation and welfare systems found in different countries. And I'll also note that places like Japan tend to have very high PIRs because they have very low-interest rates by world standards. But when you look at what they actually spend on mortgages, they're much more affordable than the ratio makes them seem, and we can really feel that in the US right now, where interest rates are very high, and that's reduced buying power by something like 30% over the past year. But that point aside to address the shortcomings or some of the shortcomings with this ratio, you developed a modified version of the PIR that tries to take into account some of these differences between countries, specifically, the fact that buyers can usually purchase these homes at discounted prices. And the income requirements usually limit eligibility to people earning less than the median income. So the price is lower than the national or local median but so is the income of the homebuyer. Starting with entry affordability, I'll pose this question in two ways: first, for the US, how does entry affordability for housing in these shared equity programs compare to housing on the private market? And then looking beyond the US, were there any interesting findings for the other countries that you want to draw our attention to?

William Cheung 31:39
I think in responding to Shane's question, first of all, I think I'm not really the expert of the US market so I may not be able to answer how substantial of that discount or the initial upfront cost they can save with those shared equity arrangement. But as I said, in the Hong Kong case, the HOS scheme basically can have the initial price discount up to 30 to 50% of the market rate. That's a huge amount that you can save from the upfront cost. And in your, I mean you tried to ask the question with the Japan case. I would like to emphasize that the PIR, the price to income ratio, that we try to invent in terms of those international comparisons, we would like to emphasize that it should be a comparison of that ratio over time within a country that will try to indicate how the affordability change it within that jurisdiction. That will be more comparable or like with like good comparison, when we try to study the those PIR.

Shane Phillips 32:46
So it's not so much comparing, you know, Hong Kong's PIR to the US PIR. It's comparing Hong Kong's PIR for like market housing to its shared equity program housing, but also then comparing its PIR for the shared equity program entry, and for the exit?

William Cheung 33:06
Yes!

Shane Phillips 33:07
Got it!

Kelvin Wong 33:08
I think that's exactly the point. I think our papers and methodology is based on the premises that we cannot compare the PIR, the price to income ratio of different cities, directly; I think that's the premises. So what we do is actually, as William said, we are actually, first of all, compare within a city over time; so that's number one. And the second thing we did, is more like you know academic quality; we call that the difference in difference approach. So another thing we do is even within the same time period, for one city, we compare the PIR of the private market with the PIR of the subsidized market. So that's why we can look at the difference between the two at a particular point in time and then we can say "oh, now the affordable housing market is you know, maybe 5% better than the private market". Then now we move on to another time period, maybe where we have a housing boom, then we'll look at the two again and see you know whether the affordability gap between the two markets have improved or not. So that is, you know, how we can see the methodology in the paper.

Shane Phillips 34:16
Could you give us a sense for just ballpark between different countries, you know, how big a discount these shared equity programs provide relative to market housing? And how that discount on the entry affordability specifically changed over time during your 10-year study window?

William Cheung 34:35
When we try to refer the paper, there is a table try to show different countries when, I mean the entry and exit affordability like China, Hong Kong, Australia, UK, US, and Norway. And you can see that the initial purchase discount or that subsidy of equity is basically ranging from 30% to 57%.

Paavo Monkkonen 34:57
Well, Norway - 57% that's a lot!

William Cheung 35:00
Yeah, and you can see in that table as well, you can get a sense that when they get exit affordability being calculated, you will see that Hong Kong is one of the most unaffordable one when you compare with the private market.

Kelvin Wong 35:17
Or I can also give a sense of another way to talk about the number. So, because maybe the audience will be able to understand better what that means. Yeah, so really when we first talked about entry affordability first, because I guess Shane will talk about exit affordability later on. So to answer Shane questions, I think yes, we can refer to the table in the paper, and actually what we use is the price-to-income ratio. So like, you know, taking Hong Kong as an example, for the private housing markets, the PIR is 18, meaning you know the housing price is 18 times of our annual income for a normal household in the private housing market.

Shane Phillips 35:57
Which just to note is the highest or at least one of the highest in the entire world.

Kelvin Wong 36:02
Yes, if we compare to other cities,

Shane Phillips 36:05
other developed countries, yeah

Kelvin Wong 36:07
Right, right! And then for the shared equity homeownership program, so if we do the same, you know PIR in that sector, so basically the households paying, the PIR 17, so meaning the housing price of this in a subsidized homeownership program is 17 times of the annual income of the subsidized households. So you can see 18 and 17, so still you know, we have some improvement. But it is not a big deal, right?

Paavo Monkkonen 36:41
Not that much!

Kelvin Wong 36:41
So that's what we saw from the paper.

Shane Phillips 36:44
And that's despite having a 30 to 50% discount, because the buyers just have much lower incomes than to be

Kelvin Wong 36:51
Exactly, exactly.

Paavo Monkkonen 36:53
Okay. And so like the UK was the other, was maybe the biggest difference where, you know, the norm, (and) the market, one was four and a half times somebody's income, and then the shared equity Program was 1.2 times somebody's income. So the shared equity is a really, really good deal in the UK.

Shane Phillips 37:12
And how about with exit affordability, how did you calculate that, and what did the results look like for different countries?

William Cheung 37:19
Well, we tried to do a simulation - how those subsidize home owner, if they need to repay that that initial purchase discount to the government, how those price to income ratio looks like after the 10 years time window for those resells. I mean, with 10 years time, basically, a lot of resale restrictions will be lifted. People can freely tray it on the market, and we would like to simulate a price that the homeowner needs to repay back part of their equity or capital gain back to government. What will the price to income ratio looks like at that exit point? That is basically how the exit affordability is being calculated in this research work. And we tried to get that simulated PIR compared with the market. That is the way (how) we compare different sectors.

Shane Phillips 38:16
And what did the results look like in different countries for that exit affordability metric?

Kelvin Wong 38:22
I can talk again about Hong Kong, right, we mentioned that 18, you know, is the average for the price that I was saying. So then, you know, when we look at the simulation, you know, I mentioned by video, you know, after 10 years living in subsidized housing, so will they be more affordable to exit to private housing or not? And the PIR we got is actually 24

Shane Phillips 38:43
Wow!

Kelvin Wong 38:44
So meaning after, you know, living in subsidized housing for 10 years, even less affordable, you know, if they really want to go to the private housing market. I think one reason for Hong Kong is very obvious, their housing price in Hong Kong has risen much faster than our income.

Paavo Monkkonen 39:05
So yeah, cuz it's a combination of that factor kind of housing price changes as well as how good of a deal, how much sharing the program forces you to do, right?

Kelvin Wong 39:16
Yes.

Shane Phillips 39:17
Did you consider looking at just assuming it was a grant, how would exit affordability look? And the reason I ask is because that 18 to one price-income ratio that existed at the beginning for the market housing, that's assuming median income but these households you know, they came into the homes with below median incomes in Hong Kong well below and so if they're exiting with lower incomes as well then of course, you know, their PIR, it's going to be hard for them to have a low PIR. Even if they got all of the money from that sale and didn't have to pay back the government like, what would it look like for them? Would they still not have enough just because their incomes were too low or, you know, what's the situation there? If you have any data on that, or just kind of intuitions about it.

William Cheung 40:09
We may not have the actual data to reflect that but conceptually, when you try to live in a subsidized home homeownership, one thing that we need to point out is the homeowner actually can save a lot of rent, when they cannot have that ownership, they need to rent elsewhere to live. But throughout the period, if they had homeownership, assist(ance) by the government, and they are actually having some kind of conceptual subsidized rent for them to accumulate enough wealth, so that they can exit the program. That's why I will say when they try to exit the program, although the price is really increasing dramatically in Hong Kong, but at the same time, I would like to point out there will be some savings from those expensive rental expenses throughout the temporary time as we assume in this study.

Shane Phillips 40:59
Yeah, I mean, even even if people have to go back to renting, they're probably walking away with quite a bit of wealth, because they paid down the principal on their mortgage, and you know, they're keeping whatever appreciation, it's better than not having been in the program. It's just you're not necessarily getting into kind of the next step. I want to pull a quote from your paper really quick and sort of interrogate it here. You say, "although the fundamental policy goal of shared equity homeownership programs is improving housing affordability, many policy discussions that support subsidizing homeownership focus only on the improvement of entry affordability while ignoring the importance of exit affordability which is the ability of subsidized homeowners to transition from subsidized housing to private housing." You follow that up a bit later, by saying, "fundamentally, a well functioning property ladder has to ensure both the entry and the exit affordability of households otherwise the ladder will lead only to a trap". I have mixed feelings about this, and I guess where someone lands on it, like what position they take will come down to whether they agree or disagree with the idea that the housing ladder necessarily needs to continue on up to private housing out of that subsidized housing market. On the one hand, if people can gain enough wealth, and Paavo talks about this a little bit, if they can gain enough wealth to move into the private housing market, and that's what they want to do, that's great. Assuming the subsidized housing that they've left behind remains affordable, then it's opening that rung on the ladder to another household, which is something I think we all want to see. But on the other hand, if under the existing limited equity structure, most people can't get to the point where they can exit to ownership on the private market, then it's hard to see how we solve that problem without giving those limited equity owners or shared equity owners a bigger windfall. So in other words, eliminating the requirement that they pay back the public subsidy. But if we do that, then that means that the subsidized home is going to be sold at market rate or something close to it. So it's no longer affordable. And in either situation, the household that first bought the subsidized home is the only real beneficiary either because they stay in the same subsidized home forever, or because they take the subsidy with them when they sell and just you know, it's their money now, basically. So this seems like the real challenge at the heart of your research and shared equity homeownership programs generally, and I do think it's a really important insight. I just like to hear a little more about how you think about the trade offs between these two different approaches or goals of these programs.

William Cheung 43:39
When I discussed this research work with Kelvin, we also see the trade off among the limited equity and shared equity approach. And we have the feeling or consensus that no policy is perfect, that's why there will be trade off and it is always referred to as 'impossibility welfare theorem'; we cannot satisfy with all the people's needs and concerns. And I think, with the shared equity approach, we can really ensure an equitable access of public money for assisting those moderate income group to get access to homeownership. And why we have, (or) we should have this shared equity approach because those are tax payers' money, government is accountable to ensure that kind of resources really allocate to those who need to access to homeownership. But it is very difficult to maintain the exit affordability for those subsidized, in particular, in the shared equity approach. People if they cannot really go out, or the moving decision is really hugely affected by the repayment back to government, it will create another layer of misallocation. As I mentioned, one of our previous research work that tried to study the misallocation of those subsidies in Hong Kong HOS market; basically those shared equity approach(es) also create a lot of mismatch among the sector. Well just imagine if you really get a job, just using San Francisco as an example, if you live in San Jose, or elsewhere, but you get a job in Bay Area in San Francisco. If you're stuck in that kind of subsidized housing unit, you cannot move because you when you repay that equity to government or any entity, you basically can't afford to buy anywhere in the bay area. That's why you need to see how's the objective of the policy - what is the main objective of that kind of shared equity arrangement to decide whether it is better to use the shared equity approach or limited equity approach?

Kelvin Wong 45:48
I think all I would like to add is, instead, what Shane mentioned, is exactly what has been happening in Hong Kong. So Shane mentioned, you know, owners need a bigger windfall so that they have incentive to move out, right? So exactly that was what the Hong Kong government did a few years ago. So they waive some of the, you know, subsidized and homeowners' requirements to pay back the subsidy. So with that in a waving waiver policy, we could see a lot more transactions - a lot more liquidity in the home ownership of subsidized home ownership market. But the question is whether this is one of our notes, right? So this time you give them a windfall, right, so now they are willing to move because they don't have to pay back. But then for people who now move into the subsidized housing market, of course, they now have to pay a higher price, as you said, and then what happened after another 10 years? So what if we want them to move over, and at that time, what kind of windfall can you give them or can you guarantee them? So, it is still a question mark so we do not know; so this is just a more recent policy. So we might need more time to figure out you know whether that could be sustainable or not.

Paavo Monkkonen 47:05
Yeah, it's almost like a good political strategy though. You can pretend it's a shared equity program then 10 years later, you just actually turn it into a grant program effectively. The other point I was going to make is, I wonder within the HOS system in Hong Kong, it's like 20% of the housing units in Hong Kong or something like that, can you buy and sell within that system without taking a hit in the equity? Because you can imagine a kind of a parallel shared equity stock that could have mobility, you know, you get a job in a different city but you can sell within the system if there's units available within the shared equity stock there, right? And so sort of like trading flats, or buying and selling flats without kind of taking the equity out of the system.

Kelvin Wong 47:53
Unfortunately, in Hong Kong, as far as I know, there's no such flexibility but people have always been talking about it; it's not so much about accessibility, because Hong Kong is a very small city that really

Paavo Monkkonen 48:06
.... Takes a long time to get from Chongqing to Hong Kong?

Kelvin Wong 48:10
The emotional hurdle, I think, you know, even though Hong Kong Island and Chongqing is just five minutes away, people are saying this is very, it's a long trip.

Paavo Monkkonen 48:20
People have, yeah!

Kelvin Wong 48:23
But then, I think the other issue about you know, it's not about accessibility. It's more about you know, the upsizing or downsizing the home.

Paavo Monkkonen 48:31
Right, right

Kelvin Wong 48:31
Because of the, you know, our lifecycle consumption requirements. So for example, when people get older, maybe, you know, their children have moved out, and they do not need such a big home. But now, there is no kind of, you know, internal mechanism for these, you know, older people. Maybe I can exchange my bigger home with a smaller one, and then, you know, get, you know, get some cash back. I think there's no such arrangement. But I think that would be you know, very necessary. We want to reduce the inefficiencies in the current and subsidized system.

Paavo Monkkonen 49:02
Yeah. So you need a big enough stock to make it to make it flexible. But then, it's like creating a whole parallel housing market that may be more trouble than it's worth.

Shane Phillips 49:13
I would be remiss if I didn't also just mention that, you know, part of the problem here is that we're trying to use housing as a way to build wealth in the first place. And the way that is done is by making it more expensive for the next buyer, in real terms, which you can't keep doing forever. There's an upper limit where that just stops working. And that means that every time the government supports a household to buy their home, it's going to be more expensive. And again, there's upper limits on that as well. So I don't think we have to dwell on that. But it's just worth mentioning that this is somewhat of an unsolvable problem so long as prices keep rising like these trade-offs are inherent. But with that said, coming to a close, just thinking of out reforms to at least improve on these programs. It seems like any reform that can be suggested is going to involve benefits for some people and costs others even if that's, you know, just the government writ large. Under the current structure in most countries, the subsidy stays with the house or has to be paid back, which negatively impacts exit affordability. But if you let homebuyers keep more of the subsidy thenn that leaves less funding to support other people in the future which means reduced entry affordability. You do propose a tweak to shared equity ownership programs which you describe "unbundling the deadlock between the right to live in a subsidized home and the right to enjoy a housing subsidy", could you say a bit about that proposal and how you think it would help?

William Cheung 50:46
Maybe I can start first and then Kelvin can add more. We try to advocate a way that tries to let the people carry the in-kind subsidies, uh, to buy the housing unit in private market. Basically, they are still subsidized by the government with that subsidy but that is the way how to maintain that subsidies still being some public taxpayers money. Well, on the other hand, it still subsidized some people who really want to move out from or exit the share equity program, they can still allow to have the budget to buy the private housing unit in a private housing market - like 'pay-as-you-go for those subsidies in the private housing market, and it will be more sustainable in particular when you mentioned how the public resources being allocated efficiently.

Kelvin Wong 51:45
Right, so maybe another way to put it as is because I know that maybe the US audience is more familiar with housing vouchers. So you know, the idea is very similar. So imagine that, you know, you are now a subsidized homeowner, you know, living in that sector for 10 years. Now you're going to move on to the private sector. One of the hurdles that we have mentioned in our conversation is that, oh, we have to repay the government. And so we are not able to afford private housing. So what can we do? So that will mean now you know, we kind of suggest that instead of repaying the government, this you know fair share of equity, what the home owner will get when they resell the property is a housing voucher. So that means instead of repaying the amount of money, you know, to the government, you're holding a voucher. So meaning that when you go onto the private market, of course, you'll have your own capital, and then on the other hand, you also have the housing voucher to help you support you to move on to the private housing market. So that is basically you know what William said as the 'Pay As You Go' idea.

Paavo Monkkonen 52:52
That's interesting. So, but it's not the case that the government would then own some equity in the next house you buy. Is that how you're thinking about it?

Kelvin Wong 53:01
That is something we keep open. I think maybe when that person will save the private housing, maybe after 10 years, then yes, I think the government could, you know, also get a share of that...

Paavo Monkkonen 53:13
Kind of like a 'lean on your next house' model.

Kelvin Wong 53:15
Exactly, exactly, yes.

Paavo Monkkonen 53:17
It would be bad for the bank of mum and dad, though, because kids don't get that money.

Shane Phillips 53:23
Bank of mom and dad often has very generous terms. All right, Kelvin Wong and William Cheung, thank you so much for joining us on the Housing Voice Podcast.

Kelvin Wong 53:35
Thank you, thank you for having us.

Shane Phillips 53:40
You can read more about William and Kelvin's research on our website (lewis.ucla.edu) Shownotes and a transcript of the interview are there too. The UCLA Lewis Center is on Facebook and Twitter. I'm on Twitter at ShaneDPhillips, and Pablo is at Elpaavo. Thanks for listening, we'll see you next time.