Abstract
Capital constraints are a major obstacle that holds back cash-poor households from purchasing a home. A workaround is to compromise the housing size and quality by buying a starter home one can marginally afford first. This study aims to investigate how capital constraints distort the pricing of starter homes. In Hong Kong, the government builds subsidized starter homes, which can be resold either to any households at full market prices through the privatized submarket or to households of limited affordability at lower prices through the affordable submarket. The subsidy in the latter case comes from the equity contribution of the government. If there were no capital constraints, the price gap between the two submarkets should simply be the government’s equity. However, our empirical analysis reveals a much smaller price gap, indicating that households with limited affordability are willing to pay a starter home premium in order to relax their capital constraints. Our estimation shows that the premium is in the range of 4.5% to 6.8%, and enlarges when the housing market becomes more unaffordable. The pricing of starter homes is based not only on their quality but also on their ability to relax capital constraints.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Data Availability
The data used in the paper are proprietary data. The authors are not authorized to share the data.
Code Availability
Not applicable.
Notes
The S&P CoreLogic Case-Shiller housing price index series report low, mid and high-tier housing price indices for 16 cities in the United States. During the two periods of market uptrends before and after the subprime crisis period, the prices of low-tier markets rose significantly faster than the high-tier markets for all of the 16 cities.
A housing estate usually comprises of several highly homogeneous high-rise condominium buildings, with housing units of different sizes, that share the same neighborhood facilities. They are usually developed by the same developer as one construction project. Housing estates are the dominant form of residential buildings in both of the public and the private sectors in Hong Kong.
Apart from the programs mentioned, there are still other sub homeownership programs under the entire public housing program in Hong Kong. For instance, Sandwich Class Housing Scheme (SCHC) were built for sale to lower-middle and middle-income residents, known as the sandwich class, who did not qualify for low-income public housing in the HOS but still had trouble affording private housing. Other program called Flat-for-Sale Scheme (FSS) is a housing development scheme by Hong Kong Housing Society in 1980s. The flats under the scheme are for sale at concessionary price. As the scale of these programs are relatively minimal, we disregarded them from the scope of our study.
The cleaning only involves two housing estates and 57 transactions altogether.
References
Adelino, M., Schoar, A., & Severino, F. (2012). Credit supply and house prices: evidence from mortgage market segmentation. National Bureau of Economic Research Working Paper (No. w17832). https://www.nber.org/papers/w17832. Accessed 2020-06-29
Bajari, P., Chan, P., Krueger, D., & Miller, D. (2013). A dynamic model of housing demand: Estimation and policy implications. International Economic Review, 54(2), 409–442.
Bardhan, A. D., Datta, R., Edelstein, R. H., & Kim, L. S. (2003). A tale of two sectors: Upward mobility and the private housing market in Singapore. Journal of Housing Economics, 12(2), 83–105.
Bayer, P., Casey, M., Ferreira, F., & McMillan, R. (2017). Racial and ethnic price differentials in the housing market. Journal of Urban Economics, 102, 91–105.
Chau, K. W. (2006). Index construction method for the University of Hong Kong all residential price index and its sub-indices. Versitech Limited, The University of Hong Kong. http://hkureis.versitech.hku.hk. Accessed 2020-06-29
Duca, J. V., Muellbauer, J., & Murphy, A. (2011). House prices and credit constraints: Making sense of the US experience. The Economic Journal, 121(552), 533–551.
Gan, L., Wang, P., & Zhang, Q. (2018). Market thickness and the impact of unemployment on housing market outcomes. Journal of Monetary Economics, 98, 27–49.
Haurin, D. R., Hendershott, P. H., & Wachter, S. M. (1996). Borrowing constraints and the tenure choice of young households. National Bureau of Economic Research Working Paper (No. w5630). https://www.nber.org/papers/w5630. Accessed 2020-06-29
Ho, L. S., Ma, Y., & Haurin, D. R. (2008). Domino effects within a housing market: The transmission of house price changes across quality tiers. The Journal of Real Estate Finance and Economics, 37(4), 299–316.
Kiel, K. A., & Zabel, J. E. (1996). House price differentials in US cities: Household and neighborhood racial effects. Journal of Housing Economics, 5(2), 143–165.
Linneman, P., & Wachter, S. (1989). The impacts of borrowing constraints on homeownership. Real Estate Economics, 17(4), 389–402.
Myers, C. K. (2004). Discrimination and neighborhood effects: Understanding racial differentials in US housing prices. Journal of Urban Economics, 56(2), 279–302.
Ortalo-Magne, F., & Rady, S. (2006). Housing market dynamics: On the contribution of income shocks and credit constraints. The Review of Economic Studies, 73(2), 459–485.
Raya, J. M., Nicodemo, C., & McMillen, D. (2020). Does Juan Carlos or Nelson obtain a larger price cut in the Spanish housing market? Urban Affairs Review, 56(5), 1581–1604.
Seko, M., Sumita, K., & Naoi, M. (2012). Residential mobility decisions in Japan: Effects of housing equity constraints and income shocks under the recourse loan system. The Journal of Real Estate Finance and Economics, 45(1), 63–87.
Sing, T. F., Tsai, I. C., & Chen, M. C. (2006). Price dynamics in public and private housing markets in Singapore. Journal of Housing Economics, 15(4), 305–320.
Steegmans, J., & Hassink, W. (2017). Financial position and house price determination: An empirical study of income and wealth effects. Journal of Housing Economics, 36, 8–24.
Stein, J. C. (1995). Prices and trading volume in the housing market: A model with down-payment effects. The Quarterly Journal of Economics, 110(2), 379–406.
Wong, S. K., Deng, K. K., & Cheung, K. S. (2018). Housing wealth effects for private and subsidized homeowners. International Journal of Housing Markets and Analysis, 11(5), 771–787.
Wong, S. K., Cheung, K. S., Deng, K. K., & Chau, K. W. (2021). Policy responses to an overheated housing market: Credit tightening versus transaction taxes. Journal of Asian Economics, 75, 101330.
Acknowledgements
We are grateful to the participants of the 2019 Asia-Pacific Real Estate Research Symposium for their helpful comments.
Funding
This research project is financially supported by the General Research Fund No. 17612017 provided by the Research Grant Council of Hong Kong and NSFC72174115 provided by the National Science Foundation of China.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflicts of Interest/Competing Interests
There is no conflicts of interest or competing interests.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Wong, S.K., Deng, K.K. & Cheung, K.S. Starter Home Premium and Housing Affordability. J Real Estate Finan Econ 68, 52–73 (2024). https://doi.org/10.1007/s11146-022-09935-8
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11146-022-09935-8