Housing : Socioeconomic, Availability, and Development Issues [1 ed.] 9781608767472, 9781606923719

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Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

HOUSING: SOCIOECONOMIC, AVAILABILITY AND DEVELOPMENT ISSUES

Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

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HOUSING: SOCIOECONOMIC, AVAILABILITY AND DEVELOPMENT ISSUES

EDWARD P. HAMMOND AND Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

ALEX D. NOYES EDITORS

Nova Science Publishers, Inc. New York

Copyright © 2009 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

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Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Housing : socioeconomic, availability, and development issues / editors, Edward P. Hammond and Alex D. Noyes. p. cm. Includes index. ISBN 978-1-60876-747-2 (E-Book) 1. Housing--Case studies. I. Hammond, Edward P. II. Noyes, Alex D. HD7287.H682 2009 333.33'8--dc22 2008047038

Published by Nova Science Publishers, Inc.    New York

CONTENTS

Preface Chapter 1

Chapter 2

Chapter 3

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Chapter 4

Chapter 5

Chapter 6

vii Three Models of Public Housing in the 20th Century: Cases in the U.S., China and Singapore Zhu Xiao Di, Lan Deng and Hao Hu

1

Housing, Amenity and Spatial Economic Growth of a Small Open Interregional Economy Wei-Bin Zhang

45

Keep Out?: Housing, Social and Physical Environments of Neighborhoods Bordering Major Cities and their Suburbs Michael Greenberg

87

The Outcomes of Housing Privatisation in South Africa: The Case of Mangaung (Bloemfontein) Lochner Marais, Moeketsi Sefika and Jan Cloete

111

A Web Spatial Decision Support System for Housing Evaluation in Urban Renovation Projects Eduardo Natividade-Jesus and João Coutinho-Rodrigues

129

...But Most Buildings are Already There: Basic Starting Points for Environmental Management in the Housing Sector Örjan Svane

149

Expert Commentary Homeward Bound and Homeless: The Challenge of Those Returning Home after Incarceration Leda M. Perez and Henrie M. Treadwell

161

Does Earthquake Risk Influence the Quality of Life in Japan? Michio Naoi , Kazuto Sumita and Miki Seko

167

Hedging Housing Risk Juerg Syz

175

vi

Contents Housing Influences Research Results and Animal Welfare in Golden Hamsters (Mesocricetus Auratus): The Influence of Size and Structure of Shelters on the Behaviour Esther Gerber, Sabine G. Gebhardt-Henrich, Evelyne M. Vonlanthen, Katerina Fischer, Andrina R. Hauzenberger and Andreas Steiger Housing and Breeding of Pet and Companion Animals: A Need for More Welfare and Research? A. Steiger and S.G. Gebhardt-Henrich

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Index

185

201 215

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PREFACE A house generally refers to a shelter or building that is a dwelling or place for habitation by human beings. The term includes many kinds of dwellings ranging from rudimentary huts of nomadic tribes to high-rise apartment buildings. This book presents the rapid growth of urban areas in most of the developed countries and it compares the international perspectives on public housing by comparing policies used in various countries. Chapter 1 - This chapter provides an international perspective on public housing, broadly defined as government-sponsored or -developed housing, by comparing the policy and practice in the United States, the People’s Republic of China, and Singapore. While research on public housing has been abundant, few papers have compared nations, especially between Asian countries and the United States. Since housing is an issue that every nation is struggling with, an international perspective would be both interesting and enlightening. Of course, each country faces its own unique housing challenges, and no single solution can be applied universally. Nevertheless, it would be beneficial for nations to share with one another their lessons and experiences learned in addressing their own unique housing needs. Chapter 2 - This study proposes an interregional economic growth model with housing and environment for an open economy in a perfectly competitive economy. The economy consists of multiple regions and each region has two - industrial and housing - sectors. The model is a synthesis of the three most well-known models in the growth theory and urban economics in a multi-regional context. Industrial production and capital accumulation follow the Solow model. Regional population distributes over the urban area according to the Alonso model and regional housing production follows the Muth model. The microeconomic foundation for determining time distribution, savings, spatial location and consumption follows by Zhang’s approach proposed in the early 1990s. Following the traditional literature of small open economies, we assume that the rate of interest is fixed in international market. Households move freely among regions, equalizing utility level among regions by choosing housing, goods and saving. A region’s amenity is endogenous, depending on the region’s output and population. We explicitly solve the equilibrium of the multi-regional economy. We also simulate the model and examine effects of changes in the rate of interest, the preference, and amenity parameters. We show, for instance, that a productivity improvement in the region with lowest productivity reduces the GDP and GNP and a rise in the preference for large cities may accelerate agglomeration of the population and economic activities into a region with high productivity.

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Edward P. Hammond and Alex D. Noyes

Chapter 3 - Housing, socioeconomic, and physical environments of almost 1,700 census tracts located within one mile of the borders of Chicago, Detroit, Los Angeles, New York City, and Philadelphia and their respective suburbs were compared. The Detroit and Philadelphia boundary areas came closest to the stereotype of the affluent suburb vs. poor central city with multiple land uses that discourage migration across the border. Yet Los Angeles and the Bronx (New York City) border with Westchester County did not fit the anticipated pattern. Chicago and Queens (New York City) boundaries with their suburbs fell between the polar cases, that is, some of border was strongly demarcated but not other parts. There is no evidence that cities or their suburbs have stacked noxious land uses along these shared borders. Typically, the physical barriers were golf courses, shopping malls, schools, and other not unattractive land uses that coincidentally also act as markers. Research is needed to ascertain public perception of housing and neighborhood quality along these borders, the current study should be repeated when the 2010 decennial census results become available, and the analysis should be extended to the borders of smaller cities and their suburbs. Chapter 4 - In South Africa, as in many other countries in Africa, a large amount of state housing stock was constructed during the 1950s-1970s. In South Africa, this policy of stateconstructed housing units went hand in hand with apartheid policies, preventing black people from urbanising. In this country, as in the rest of the world, a concerted effort (begun by the apartheid government, but continued in the post-apartheid period) has been made since the 1980s by the state to privatise these housing units. At the time of its implementation, the privatisation policy was criticised for generally reducing the role of the state; creating landlordism; and also for purely practical reasons, such as the problem of determining the rightful owners of these units. Yet, despite these conceptual points of criticism, there is a scarcity of research focusing on the actual housing outcomes of this privatisation process. This chapter examines the housing outcomes of the privatisation process on the basis of an empirical survey of approximately 390 such units in the Mangaung Township near Bloemfontein in central South Africa. Chapter 5 - The second half of the XX century saw a rapid growth in urban areas in most of the developed countries. This growth was characterized by the development of suburbs coupled with urban center decay implying important socio-economic, environmental and sustainable impacts. Many countries are attempting to renovate and/or redevelop their cities (especially their historic centers) in order to combat these trends. Such efforts, involving extremely complex decisions, address not only the renovation of large numbers of buildings but also the redesign of the urban infrastructure and services. The complexity of urban renovation projects, their large capital investments and the multiple impacts of this kind of problems, justify the development, and use, of state-of-the-art decision support methodologies to assist decision makers. We present a multicriteria web-based spatial decision support system (Web-SDSS) for supporting the DM (e.g., local authorities) in the analysis of the problem and in the definition of the strategies and priorities of intervention. An example of the application of the Web-SDSS to a real-world context (the Renovation Project of Coimbra Downtown) is presented. Coimbra is a 140 000 inhabitants city in the central region of Portugal and their downtown is a historical old part of the city with houses (many of them with centuries) that require maintenance, repair and refurbishment. The area

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Preface

ix

under study includes a total universe of about 842 families, 1280 dwellings and 721 buildings, and the total cost of intervention is estimated in 200 x 106 Euro. Chapter 6 - Few products of man are larger, heavier and have a longer average usage life than buildings. In order to function as expected, they each year use resources of the same magnitude as their own weight and produce about the same amount of waste. Reducing this metabolism of a building to a sustainable level calls for a wide set of measures, and it is normally the joint responsibility of several stakeholders. There are shorter periods of time, Situations of Opportunity, when reduction is easier than the average. In these Situations, also the stakeholders’ Field of Options is wide. In the paper, the above statements are discussed as conditions for addressing the sustainability challenge of housing in a two-generation perspective. The construction of new buildings and the refurbishment of existing ones are well-known examples of such Situations. In these, the stakeholders cooperate in short-lived project organisations. However, one main conclusion is that even if the environmental performance of all new buildings is twice as good as the present average, major transformations are needed in the existing building stock. Furthermore that efficient use of space and gradual improvements in parallel with maintenance are other categories of Situations of Opportunity, having their specific set of stakeholders. Finally, that technical measures could be combined with changes in residents’ habits and managers’ routines to further widen the Field of Options available to the stakeholders of housing. Expert Commentaries - In 2006, there were approximately 2.2 million people incarcerated in the jails and prisons of the United States (Sabol, Couture and Harrison, 2007). It has been reported that more than 600,000 individuals – over 1600 a day – will return home to their families and communities. Unfortunately, many of these men, women, fathers and mothers are unable to return home if they or their families reside in public housing. Over the years, federal legislation has restricted the access to public housing for many ex-offenders who are returning to their families and communities. In short, those returning home can be excluded from public housing either by operation of law or by administrative decisionmaking. Housing is a paramount issue and challenge. Our nation must revisit the restrictive policies and laws that prevent those who have served their debt to society from successfully returning home. These are some of the issues that will be explored. Japan is famous for its earthquakes. How do households and firms respond to this potentially devastating risk? How does earthquake risk affect housing costs and wages? To answer these questions, we construct a Quality of Life Index (QOLI) and estimate the social cost of earthquake risk among cities/counties in Japan. The regional QOLI is obtained through estimating the hedonic wage and housing regressions using household longitudinal data covering all Japan. From the estimated results, we find that earthquake risk has a significant impact on the overall quality of life in Japanese prefectures, and that there are large city/county differences in terms of the social cost of earthquake risk. Finally, we argue that the large regional variation in the social cost of earthquakes arises from earthquake insurance market imperfections – crude and rough geographical risk rating – and propose a possible remedy for enhancing earthquake insurance risk. Both prospective and current homeowners are exposed to housing risk. While the former bear the risk of rising property prices, the latter are concerned with falling home prices. To mitigate housing risk, they should engage in a long, respectively a short hedge. The academic literature has forcefully attempted to encourage the introduction and the use of property derivatives as a hedge against house price risk (e.g. Shiller and Weiss, 1999).

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Edward P. Hammond and Alex D. Noyes

In practice however, most of the property derivatives available have been targeted to meet the needs of institutional investors, not those of current of future homeowners. We propose two applications - tailored to retail clients - that combine a traditional financial instrument with a property derivative: an indexed building savings plan and an index-linked mortgage. The funds in the savings plan grow with a house price index, in order to keep purchasing power with regard to housing stable. The due payments of the indexlinked mortgages on the other hand are reduced in an environment of falling house prices. Since 80 years golden hamsters have been kept as laboratory animals and pets in large numbers; captive hamsters now outnumber wild conspecifics. In our experimental studies we addressed the following aspects of housing and how they could influence research with golden hamsters and the welfare of laboratory and pet hamsters. 1. Thirty female golden hamsters (Mesocricetus auratus) were provided with three different shelter types (small, large undivided and large divided) and were observed for their favoured sleeping place and where they placed food, urine and faeces. In addition, their tunnel building was registered. Once a week for five weeks, each shelter and cage was examined and cleaned afterwards. The hamsters slept inside the shelter without exception. Hamsters in all three groups preferred to sleep in areas away from the entrance hole and animals with large divided shelters avoided the front compartment. Shelters were also used frequently for food storing and urination. Hamsters in small shelters urinated significantly more often additionally or exclusively outside the shelter than those in large divided shelters. Food and urine at the same place was found most often in large divided shelters. In comparison with the large undivided shelters, the hamsters with large divided shelters built fewer and shorter tunnel systems. This study demonstrates that golden hamsters use the shelter, whatever structure it has, above all for sleeping, but also for urinating and food storing. This experiment contradicts the expectation that hamsters, which have a shelter with two compartments, may separate the places for sleeping, urinating and hoarding their food. 2. Running wheel: Female golden hamsters were kept with large functional or non functional running wheels and their behaviour and lifetime reproductive success was examined. Females with functional wheels had significantly larger litters and showed significantly less stereotypical wire-gnawing than females with nonfunctional wheels. 3. Cage size: Female hamsters were kept in four different cage sizes (1800 cm2 up to 10000 cm2). Those in the small cages gnawed significantly longer and more frequently at the wire than females in larger cages. 4. Depth of bedding: Male golden hamsters were kept in cages with 80, 40, or 10 cm deep wood shavings. Hamsters kept with 10 cm deep bedding showed significantly more wire-gnawing than those kept in deep bedding and bedding depth influenced the circadian rhythm. Our studies show that various aspects of housing can influence the behaviour of golden hamsters with implications on research and welfare. Worldwide the importance of pet and companion animals has grown. High percentages of the populations are owners of pet and companion animals, in particular in towns, with different percentages from country to country. The industry of animal feed and pet animal equipment as well as the number of pet animal shops are growing. The great majorities of veterinarians in practice are working in mixed practices with small and large animals or in small animal practices (Unshelm 1997, 2002). Specializations in small pet animal and exotic animal medicine (including treatment of reptiles) and in behavioural medicine (treatment of behavioural problems in particular of dogs and cats) are gaining in importance in veterinary practice and in veterinary schools of universities.

In: Housing: Socioeconomic, Availability & Development Issues ISBN 978-1-60692-371-9 Editor: Edward P. Hammond and Alex D. Noyes ©2009 Nova Science Publishers, Inc

Chapter 1

THREE MODELS OF PUBLIC HOUSING IN THE 20TH CENTURY: CASES IN THE U.S., CHINA AND SINGAPORE Zhu Xiao Di, Lan Deng and Hao Hu

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INTRODUCTION This chapter provides an international perspective on public housing, broadly defined as government-sponsored or -developed housing, by comparing the policy and practice in the United States, the People’s Republic of China, and Singapore. While research on public housing has been abundant, few papers have compared nations, especially between Asian countries and the United States. Since housing is an issue that every nation is struggling with, an international perspective would be both interesting and enlightening. Of course, each country faces its own unique housing challenges, and no single solution can be applied universally. Nevertheless, it would be beneficial for nations to share with one another their lessons and experiences learned in addressing their own unique housing needs. The three nations we chose to review make an interesting group for comparison for reasons below. Despite their very different social and economic conditions, each nation had once set up an ambitious goal to provide adequate housing for all of its citizens. In the mid20th century, each of the three nations witnessed a strong political movement to significantly improve its urban housing conditions. In the United States, the Housing Act of 1949 charged the administration with providing each citizen with a “decent home and a suitable living environment,” and allowed local governments to take major actions to clean up unsanitary slums in urban areas. In China, the new government founded after the 1949 Revolution converted all privately-owned housing in urban areas to public ownership, and was proud about its solution to the housing shortage through rationally social redistribution. In Singapore, independence from Britain in 1959 empowered an ambitious new government to expand public housing on such a grand scale that the colonial government had never envisioned, and some thirty years later, Singapore had achieved to house nearly 90 percent of its population in public housing.

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Yet, other than sharing a strong political momentum, the three nations took completely different approaches to building their public housing programs as solutions. In China, the Communist Revolution first brought a complete conversion from private to public homeownership in urban areas, but fifty years later that government reversed its policy and privatized almost all of its public housing. In the United States, the majority of the population lives in privately owned housing, and the government only provides housing for a small fraction of its population. On the other hand, the proportion of public housing in Singapore has grown rapidly since the British granted it independence. By 1995, 86 percent of Singapore’s population lived in government developed housing units, and every nine of ten households living in those units had homeownership of the units. All three nations have fascinating, yet very different histories, some of which are well-known and some are not among English-speaking audience. In this chapter, we take slightly different strategies to present the three public housing models developed in the last century. We provide a comprehensive and coherent overview of the U.S. housing experience based on the existing voluminous literature written on this subject. We do not aim to advocate or promote certain policy changes, but to strive to explain the dilemma and choices that U.S. public housing program has faced. In the case of China, we first provide a historical context to help understand how China experimented with constructing a new society in an old nation. We then move to explain its housing policy changes within the context of other social changes in the era of economic reform. As for Singapore, we take advantage of its small size and examine some of its housing policies in detail, particularly its financing strategies, to provide useful examples of alternative solutions for addressing social-economic, accessibility, and development issues in housing. Finally, we discuss a few issues that may legitimately arise after such an international and historical review:

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•

•

•

First, what does Singapore’s innovative public housing finance have to offer in helping to address the dilemma between affordability and sustainability that is commonly faced by many countries? How can historical experiences help influence current reforms, especially the lessons we learned regarding the constraints the political structure has imposed on governments’ housing choices? What could nations learn from each other in terms of the possibility and feasibility of different housing solutions?

PUBLIC HOUSING IN THE UNITED STATES The government had kept itself from the housing industry until the two World Wars and the Great Depression fundamentally changed public views. Even then, the purpose of the government’s role in the housing of its citizens focused on a stable and prosperous economy rather than a consideration for social equality. To a large degree and for too long, the public housing practice in the United States failed the expectations of its supporters, and its negative image continues to linger and challenge the role of the government in managing the housing supply.

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Three Models of Public Housing in the 20th Century

3

The general public has been frugally conservative about whom public housing should serve and are often suspicious about its relationship with the private housing sector. The National Housing Act of 1934 allowed the federal government to intervene in the housing market and save the housing industry from bankruptcy in the Great Depression, but its dual purpose was to protect middle-class homeowners from default rather than promoting public housing construction. So it was clearly stated that public housing should be targeted at lowincome families without competing with private-housing industry. Thus until the end of the World War II, large-scale public housing construction was limited to only those units built to house war workers. The period between 1949 and 1973 witnessed both the glories and the gloom of public housing development in the United States. The Housing Act of 1949 sought to provide “a decent home and a suitable living environment” for everyone, through an ambitious plan to build 135,000 units of public housing annually. Due to the outbreak of the Korean War, however, the plan was soon downsized and never revived even after worries over the war waned. Under the sway of political tension between the Republicans and Democrats, public housing programs were never financed as planned in the 1949 Housing Act. As more and more middle and moderate-income families became homeowners during the postwar prosperity, not only the conservative politicians, private developers, but also homeowners had become hostile towards public housing. It was strictly limited to the poor, and as the federal urban renewal programs in the 1950s forced many displaced poor people to crowd into public housing, its image as a decent place to live was also destroyed. The concentration of social and economic problems accelerated the deterioration of the public housing stock, and it continued to be the last resort for the poor and especially for minorities. Public housing was only able to survive due to the shift toward welfare capitalism in the 1960s perhaps best symbolized through the establishment of the Department of Housing and Urban Development (HUD). The Housing and Urban Development Act in 1968 led to an expansion of public housing by over 200,000 units per year, but along with that came many more problems. By 1973, President Nixon imposed a moratorium on future public housing construction. Since 1974, public housing policy in the United States has shifted away from only subsidizing the housing supply to also subsidizing housing demand. There were plenty of vacant housing units available, but low-income families just couldn’t afford them. Thus the Housing and Community Development Act of 1974 established the Section 8 program, including both project-based and tenant-based housing subsidies. The program has met with varying success; the tenant-based Section 8 program, which provided low-income families with vouchers and certificates to supplement rental payments for existing housing units, has expanded into the largest single program for low-income housing assistance (Pendall, 2000). On the other hand, the project-based Section 8 program, which subsidized affordable housing supply by providing guaranteed rental subsidies to private landlords and developers, was terminated after 1983. Instead, Congress established the Low Income Housing Tax Credit (LIHTC) program with the 1986 tax reform, thus providing tax benefits for developers who keep a proportion of their constructed units affordable to low-income people. Another important shift in the American public housing policy was the decentralization of the government’s role in providing housing, from the federal to state and local levels. The creation of the Community Development Block Grants (CDBG) gave more flexibility to local governments to decide how to spend federal housing subsidies. Furthermore, in the 1990s, considerable efforts were made to encourage the participation of private sector entities, such

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as developers and commercial banks, as well as non-profit organizations and local communities.

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The Early Experience Prior to the Housing Act of 1949 As early as in the 1840s, when industrialization had created slums across cities, housing reformers believed that severely poor housing conditions were the root of many social problems, having ruined not only the health but also the morals of dwellers. Throughout the late 19th and early 20th centuries, the reformers’ efforts led to the establishment of improved building and sanitary regulations. To encourage private developers and landlords to provide better housing for the poor, reformers even assisted in developing model housing projects (von Hoffman, 2000). In 1918, Congress appropriated $110 million to start two separate programs to house war workers: the United States Shipping Board’s Emergency Fleet Corporation (EFC) and the United States Housing Corporation (USHC). As some critics pointed out, this initial federal involvement was neither the result of a conscious effort to help the poor nor an increased reform spirit, but an exercise of war power (Jackson, 1985). When the war ended, Congress returned to its previous preference for individualism, and the wartime public housing programs did not lead to any permanent federal involvement (Szylvian, 1999). The public housing practice in Europe during the 1910s and 1920s brought innovative ideas to the United States. Housing reformers such as Catherine Bauer called for stronger measures than building codes and model tenements to address the housing crisis during the Great Depression. Between 1928 and 1933, housing construction had fallen by 95 percent and expenditures on home repairs fell by 90 percent. Half of all home mortgages in the United States were technically in default by 1933 (Jackson, 1985). This was no time for laissez-faire policies, and nearly everyone was asking what the government should and could do about the emerging crisis. Bauer believed that the federal government should supply rental units for two-thirds of all urban households (Bauer, 1934), not only for the poorest population of unskilled workers, but also for part of the working and middle class (von Hoffman, 2000). Such a radical approach was never implemented, however, and market oriented approaches were taken instead. For example, The National Housing Act of 1934 aimed to revitalize the housing industry and generate jobs to lift the economy. The Federal Housing Administration (FHA) was established in 1934 to provide insurance for private residential mortgages and home improvements. The founding of the Federal National Mortgage Association in 1938 (now known as Fannie Mae) created a secondary market for loans insured by the FHA (von Hoffman, 2000). The positive effects of these approaches resulted in the fact that “the homeownership rate in the United States increased from just over 40 percent in the early 1940s to 62 percent in 1960” (Van Order, 2000). There was a debate during the 1930s among housing advocates over the most effective way to house the poor. Some believed that eliminating slums was necessary to improve living environments. Others, like Catherine Bauer, argued that slum clearance would only worsen the housing shortage. Instead, she believed that good-quality public housing should be developed at the outskirts of cities in order to attract slum dwellers from their tenements. Bauer used the success of modernist architecture and the garden city movement in Europe as models to support her beliefs (Radford, 1996; von Hoffman, 2000). In the end, however, slum

Three Models of Public Housing in the 20th Century

5

clearance had the most political appeal, and the Housing Act of 1937 established a public housing program that targeted slums and slum-dwellers. That program almost immediately encountered political difficulties. Conservative politicians were concerned that public housing would compete with privately-developed housing, and also argued that the program would foster dependency on government by the poor. Senator McCarthy even speculated that public housing would lead to an acceptance of communist ideology. As a result of such speculations, Congress cut off funding for the public housing program between 1938 and 1942. During World War II, it only funded housing for defense related reasons and banned funding for low-income households. It did not authorize any more public housing until the passage of the Housing Act of 1949.

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Years of Experiment and Failure (1949--1973) The Housing Act of 1949 is remembered today perhaps more by its noble housing goal than by its specific title programs.1 As the fundamental philosophy of relying on the private sector did not change, public housing was only seen as filling the gap on the supply side in the lower end of the market. Many bitter ironies occurred in the ambitious public housing plan authorized by the 1949 Act. To begin with, some supporters of public housing changed their attitudes. One of its strongest supporters, President Harry Truman, reduced the program just as it began. As he sent the troops to Korea, Truman began to worry about material shortage and inflation at home (von Hoffman, 2000). To prevent such gloomy outcomes, he ordered the federal government in July 1950 to build only 30,000 public housing units during the remaining six months of 1950, although the 1949 law actually allowed building 135,000 units annually (Davies, 1966). Truman’s initiative gave conservatives in Congress an excuse to nearly abolish the program completely, as they allocated public funds for only 5,000 new housing units in the following year. Although Truman tried to revive the program later, Congress cut his request from 75,000 to 50,000 units (von Hoffman, 2000). As this modest figure became the starting point for negotiations, any hope for expansion in public housing as authorized by the Housing Act of 1949 went away, and the public housing movement lost its momentum. To further compound the resistance to the expansion of public housing, private interest groups, such as members of local real estate agencies and the Savings and Loan League, launched an anti-public housing campaign at the grassroots level. They mobilized people to oppose public housing projects, reject public housing appropriations and bonds, and even close local housing authorities. This effort was more successful in the South and the West than in large Eastern and Midwestern cities where political support was still available for public housing and urban redevelopment (Davies, 1966). Such effort by private interest groups succeeded only because working class and middleincome families felt that they no longer needed public housing. Most of them were becoming 1

Title I, financed slum clearance under urban redevelopment (later renewal) programs; Title II, increased authorization for Federal Housing Administration (FHA) mortgage insurance; Title III, committed the federal government to building 810,000 new units of public housing; Title IV, provided funds and the authority to conduct extensive research into the economics of housing construction, markets, and financing; Title V, allowed farmers to purchase and improve farms through an expanded loan program.

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Zhu Xiao Di, Lan Deng and Hao Hu

homeowners, benefiting from the government’s first-tier housing policy that made marketrate housing more affordable and financially attractive. Worrying about the possible negative impacts of the poor’s housing on their communities and property value, homeowners sometimes violently objected to public housing projects in their neighborhoods. Frequently, whites opposed predominantly black public housing, and even African-Americans themselves sometimes objected to such projects. These phenomena revealed that both racial and class conflicts lay behind the public housing controversies (von Hoffman, 2000). The location of new public housing had always been an issue. In the early 1950s, members of Congress and the federal House and Home Financing Agency (HHFA) rejected the proposal by some regional planning and public housing advocates to use Title I to develop planned communities on the outskirts of cities. Advocates like Catherine Bauer argued that the HHFA should interpret broadly a clause that allowed urban redevelopment projects to use open land for residential use. The HHFA, however, only interpreted the clause narrowly to mean land close to or even within slum clearance areas. As a result, housing authorities often built new housing projects near old ones in poor and black neighborhoods and thus reinforced old racial ghettos and even created new slums (Friedman, 1968; von Hoffman, 2000). The slum clearance authorized by Title I of the Housing Act of 1949 thus became a painful experience for the poor. Perhaps more ironically, supporters of slum-clearance succeeded in passing a law requiring that one slum unit should be demolished for every public housing unit built (McDonnell, 1957; von Hoffman, 2000), but didn’t require that there should be at least one new unit built for each demolished one. As a result, 425,000 units of low-income housing, mostly occupied by poor minorities, were razed for redevelopment between 1949 and 1968, while only 125,000 new units had been constructed, over half of which were luxury apartments (Wright, 1981). Unable to afford market housing, all the displaced public housing tenants had to crowd into the rest of the public housing projects, which further accelerated their deterioration. In retrospect, it seems that the law should really have required just the opposite: to build a new and affordable unit for each demolished unit. Meanwhile, both the design of public housing and the characteristics of public housing tenants were undergoing major changes, but not necessarily in sync with each other. As the federal public housing agency asked local governments to enforce income limits, stable and upwardly mobile tenants and families of servicemen who had returned from the war were expelled from public housing units (Wood, 1982; von Hoffman, 2000). Consequently, an increasing number of welfare recipients took up residence in the projects, giving them a reputation as housing of last resort. At the same time, particularly in large cities such as New York, Philadelphia, Chicago, and St. Louis, high-rise towers were built to create a modernist skyline. To mayors, city planners and housing officials, this was a visible expression of economic efficiency and a desirable new social order. As James Ford wrote in Slums and Housing, a large project was believed to have an “increased chance of maintaining its distinctive character because its very size helps it to dominate the neighborhood and discourage regression” to slum life (Ford, 1936; von Hoffman, 2000). This turned out not to be true. Critics found later that high density and monotonous standardization actually made these projects look harshly institutional and forced families with young children to live in difficult environments (Wright, 1981). The federal government's policy of subsidizing the capital costs but not operating costs might also have led local housing authorities to favor high-rise structures for efficiency

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Three Models of Public Housing in the 20th Century

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(Quigley, 2000). Despite that, the federal government began contributing to operating costs in 1970, and that the majority of public housing projects were actually built as 2-4 story structures, the perception of public housing is still often associated with high-rise projects (von Hoffman, 2000). The imposed rent ceiling of 25 percent of a tenant’s income in the Brooke Amendment poked a major hole on the sustainability of public housing finance. While such regulation protected poor tenants from heavy rent burdens, local housing authorities were unable to raise sufficient resources to properly maintain the properties. All these government policies, combined with social circumstances, sent public housing into a downward spiral (von Hoffman, 2000). Also compromised was the social work component of public housing. New public housing projects lacked the community facilities and social services that characterized early public housing (Bauer, 1957), while the new type of tenants actually needed the services even more. In the 1930s, most public housing tenants were underpaid working-class families who gradually adapted to city life. However, after the war, more and more tenants were rural migrants from the South, Puerto Rico, and Mexico. Many of them had little experience with the city and its institutions (von Hoffman, 2000). When deterioration and crime began to plague the large projects built under the 1949 act, many began to see the faults in the architecture, while racial segregation actually played a more active role. Despite a 1954 Supreme Court ruling and a 1961 Presidential order forbid discrimination in public housing, it was common that local authorities segregated tenants by race, exacerbating tensions among the divided groups. Civil rights advocates protested such policies in the 1960s with marches, demonstrations and lawsuits, and the Civil Rights Act of 1968 formally banned racial, religious, or ethnic discrimination in real estate transactions. In the 1969 landmark Gautreaux case, the Chicago Housing Authority (CHA) and the Department of Housing and Urban Development were charged with discriminating against black tenants and concentrating them in large-scale developments located in poor, black neighborhoods. The decision by the court to call for building mixed income projects at “scattered sites” in non-minority communities has become a driving force for the transformation of federal public housing policy in more recent years (Popkin et al., 2000). The Housing Act of 1949 allowed for the construction of 810,000 public housing units in 6 years, but it actually had to take 20 years to accomplish. Public housing fared no better during the administration of Eisenhower, who disliked it from the beginning. During his first term, Eisenhower asked the Congress to authorize only 35,000 new units. In his second term, he requested none at all. As a result, 11 years after the passage of the 1949 law, the government had built less than 40 percent of the 6-year goal of 810,000 units (Biles, 1996; von Hoffman, 2000). The shift in the political climate toward liberalism during the 1960s helped the public housing program expand. The real estate and building industries that had once tried to kill it now also accepted it conditionally, because they began to find the potential in it for profits. Although President Kennedy did not push for large allocations for public housing, President Johnson was much more aggressive. He made urban issues a focus of his administration and benefited from the rising tide of liberalism. In 1965, Johnson called for the HHFA to be elevated to a cabinet-level Department of Housing and Urban Development (HUD) and asked Congress to expand the public housing program. The landmark Housing and Urban Development Act of 1968 reaffirmed the housing goal of the Housing Act of 1949, and set

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Zhu Xiao Di, Lan Deng and Hao Hu

ambitious goals of 26 million new dwellings over the next 10 years, including 6 million units for low- and moderate-income households. In addition to public housing, two new programs were set up in 1968 to encourage private developers to build for low-income families: Section 235 and Section 236. The rapid expansion of public housing and subsidized housing in the later years of Johnson’s administration resulted in remarkable numbers. Between 1957 and 1966, the traditional public housing program plus subsidized housing programs such as Section 202 and Section 221 (d) (3) only achieved an annual average less than 30,000 housing units in production, including both new construction and rehabilitation. The annual figure jumped to 203,000 units between 1966 and 1973, and most of the units were constructed after 1968 through Section 235 and Section 236, amounting to 364,000 and 334,000 units, respectively (Doan, 1997). The Johnson administration was replaced by a presumably more conservative administration in 1969. But because Nixon appointed the production-minded Governor George Romney of Michigan as HUD secretary, more public and subsidized units were actually produced than ever before. The new additions, however, did not solve the basic problems perturbing public housing, such as the concentration of poverty, the lack of maintenance, and the deterioration of neighborhoods. The harsh reality failed housing advocates’ original plans and expectations. Many critics depicted the failed public housing units as a notorious living environment for the poor. A presidential report even suggested that new subsidized housing might be contributing to the middle-class exodus to the suburbs (President’s Third Annual Report on National Housing Goals, 1971). Finally, during his second term, President Nixon imposed a moratorium in 1973 on all public housing.

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Recovery and Search for New Solutions (Since 1974) The Housing and Community Development Act of 1974, signed into law by President Ford, marked several important changes in the direction of American public housing policy. The most important one was the new consensus on the core problem in housing for lowincome households: affordability. After the overall physical condition of the housing stock had improved greatly, the problem was no longer living in substandard dwellings but paying too large a percentage of one’s income for standard dwellings (Winnick, 1995; Hays, 1995; Orlebeke, 2000). Both the project based and the tenant-based Section 8 programs of the 1974 law created a system that allowed rent subsidies to go towards privately constructed units. Similar to the earlier laws, Section 8 specified that 25 percent of household income as the reasonable rent burden of low-income households, and that federal government would pay the difference between this figure and the fair market rent, as defined by HUD based on comparable units in the local market. The project-based Section 8 program has produced more units for low-income households than the public housing program. The guarantee of a stable income, in combination with other financial subsidies such as tax deductions and tax exempt bonds that created leverage for developers to attract private mortgage money, promoted the production of assisted housing units. The tenant-based Section 8 allows low-income families to live in private housing units by giving them portable vouchers or certificates so that they may have access to better neighborhoods and job opportunities. Because Section 8 appealed to both

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Three Models of Public Housing in the 20th Century

9

liberal and conservative ideologies and was viewed as more cost saving and market-driven, political conflict was relatively small, resulting in an upsurge in the production of assisted housing during the later half of the 1970s (Hays, 1995). This allowance-type program actually had its roots in the 1930s when the National Association of Real Estate Boards first advanced it as an alternative to government-sponsored housing for the poor. But the 1937 Act and the 1949 Act both promoted public housing as the chosen means to achieve the nation’s housing goals. The idea of housing vouchers reemerged in the 1960s and its possible impacts were tested through a program called the Experimental Housing Allowance Program (EHAP) (Orlebeke, 2000). By examining whether demand-side housing subsidies would raise the market rents of low-cost rental housing and hurt unassisted low-income families, EHAP found that low-income families tended to use housing subsidies to reduce their rental payment rather than to increase their housing consumption, thus subsidies should not significantly impact market rents. Another important change in the American housing policy since 1974 is the disengagement of the federal government from handling many urban problems directly, and increasing local responsibilities instead, particularly through the creation of Community Development Block Grants (CDBG) (Quigley, 2000). By pooling together several Great Society categorical programs, CDBG provides eligible jurisdictions an automatic, formulabased annual grant according to each jurisdiction’s population, poverty level, and level of overcrowding. As they decided on expenditures themselves, recipient local governments usually spent about 40 percent of CDBG for housing and housing rehabilitation (Connerly & Liou, 1998). The CDBG program increased steadily during the Ford and Carter administrations, although some critics argued that the aggregate grants to state and local governments actually declined during the mid and late 1970s (Quigley, 2000). The failure of the Democratic administration to deal with the unprecedented stagflation during the economic recession of the 1970s eventually brought a conservative administration to power in the 1980 election. This “set the stage for a major shift in expenditures and in philosophy at the federal level, and housing programs could hardly avoid the effects of this shift” (Hayes, 1995, p. 233). The dominant characteristic of housing policy during the Reagan Administration was the extensive budget cuts in existing housing assistance, from $30 billion in the FY 1981 budget, to $17.5 billion in the FY 1982 budget and to $8.6 billion in the FY 1983 budget (Hayes, 1995). In addition, the already reduced Section 8 housing subsidy was granted in a way that discouraged production (Orlebeke, 2000), and in 1983 Congress terminated the project-based Section 8 programs completely. After that, government-assisted new housing construction was limited to the elderly and handicapped under Section 202. Meanwhile, CDBG dropped at an annual rate of 6.5 percent, with an increased emphasis on economic development and public facilities and a decreased share for housing (Quigley, 2000). The 1986 tax reform reduced the tax incentive for investing in rental housing properties by extending a property’s depreciation time and limiting passive-loss offset, and thanks to the lobby of housing advocates, Congress created the low-income housing tax credit (LIHTC) to compensate for the possible loss of affordable housing supply. LIHTC program designates that investors of a LIHTC project without federal tax exempt bond financing can claim a tax credit of 70 percent of construction costs or 30 percent of acquisition costs, if it rents at least 20 percent of its units to households with less than 50 percent of the area median income or at least 40 percent of the units to households with less than 60 percent of the area median

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Zhu Xiao Di, Lan Deng and Hao Hu

income. To get the full tax credit, the project must remain affordable for at least 15 years. Tax credits are allocated to states annually based on population: each state received $1.25 per resident, which has now been increased up to $1.75 per resident. Most of the tax credit projects have actually allocated a much higher percentage, usually more than 80 percent, of their units to low-income households (Guggenheim, 2003). LIHTC has become the primary funding source for producing low-income housing, partially because it spends only future tax revenue and thus circumvents the budget approval process. As the private sector became familiar with LIHTC and competed for tax credits, the previous criticism on its complication and high transaction cost lost ground. Today, the LIHTC program gives state and local LIHTC allocating agencies the equivalent of nearly $5 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Over 1.5 million housing units have been placed in service between 1987 and 2005. The later years of the Reagan Administration witnessed some consequences of its own policy: a worsening rental housing shortage, a substantial growth in the number of homeless people, and the prepayment crisis of privately owned affordable housing (Hayes, 1995). In 1987, the McKinney Act was signed to provide funds for emergency shelter, supportive housing, and other programs benefiting the homeless (Quigley, 2000). The 1990 National Affordable Housing Act reflected a new paradigm and a considerable degree of consensus among liberals and conservatives (Hayes, 1995). Despite its continuous emphasis on housing vouchers, the 1990 Act set up two programs to promote the production and rehabilitation of low-income housing: the HOME Program and the HOPE Program. Requiring 25 percent local matching funds, the HOME Program provided formula grants to local governments, as well as lines of credit to participating jurisdictions to be used in rehabilitating existing units and, if necessary, in new construction too. The HOPE I & HOPE II Programs were established to promote homeownership by selling the existing assisted housing or producing owner-occupied housing to low-income families. HOPE VI program was created later to help rebuild public housing in dispersed suburban sites to compensate for the demolished public housing in central cities. The hallmarks of these programs were flexibility and local responsibility. Federal funds can be co-mingled with state and local resources, and can be used in partnership with nonprofit participants (Quigley, 2000). The efficient management of nonprofit organizations often avoided bureaucracy and was recognized as a third way to address the housing needs of the poor (Barton, 1996). Although nonprofit developers have been very active in some regions’ affordable housing development, funding shortage continues to be a bottleneck. It is common for a nonprofit organization to pool 7 or 8 different funding resources to complete a project. Under the Clinton Administration, the number of Section 8 certificates and vouchers doubled to about 1.5 million by 1995 (Barton, 1996). The capital available for affordable housing development was also expanded through the Community Reinvestment Act of 1994, which forces private financial institutions to invest more money in “underserved” communities. This was accompanied with a rapidly expanding secondary market for home mortgages that has channeled more and more private capital to mortgage lending. Due to improved technology in dispersing and reducing credit risk by securitization, many mortgage lenders expanded their businesses by approaching those previously viewed as high-risk groups. Thanks to the financial innovation and the continuous economic prosperity in the 1990s, more and more families are able to achieve their homeownership dream. The

Three Models of Public Housing in the 20th Century

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following chart (Figure 1) illustrates the funding structure of public and public-assisted housing for low-income households in terms of the direction of the money flow, not the size of the amount, of course.

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Figure 1. Flow Chart of Federal Resources into Public & Assisted Housing in the United States.

More than 2 million households received Section 8 assistance (U.S. Government Accountability Office (GAO), 2005). As the tenant-based Section 8 program became the single largest program for low-income housing, some critics began to challenge the conclusion of EHAP (Apgar, 1990). Since EHAP only examined the effects of demand-side housing subsidies in several selected metropolitan areas, the question of whether a nationwide application of the tenant-based Section 8 program was actually pushing the market rent higher remained. As it was well said by an academic, “The real issue is not whether tenant-based vouchers can be used in all market conditions but whether it would be better to use new construction or substantial rehabilitation programs in tight market…. Whether there are any market conditions under which construction programs are more cost-effective than vouchers is one of the most important unanswered questions in housing policy analysis” (Olsen, 2001, P41) After two relatively long economic booms during the 1980s and 1990s, the surging wealth among American households has pushed homeownership rate to its record high along with tremendous home price appreciation. Yet, there is still a significant gap in homeownership rate between whites and minority. For white households, the homeownership rate is already above 70%, while it is still below 50% for black and Hispanic households. On

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the other hand, housing affordability is worsening for rental households, especially for those at the bottom of the income distribution. 50% of the households at the bottom income quintile suffer from severe housing cost burden by paying more than half of their income on housing (Joint Center for Housing Studies, 2005). Also, in no county in the United States could a minimum wage earner afford a 2-bedroom unit at fair market rent, and in San Francisco, one has to make $26.58 an hour to afford a 1-bedroom apartment at fair market rent (NLIHC, 2001). Thus the challenging task of dealing with the affordability issue in the United States remains in the 21st century, particularly after a rapid booming housing market for over five years since 1999. Ironically, the over-expansion of subprime loans from 2004 to 2006 has not been helpful to close the racial gap in homeownership; nor has it been effective in addressing the affordability problem. The subsequent credit crunch has put homeownership further beyond the reach of many American households.

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PUBLIC HOUSING IN CHINA Like most public policies in the People’s Republic of China founded in 1949, public housing policy and practice can be roughly divided into two periods: from 1949 to 1979, and from 1979 to the present. During the first period, the new government took a gradual but firm approach to apply its ideological beliefs and transformed China’s urban housing from a private market to complete public ownership. Thereafter, the government provided housing to its urban residents through a dual-track management system: either through employees’ work places, called work unit, or through local housing authorities that owned rental units. From 1966 to 1976 was a period of economic stagnation and political turmoil that was commonly known as the Cultural Revolution. After that, a new and stabilized leadership since 1979 took the country on a road of economic reforms that has gradually reinstated a private market economy. Urban homeownership also undergone a transition, and over 50 percent of urban residents became owners of their occupied housing units or purchased newly constructed units in the private housing market. In contrast to these dramatic changes in urban housing ownership, rural China took a different path since the 1949 Revolution and about 90 percent of China’s population did not even live in the cities until some 20 years ago. After the initial confiscation of household wealth of rich families in the villages and the reallocation of their assets among all the villagers, housing ownership in rural areas remained in the hands of individual peasant families. It was completely a private matter requiring family decisions and resources to build any new housing. Public housing construction and management were thus only an urban phenomenon, and therefore the scope of the review here.

Urban Housing Conditions before the 1949 Revolution Housing problems in urban areas had reached a critical stage long before the revolution in 1949. Industrialization and modernization in the late 19th and early 20th century led to a rapid growth of many Chinese cities and towns. While the colonial Western influence grew stronger, the Chinese government only became weaker as it failed to address many of the

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emerging urban issues such as housing shortages and public health threats. The Japanese invasion and civil wars had seriously damaged the national economy and the infrastructure of most Chinese cities and towns, further exacerbating these problems. Housing issues were largely ignored and throughout the thousands of pages of statistical yearbooks from the 1930s and 1940s there is no mention of housing and no record of homeownership rates. When the People’s Republic of China was founded in 1949, few urban residential areas had sewage or water systems, and slums were seen in all cities and towns across the country. The housing shortage was so severe and overcrowding resulted in only 4.5 square meters (each square meter is roughly about ten square feet) as the national average living space per person by 1949 (Hong, 1999). In the largest metropolitan city, Shanghai, it was only 3.9 square meters (China Urban Statistical Yearbook Press, 1985). The uneven distribution of housing made the actual living conditions for most people much worse than the above statistics could actually show. At the time, most housing was privately owned, and the real estate market was in chaos. Speculation drove up rents -- in Guangzhou, a major southern city, rent increased by 20 times between 1945 and 1949 (Guangzhou Real Estate Administration Bureau, 1990). It was under these circumstances that the new government took over.

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Transformation of Urban Homeownership from Private to Public (1949--1966) The new government adopted a cautiously gradual approach to the transfer of urban homeownership in order to avoid further shaking of the already fragile post-war national economy. In August 1949, two months before the new government was officially established, a new housing and property policy had already been put in place. While demanding the expropriation of the larger property companies, the new government allowed both homeowners and small rental property owners to keep their private ownership and operate legally in the real estate market (China Planning Press, 1991). Rent control was introduced to tackle speculation in order to stabilize housing market. Landlords could only adjust their rents within a regulated range. Along with the revolution was the ideological belief that public ownership is the fundamental cure for all the diseases of the old society. The Land Reform Act in 1950 abolished the land market by prohibiting land sales and renting, making it impossible for private developers to buy land and build housing. Even building for one’s own use was extremely difficult. By 1956, 95 percent of all urban land was state-owned (Kai-ko Press, 1996). Following the socialist transformation of land ownership was the shift of urban housing from private to public ownership. Landlords with more than 150 square meters of living space in large cities, 100 square meters in medium cities and 50 square meters in small cities were subject to the socialist transformation (The Second Department of Commerce, 1958). Properties exceeding the quota were converted to public ownership at regulated prices, while individuals could still own smaller units (structure only, not the land). The government took over the day-to-day management of large private rental housing operations, including tenant searching, rent setting, and maintenance. Landlords received their ‘rent’ from the public agent instead of their tenants, and therefore the direct linkage between private landlords and tenants

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Zhu Xiao Di, Lan Deng and Hao Hu

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was cut, so private landlords could no longer charge unreasonably high rent. The government gained total control over all rental properties and was able to allocate rental units more equally across the urban population. Individual homeowners who wanted to sublet one or two rooms to supplement their family income now faced strict regulations on how much rent they could ask for. With public management and government regulations, rent speculation was quickly under control and living conditions for average urban residents generally improved by the late 1950s (Construction Administration Department of Shanghai Municipal Government, 1992). The transformation of homeownership and the elimination of the private housing market, however, also threatened the existing urban housing stock. Because landlords were considered “public enemies” belonging to an exploiting class, individuals who had already lost most economic incentives also avoided political risks. Many owners stopped maintaining their property adequately. Some even deliberately destroyed their property and claimed it was lost due to natural forces. By 1964, one billion square meters of floor space was transformed, which accounted for 70 percent of the total rental housing stock. The rest of the housing stock was in the hands of small landlords, who were still under strict rent regulations (China Construction Industry Press, 1992). By the time the Cultural Revolution began in 1966, nearly the entire stock of urban housing was under public ownership. From then on until the early 1980s, the government took on full responsibility for urban housing, including its construction, allocation, maintenance, and management, through either local housing authorities or “work units” of public employers. During this period, housing in urban China was no longer a commodity but merely a component of social welfare.

Slum Clearance and the Construction of “New Villages” When the new government took over in 1949, most large cities had slum areas, and the notoriously unsanitary conditions in these areas were well captured in literary works such as Long Xu Gou by Lao She. The new government took immediate action by launching a broad campaign to clear slums of their unsanitary and unsafe housing. In Shanghai, for example, 90 percent of the slum areas were removed and proper sewerage and water supply systems were installed within three years (Construction Administration Department of Shanghai Municipal Government, 1992). After the initial clearance of slums, the government constructed new public housing in these areas to mitigate housing shortages. These new construction projects were often named “new villages” or “workers’ villages,” and typically consisted of multi-story buildings organized in parallel rows. The planning and design of these buildings and residential communities were strongly influenced by the Soviet model, which had common roots in the Modern City Movement in Europe that believed change in the people’s living environment would lead to change in their social behavior. Such housing styles in China sought to group people into communal neighborhoods and encouraged a collective and socialist lifestyle. The dominant type of housing in these “new villages” was a mix of one-bedroom and twobedroom units, with a typical floor space per unit of 30 square meters, and a communal kitchen and a toilet shared by three or four of the units. Sometimes units contained their own private kitchens and toilets, thus occupants did not need to share usage with other households. Compared with the living conditions prior to 1949, the new type of housing was a remarkable improvement and modernization, and was quickly installed in all large cities. In

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Shanghai alone, more than 360,000 square meters of new village-style public housing was built within three years (Construction Administration Department of Shanghai Municipal Government, 1992). With a population around 5.78 million, (Zhan-wang Press, 1988) nearly 1 percent of Shanghai’s citizens moved into the new-village apartments during those three years, assuming an average family size of four and an average apartment size of 30 square meters. To make rental units affordable and relieve the housing burden for most urban residents, the government set up a low-rent policy. The rent was often only 1 percent of the household expenditure (Kim, 1990), which was apparently not enough to cover the cost of maintenance. Public expenditure on housing soon became an investment with negative returns: the more public housing units constructed, the more subsidies were needed for maintenance.

Specific-Project-Oriented Development and Satellite “Factory Towns” After solving the immediate crisis of a severe housing shortage, the government shifted its attention towards economic development, and housing construction was only a sideshow compared to industrial construction. In order to achieve rapid industrialization and economic growth, the central government empowered its various ministries to build all kinds of large plants and factories on the outskirts of major cities throughout the country. Surrounding these factories, housing units and other facilities such as shops, hospitals, and primary and secondary schools were built for workers and their families. Many self-sufficient satellite towns or “factory towns” were created in this pattern, where employees lived close to where they worked. At the time, people only appreciated the convenience in daily life without noticing the threat of air and water pollution generated by these factories. As large stateowned enterprises, these work units played an ever-growing role, not just a place to work, but also was responsible for all aspects in the life of the employees and their families, from their careers and promotions to housing, healthcare, and even their children’s education. Although the central government provided the initial funding to build the new “factory towns,” thereafter it was the work units that were responsible for the management and maintenance of housing, which had to compete with other items in the budgets of operating these plants and factories. Meanwhile, old central cities were also reconfigured, so that work units such as colleges and universities, municipal governments, and even large hospitals would provide housing for their employees and their families. As a result, a college or a municipal government would often have an adjacent residential compound and sometimes even have a primary school inside the compound. Housing structures in these residential compounds were usually threeto five-story walk-up apartment buildings. Sometimes units were not self-contained, and families living on the same floors had to use hallways as a shared kitchen place. A floor for eight families often would have just one or two shared toilets. But compared with the old housing stock, much of which was not even equipped with facilities such as water taps or toilets, this new housing style provided considerably improved living conditions. Smaller work units had to rely on local governments to provide housing for their employees, as these work units could not afford to build any housing on their own. The linkage between housing and work units was supposed to create a better working and living environment. But as housing was often viewed as a service facility and therefore a burden to the enterprise, it was often not provided with the appropriate resources. More importantly, China at the time chose industrialization without urbanization as its development

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strategy and the prevailing ideology was that large cities represented the evils of capitalism and should not be encouraged for much further development. Its tense relationship with the outside world also emphasized self-sufficiency and self-reliance in case of a war. The “large city panic” and the fear of war even led to a strategic build-up and transition that relocated many large plants and factories from major coastal cities to more inland and rural areas. Housing needs of urban residents in the metropolitan cities were generally overlooked and there was no construction for residential suburbs either.

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Stagnation and Deterioration of the Housing Stock (1966--1978) As the socialist transformation took away homeownership from the urban residents, it became the government’s responsibility to provide urban housing. People had to wait for new allocated public housing if they changed jobs, formed new households, or added new members to their households and therefore needed more space. Things became much worse during the Cultural Revolution launched by Chairman Mao in 1966. The whole country was in chaos and both local and provincial governments collapsed for nearly three years. Industrial production, including urban housing construction, was basically abandoned. Even after the first three tumultuous years of the Cultural Revolution, housing remained a particularly low priority in the nation’s economy. During the time of ideological conformity, improving the quality of life was often stigmatized as bourgeois. “Revolution first, production second” and “working first, living second” are some of the slogans of the time that accurately characterize the fanaticism of the day. While the frenzy went on for years, the nation was undergoing a demographic change largely unnoticed. China’s population, which was only 541.7 million in 1949, had grown to 725.4 million by 1966, and 962.6 million by 1978 (China National Bureau of Statistics, 1997). Baby boomers born in the 1950s and early 1960s became high school students and graduates in the late 1970s. Those living in cities had been forced to relocate to the countryside during the Cultural Revolution, but were now allowed to return to the cities after Mao’s death. But since little housing construction had been done during the Cultural Revolution, the returning baby boomers exacerbated the already severe overcrowding situation. A standard apartment built in the 50s and early 60s had a size of only 20-40 square meters, and now often had to accommodate four to six people. As many of these units did not have independent kitchens or baths or even water taps, the evermore crowded households had to share even more limited space and communal facilities. To accommodate more families, single-family homes built prior to 1949 were often subdivided to accommodate multiple households. Just as most ideals of the communist revolution failed to materialize, the urban housing shortage became even worse than the situation prior to the revolution. By 1978, the average living space per capita was only 3.6 square meters (China National Bureau of Statistics, 2001), even lower than the 1949 level of 4.5 square meters (Hong, 1999), and less than 25 percent of families lived in self-contained units (Lin, 1990).

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Housing Reform Since 1979 Construction Boom and Experiment of Privatization (1979--1985) In 1979, China started the economic reform of its socialist economic model, and gradually shifted from central planning to a market economy. The changes first occurred in the rural areas where peasants were released from collective farming and began to work independently on their own share of public land. Then in the cities, a bigger private service sector was allowed and encouraged to boom. Employees of state-owned work units were free to take second jobs for supplemental incomes. The ideological frenzy was replaced by the new national goal to improve the economy and living standards. Within this context, a large amount of public capital went towards housing between 1979 and 1985, and the nation witnessed an urban housing construction boom that it had never experienced before. Table 1 shows the rapid expansion in housing investments during this period. Table 1. Rapid Increase in Housing Investment in China Year Total Capital Investment Housing Construction Investment Share of Housing Investment (percentage)

1978 47.96

1979 50

1980 55.89

1981 44.3

1982 55.55

1983 59.41

1984 74.32

1985 107.44

3.75

7.38

11.17

11.11

14.11

12.51

13.45

21.52

7.8

14.8

20

25.1

25.4

21.1

18.1

20.0

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In billions of current yuans. Data Source: Hong, 1999.

Government institutions and most state-owned enterprises were the driving forces of the new construction boom. As employers, these “work units” were responsible for taking care of their employees’ housing, but they had largely neglected it for years due to the ideological reasons discussed above. Now with changes in the political wind, they began to fulfill their responsibilities. Decentralization of fiscal and financial control also gave work units more freedom to reallocate their budgets and provide more funding for housing. A few cities were selected to experiment with the privatization of homeownership in 1980. Initially, the price was set to cover only the construction cost of the structure, excluding the cost of land and other municipal fees, and was about 4 to 5 times the average annual household income. Yet, urban residents had little incentive to own their homes because since the 1949 revolution they had only needed to spend about 1.4 percent of their monthly income on rent (Kim, 1990). So the government began to give larger discount: households only had to pay one third of the cost of construction, and local governments and work units would subsidize the other two thirds. By 1985, this resulted in the sales of almost eleven million square meters of public housing units (Hong, 1999). To prevent speculation, buyers of these units did not obtain full property rights, and various restrictions were placed on the timing and procedure of resale. Because work units had to underwrite much of the subsidy for privatization, they strongly objected to it. The experiment also caused a concern that such cheap sales would lead to a great loss in state-owned capital, and the policy was soon repealed.

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18

Zhu Xiao Di, Lan Deng and Hao Hu

Failed Reform on Rent Subsidy and a New Construction Craze (1986--1994) Starting in 1986, experiments began in several cities to increase rent. The Chinese government announced a comprehensive housing reform plan in early 1988. One of its goals was to raise rent to cover the operating costs. But wages were so low that no one could afford such rent hikes, so the government decided to provide housing vouchers. The allocation was based on income instead of the size of the housing, and therefore, whoever had the privilege to have occupied larger space would now have to pay more. The aim of this policy was to correct previous unfairness in housing allocation and was strongly protested by the privileged groups. In a central planning economy, rent was only one of the many items on which the prices had been set too low. As prices were adjusted towards their market values, living expenditures increased rapidly in general. A serious inflation swept the country and in 1988 alone, the urban residents’ cost-of-living index increased by 20.7 percent, and consumers were in a panic purchasing mood. Concerns over social stability and selfish resistance from vested interest groups led the government to suspend its rent-oriented housing reform. By the summer of 1989, political unrest and a government crackdown resulted in a complete halt of any type of reforms, including that of housing. After three years of economic slowdown following the political turmoil in the summer of 1989, the top leadership reinstalled the policy pushing for rapid economic growth. Even the constitution was revised to promote something called “development of a socialist market economy.” Almost overnight, the nation was in a frenzy of making money quickly. Development was the buzzword of the day, and millions of deals were struck to build almost everything. New plants, factories, office towers, and apartment buildings mushroomed throughout all major cities. The GNP growth rates in 1992 and 1993 were as high as 14.1 percent and 13.1 percent, respectively. Part of the growth came from “commercialized” housing development, housing units developed by newly established development firms to be sold on the market for profit. Total sales revenues increased 80 percent in 1992 and 55.6 percent in 1993. Many of the development firms were actually created by the state-owned enterprises or institutions, i.e. the work units. Even if a private individual held the title of the firm, the development money came from the state-owned banks. The national investment put into commercialized housing was 113.8 billion yuan in 1993, conspicuously 125 percent higher than in 1992 (Hong, 1999). Such a commercialized housing development was only possible because large work units now became major buyers, purchasing over 70 percent of all the units on the market. Because these work units could use soft money, the extra-budgetary fund, to buy housing for their employees, the new housing on the market soon became so expensive that few urban families could afford to buy them on their own. As a result, the new housing market was often a place where large amounts of money changed hands from the public (work units) to a few individuals who had set up private development firms using public money as the initial capital. In the name of “deepening housing reform,” many work units sold the newly purchased housing units to employees at cheap prices, sometimes less than 15 percent of the purchase price. Due to the lack of regulations and an unreliable legal system, the privatization process was manipulated by interest groups “to gain advantage for themselves, and to benefit from the conversion of the advantages that they possessed under socialism into private ownership rights in the new regime” (Harloe, 1996, p. 17).

Three Models of Public Housing in the 20th Century

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When the government decided in 1994 to cool down the economy by tightening the control over budgets, work units no longer had the resources to buy housing units, and the demand for commercialized housing went down. Many completed units stayed vacant for years, and the firms that developed these projects went bankrupt. As a result of such overbuilding, 70 million square meters of new units were vacant by 1997, even though three million urban families still lived in over crowded conditions of less than 4 square meters per person (Su, 2000). Housing reform between 1979 and 1994 aimed to address two thorny problems left by the old public housing system: the severe housing shortage and the heavy burden of housing subsidies to maintain the existing public housing stock. Figure 2 summarizes the reform measures and processes during this period. As shown on the right side, reform measures produced more housing units, first by work units and then by commercial developers. After work units purchased these housing units, the public housing stock increased. On the other hand, because governments are responsible for managing and maintaining public housing units, more public housing units only meant a heavier financial burden for the government. Thus, privatization and rent reform were also adopted in an attempt to relieve this financial burden, as shown on the left side.

Figure 2. Process of Public Housing Reform in China (1979-1994).

Rent reform was very difficult to carry out and the initial experiment with privatizing public housing through deep discounts did not help relieve the burden of these subsidies. While housing shortages were alleviated to a certain degree, the burden of housing subsidies became too heavy. In 1978, when the average living area per urban resident was 3.6 square meters, the annual housing subsidy was 28.08 yuan per capita. By 1995 when the average living area per urban resident became 7.9 square meters, the annual housing subsidy rose to 1,960 yuan per capita. Even after adjusting for inflation, the subsidies were about sixteen times higher, representing 59.6 percent of the total subsidy in government budget (Dong et al., 1999).

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Zhu Xiao Di, Lan Deng and Hao Hu

Towards Market and Private Housing (Since 1994) Despite the high vacancy rate of commercialized housing and the bankruptcy of many real estate development firms, China’s government was determined to continue its housing reform. In addition to a large-scale transformation of the existing housing stock from public or work unit ownership to private ownership, it also issued a series of policies to encourage urban households to purchase new housing units on the private market. Three measures have been taken since 1994 to facilitate this transition: supply-side subsidies, financial mechanisms to help buyers, and demand-side subsidies. Figure 3 summarizes China’s housing reform measures since 1994.

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Figure 3. Housing Reform Measures Since 1994.

Building Economic and Comfortable Housing (ECH) To keep housing affordable for the majority of families, the Chinese government decided in 1994 to develop Economic and Comfortable Housing (ECH), a form of subsidized commercialized housing for middle and low-income families. ECH is different from both previous public housing and private housing initiatives. First, all the ECH units were developed for sale, not for rent, so that the government could be saved from having to subsidize operations of these housing units. Second, they were built by for-profit real estate developers and sold to middle- and low-income families through market transactions. The ECH developers received government subsidies such as free or cheap land, and exemptions from fees and taxes. In exchange, local governments regulated the sales price of ECH units to restrict developers’ profit to less than 3 percent. Therefore the prices of ECH units were usually 15 to 20 percent lower than market prices (Liu & Xie, 2000). With government promotion, the construction of ECH took off successfully and the scale of production expanded rapidly. By 1999, ECH accounted for about 60 percent of all new housing construction in terms of completed construction area (Liu & Xie, 2000). ECH advocates hoped that it would cover 70 percent of all urban households, leaving no more than 30 percent of urban households as consumers of regular market-price housing units, either as

Three Models of Public Housing in the 20th Century

21

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owners or renters. Others challenged this idea, insisting it was "a serious policy mistake to limit the scale of housing commercialization to a small group of residents, while promising the majority with 'social security housing’.” (IFTE, CASS and IPA, 1996, p. 147). To opponents, such a policy would prevent further housing reform and force people to continue to rely on the government instead of the market for housing. One indisputable fact is that the regular market-housing price has gone down remarkably since the construction of ECH. In Beijing, for example, the construction of ECH has reduced home prices by about 1,000 yuan per square meter at the time, almost a 25 percent drop (Liu & Xie, 2000).

Introducing Financial Leverage Since 1979, bank loans have played an important role in stimulating China’s housing construction. It certainly contributed to the oversupply of commercialized housing in the early 1990s. Until 1994, loans were only available for housing development, not for home purchases. After nearly fifty years of its absence, mortgage banking was reintroduced in China in 1994. Initially, both banks and families were unfamiliar with how to use loans to bridge the gap between high housing prices and their low family income. But after several years of experimentation, people are now becoming more comfortable with taking out home mortgages with loan terms even as long as 30 years. Without insurance mechanisms in place to reduce the risk and cost of home mortgages for lenders, home mortgages remained only a small portion of all loans. By the end of June 1998, banks’ total housing loans were 264.3 billion yuan, of which only 35 billion, about 13 percent, were for home mortgages (Han, 1999). Another mechanism for financial leverage is the Housing Provident Fund (HPF), established in Shanghai in 1991. This was modeled on Singapore’s Central Provident Fund (CPF), which is a compulsory retirement savings program in which both employers and employees contribute about 20 percent of the employee’s salary. In China, each party is required to contribute only 5 percent of salaries to the HPF account. By 1995, 35 cities had established Housing Provident Funds (Wong et al., 1998), and by 1998, the aggregated HPF accounts reached 120 billion yuan. However, such HPF accounts only provided 1.5 percent of the required funds most urban residents needed to purchase housing (Han, 1999). In March 1999, the Chinese government issued an ordinance to increase the efforts and availability of the Housing Provident Fund, and most cities have now established such funds. The transformation of the CPF fund in Singapore into China’s HPF fund demonstrates how a nation that shares a similar culture can effectively influence Chinese housing policy and reform (Wang & Murie, 1999). Phasing Out Work Units as Housing Providers For years, work units have been providing housing for their employees. While continuing to construct new housing units, work units also became major buyers of commercially developed housing units. In 1996, for example, two thirds of the 301 million square meters of new units were either built or bought by work units (Dong et al., 1999). As long as people could get housing from their work units for almost no cost, they would not buy housing even if they could afford to. The great purchasing power of work units also caused housing prices to skyrocket. Despite the help of home mortgages and HPF funds, few families could afford market price housing. In 1997, the average ratio of market housing price to annual family income was about 8.3. In some metropolitan areas, the ratio was much

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Zhu Xiao Di, Lan Deng and Hao Hu

higher; in Shanghai, the average price of a unit was around 340,000 yuan but the average annual income of a middle-income household was only 22,300 yuan, producing a ratio of housing price to household income as high as 14.96 (Wang, 2001b). It was even worse in Beijing, with this ratio up to 15.4 (China National Bureau of Statistics, 1999). In July 1998, the Chinese government announced a new policy, forbidding work units from building or buying new housing units for their employees. Instead, it would let employees get direct monetary subsidies from their work units to buy homes on the market. The rationale was that developers would then make money and reinvest in housing development while work units would be relieved of the responsibility of providing housing and therefore concentrate on their main businesses. The announced policy change met considerable resistance before its implementation and yielded quite unexpected results. While the existing regulations allowed work units to spend soft money on constructing or purchasing, work units could not give away this soft money in cash to their employees, thus actually decreasing the amount of work-based support available to employees. Work units rushed to buy more units and allocate them to their employees before the new policy came into effect, a behavior known as “catching the last train.” This actually created a strong new demand that not only helped absorb the vacancy of commercialized housing but also helped stimulate new construction and increase domestic consumption overall, which had been declining since the Asian Financial Crisis of 1997. If the new policy became effective as announced, this last-minute strong demand would disappear and cause a new round of housing oversupply. Considering the importance of maintaining a stable housing demand to stimulate the economy, the government had to postpone several times the deadline for implementing the new policy. The policy was also revised to allow some work units to continue building new housing. State-owned enterprises that were losing money and could not give their employees housing subsidies, but that might still have vacant land for new construction available, were allowed to contribute the land and collect money from their employees to build housing. Thus, local governments were given the power to decide when to implement the new policy based on local conditions. As a result, according to a survey by China’s Construction Ministry, the new policy was in effect by 2000 in only about 30 percent of all cities, with about 40 percent still finalizing their plans, and the remaining 30 percent had no clear plans yet (Liu & Xie, 2000). As work units were banned from allocating free public housing to their employees, market housing became the only option for most urban households.

Fixing and Retaining the Rental System While reforming the housing provision system, the efforts to raise public housing rent continued. In April 2000, the Construction Ministry announced that minimum rents for public housing would increase from 1.3 yuan per square meter to 3.05 yuan, still far below the 10 to 20 yuan needed to cover the operating costs and match up with the housing price. Between 1999 and 2000, 36 large and medium size cities had already increased their average public housing rent from 1.67 to 2.20 yuan per square meter, an increase of about 32 percent (China's Ministry of Construction, 2001). By 2001, the average rent of public housing across the country was about 1.75 yuan per square meter (China's Ministry of Construction, 2001). In most provinces, for two-worker households, rent was more than 6 percent of the household income, and sometimes more than 10 percent (The Office of China’s Planning Committee, 2001). While rent was still subsidized by the government, it was already quite a burden to

Three Models of Public Housing in the 20th Century

23

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low-income households as their expenditures on food, healthcare, and education had also increased considerably. The rent reform was still very much constrained by the tenants’ incomes, which tended to be even lower after higher-income families have become homeowners. To help low-income renters, China began to establish a Social Rental Housing system, which benchmarked a significant change in housing policy from twenty years of focusing only on reducing government subsidies and promoting housing to stimulate the nation’s economy. It seemed that the increasing income gap among urban residents had finally received the government’s attention. As for privatization, over 77 percent of the public housing stock has been privatized. Large cities in about 22 provinces have allowed the resale of privatized public housing on the private market. Shanghai was the earliest and the most aggressive in resale. Even there, however, the portion of resold units was only 5 percent of the total privatized public housing units (Xie, 2001). Plus, property rights arrangements surrounding individual privatized units were often not clearly defined. In order to accomplish the goal of reducing or ending the burden of managing public housing, privatization prices needed to be low enough for sitting tenants to purchase their units. For those without the resources to buy at a price carrying full property rights to the unit, a lower set of prices was established under which ‘use rights’ (including the ability to inherit them) to the unit were sold but the state or work units retained a claim to capital gains on sale of the unit (Wang and Murie 1999). Furthermore, ironically, after two decades of privatization, the Chinese government has now realized that the public housing stock could have become an excellent source for the social rental housing system it tries to establish. Thus, modest efforts have been taken to preserve some of the units in public ownership.

Results of 20 Years of Housing Reform So far, China has not fully established a functional private housing market to satisfy the majority of housing demand yet, and the market price remains far beyond the reach of most urban families. Although home mortgages have now been accepted as the main vehicle to finance housing purchase, almost all the mortgages are held by the financial institutions who originate them. There is no secondary mortgage market in China. As a result, due to the concern about liquidity and default risks, strict restrictions have been placed on borrowers. For example, in 2006, the Chinese central government required residential mortgage down payment to remain at least 20% for households purchasing units less than 90 square meters. For those who wish to buy larger units, or buy second houses, the down payment must be at least 30%, or even 50%. There are no mortgage products tailored to low-income households or households who do not have stable jobs. The aforementioned Housing Provision Fund (HPF) is not available to these households either since it requires employers’ contribution. Even for those that are signed up in the HPF system, the ability for HPF fund to meet their credit needs also varies significantly from employers to employers. Wealthy work units often contribute a lot more to their employees’ HPF than budget constrained work units, exacerbating the income inequality among urban households. Management of the HPF fund is also a challenge; rigorous restrictions have been imposed on its investment in response to widespread corruption. Along with the fund set aside for housing maintenance and the revenues from the sale of public housing units, the HPF fund can no longer hold investments in the stock market but only in bonds issued by the

24

Zhu Xiao Di, Lan Deng and Hao Hu

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central government. Nevertheless, some preliminary evidence shows owners that are beneficiaries of the program were more likely to purchase larger homes and enjoy more living space per person than other owners (Duda et al., 2005). The transition to and the development of private housing have already turned 50 percent of urban households into homeowners, even though a large portion of this has been achieved through a deeply discounted price (UBS Warburg, 2001). The living conditions of most urban Chinese households have also been greatly improved; by 2000, urban residents’ living area per capita was already up to 10.3 square meters (China State Statistics Bureau, 2000). As two Westerners once observed, “The Chinese government has provided an average household with as much as in far more prosperous Hong Kong. The slums of the developing world cities are largely unseen in mainland urban areas. China’s housing policymakers therefore have much to be proud of” (Hamer and Steekelenburg, 1999, p. 91). The soundness of this impartial evaluation remains today. Thanks to the continuous economic prosperity the country enjoys for almost three decades, many urban households were able to purchase market price housing. Ironically, as the housing price has been driven up by this newly released demand, more and more urban households have started to worry that if they do not buy today, housing prices will soon rise beyond their means and they will never be able to afford a home. As a result, these households have also rushed to the market, adding fuel to the fire. From 2005 to 2006, housing price increased by about 6% nationwide.2 The growth was even faster in many large cities. Housing affordability in China went from bad to worse. Nationwide the ratio of housing price to annual family income averaged about 7.8 in 2006,3 quite high compared to standards in other countries, for example in the United States. The ratio of typical home value to annual household income in the U.S. jumped from only 3.1 to 4.6 during the latest home price inflation between 2000 and 2006 while having been kept at no more than 3.1 for two decades between 1980 and 2000 (Joint Center for Housing Studies, 2007).

PUBLIC HOUSING IN SINGAPORE Compared to other nations or large cities in the world, public housing in Singapore has achieved impressive results. Singapore had a serious housing shortage following its rapid population growth in the 1950s, resulting in about 80 percent of the population living in slums in the central area of the city. The post-colonial government responded with a rapid and innovative expansion of public housing and achieved admirable results. Within the next 40 years, Singapore built over 920,000 public housing flats, providing housing for over 80 percent of Singaporeans since 1985. Nine of ten households living in public housing now virtually own their units through a 99-year lease officially called the “Home Ownership Scheme.” The development of public housing first began in 1960 with the creation of the Housing and Development Board (HDB). In its early years, the HDB focused on building housing units for low-income households. Responding to the immediate housing needs addressed in 2

www.chinadataonline.com, a website published by All China Marketing Research Corporation and authorized by the China National Bureau of Statistics. 3 Ibid.

Three Models of Public Housing in the 20th Century

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the 1970s, the HDB’s attention shifted to improving the quality of public housing. In the 1980s, communities of self-contained townships helped increase the available housing options. From 1989 onwards, town councils replaced the HDB in the daily management of public housing stock. Singapore also launched upgrading programs in early 1990s to renovate and improve the public housing stock in the older towns. Singapore has also created an innovative finance structure for public housing. The backbone of its public housing finance is the Central Provident Fund (CPF) scheme, a forced saving program contributed to by employees and employers. Also, the government supports public housing construction in the form of loans and grants. As a result, most households now only need to pay 20 percent or less of their incomes to be homeowners. Most public housing units in Singapore are in high-density, high-rise structures, which enable optimal use of its precious land resource. Singapore’s experience shows that this kind of development can be successful if it is efficiently and comprehensively planned and creatively designed.

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Colonial Historical Background The Republic of Singapore is a small island with 64 surrounding islets, which together occupy a total area of 682.7 square kilometers. It is situated at the southern tip of the Malay Peninsula, just 1º north of the equator. The population of Singapore is a multi-racial mixture of 3.2 million people. Singapore obtained internal self-government in 1959, and gained full independence from Britain as a part of Malaysia in 1963. On August 9, 1965, it was separated from the rest of Malaysia and became an independent sovereignty. By 1999, Singapore achieved an annual income of $29,610 per capita, ranking it as one of the highest in the world (World Bank, 2000). By 1990, more than 85 percent of its people live in public housing flats, and 68 percent of households in Singapore live in units of at least 4 rooms and 1,000 square feet or larger, either in public or private housing (MITA, 2001). Public housing programs in Singapore can be traced back to 1927 when the colonial government founded the Singapore Improvement Trust (SIT) to alleviate overcrowding in the central area. In 1936, the SIT began to construct Singapore’s first low-cost public housing satellite town. After the World War II, the SIT resumed the program of low-cost flats for lowincome households (Gangatharan, 1990). However, during its 32 years of existence, the SIT only built 22,115 housing units (HDB, 1997). As the population rapidly grew in the 1950s, the problems of housing shortage and overcrowding were compounded by the fact that about 80 percent of the population lived on about 20 percent of the land in the southeastern sector of the island. Through the Housing & Development Act passed on February 1, 1960, the new autonomous government set up the Housing and Development Board (HDB) to replace the SIT as a statutory board. Since then, the percentage of the population housed in the HDB flats has increased steadily from 9 percent in 1960 to 87 percent by 1990 (See Figure 4).

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Zhu Xiao Di, Lan Deng and Hao Hu 100

3500 87%

86%

90

81% P opula tion in S inga pore (,000)

67%

70 60

2500 46.8

50 40

2000 34.6

30

23%

P opula tion in HDB fla ts(%)

80

3000

20

1500 9%

10

1000 1960

0 1965

1970

1975

1980

1985

1990

1995

2000

Ye a r E s tim ated resident population in S ingapore E s tim ated resident population living in HDB flats

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Data source: HDB, 2000, HDB’s Annual Report 1999/2000; Singapore Department of Statistics. Figure 4. Population Housed in HDB Flats.

The Importance of HDB In its early years, the HDB’s task was simply to build low-cost housing for low-income people. To do this, the HDB constructed high-rise high-density blocks of one- to two-room units, which were then rented out at subsidized rent to those who qualified for public housing. Over the years, however, the HDB’s role has expanded. The Land Acquisition Act of 1967 allowed the government to compulsorily acquire private land for public housing or other development programs. The act enabled the HDB to clear slums and build new and comfortable HDB flats in their place. Table 2 displays the number of housing units built over the past 40 years. In 1964, the HDB started promoting homeownership. Entering the 70s, it improved the quality of its housing stock, continued to promote homeownership, and cleared slums in the central area and replaced them with high-rise luxury apartments and commercial development. Since the 80s, the HDB has built communities of self-contained townships with

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Table 2. Public Housing Statistics Years 1927-1959 (SIT) 1960-1965 1966-1970 1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 Total

Dwelling units built 22,115 53,777 63,448 110,362 130,981 189,299 119,708 98,994 157,919 946,603

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Source: HDB, 2001, HDB’s Annual Report 2000/2001.

schools, police and fire stations, libraries, community centers, playgrounds, shops, offices, sports facilities and parks. Today, in addition to planning and developing affordable and quality public housing, the HDB also builds commercial, recreational and public premises, provides infrastructure facilities, clears land for development, reclaims land for new development, sells and rents flats, and take care of the nation’s housing estate in general (Lau et al., 1997). Table 3 illustrates the scope of the HDB’s work. The homeownership initiative started in 1964 encouraged people to purchase public housing units in the form of long-term leases of up to 99 years. The purpose of the scheme was to give citizens an asset in the country and to use the house as a means of financial security to hedge against inflation (Tan, 1998). Home ownership was also viewed as helpful to the country’s overall economy and its social and political stability. This is quite similar to the beliefs in the United States, where homeownership is claimed to be “the cornerstone of family security, stability and prosperity” that “strengthens the nation's communities, encourages civic responsibility and provides a solid foundation from which Americans can work to support their families, enhance their communities and achieve their personal goals” (NAHB, 2001). Singaporeans can stay in public housing flats either as renters or owners, though many measures are available to help more families own their homes. Low-income families can rent 3-room flats from the HDB and buy them later when their financial situations improve. When available units cannot meet the demand, waiting low-income buyers can rent from the HDB at prices about 30-50 percent lower than those in the rental market. Sitting tenants received priority in purchasing their units as well as discounts. Only very high-income families are not eligible for public housing. The income qualification limit is frequently reviewed to ensure that 90 percent of its population can enjoy the benefits of public housing. The monthly income ceiling in 1998 was $4,700 for a nuclear family and $7,000 for an extended family (Tan, 1998).4

4

Assuming 1US$=1.70 S$.

28

Zhu Xiao Di, Lan Deng and Hao Hu Table 3. Cumulative Achievements by HDB (1960-1999)

Building Projects Residential Commercial

Industrial

Sports and Recreational

HDB or Government /Institutional Engineering projects

Dwelling units Shops and eating houses Markets and food centers Offices Kiosks Industrial workshops Terrace workshops Wholesale/Warehouses Flatted/Ramp-up Factories Prototype Factories Canteens/Eating Houses Swimming complexes Sports complexes Indoor stadiums, training halls and sports halls Town gardens and parks Civil defense shelters Area offices and branch offices Community centers Bus interchanges Completed land reclamation

Units Completed 929,007 16,248 209 1,882 733 5,884 4,802 1,242 1,798 207 58 18 12 9 64 446 63 43 25 2,801 hectares

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Data Source: HDB, 2001, HDB’s Annual Report 2000/2001.

As public housing units are rented, sold, or resold, efforts have been made to keep the racial composition in each housing block roughly equal to that of the national population. By design, relatively few and smaller rental units for low-income households are blended with larger owner-occupied units, and different sizes of units are blended within the same block in order to prevent income segregation. Meanwhile, each housing type has an income ceiling, and higher income households are not eligible to purchase lower type of housing. After owning a public housing unit for several years (currently it is regulated as 2.5 years), the owner is permitted to sell the flat to anyone eligible for public housing at the market price, which is usually 50-100 percent higher than the original purchase price set by the HDB. Sellers can either upgrade their housing by applying for a larger flat from the HDB or buying private estates, or moving to a similar or smaller flat to keep their capital gains. But each eligible household can only buy subsidized flats directly from HDB twice. After using up its quota, it has to buy public housing flats from the resale market or buy private housing units. Table 4 outlines the eligibility to purchase HDB flats in Singapore. The HDB receives funding from the Singaporean government in the form of both loans and grants. There are two types of loans from the government: the housing development loan, which covers development and operating costs, and the mortgage financing loan, which

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Table 4. Eligibility Conditions for Purchase of HDB Flats Flat Type

Floor area (sq m)

3-Room

69

4-Room

100

5-Room

120

Eligibility Conditions Buying a Flat Direct from HDB Singapore Citizen; At least 21 years of age; Have a nuclear family; Total household income not more than $1500 per month for 3-room flat / $8000 per month for 4 & 5-room flats. Must not own any private residential property.

Buying a Resale Flat on the Open Market Singapore Citizen or Singapore Permanent Resident; At least 21 years old; Have a nuclear family; No income ceiling.

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enables the HDB to grant mortgage loans to buyers. The HDB has thus actually taken on the dual role of both a developer and a banker. Since public housing in Singapore is heavily subsidized and sold below its cost, the HDB also receives an annual grant from the government to cover the net deficit incurred for its public housing activities. By 1999, the sum of the accumulated grant from the government had reached $35.24 billion5 Figure 5 demonstrates the financial structure or relationship between the HDB and the government.

Figure 5. Loans and Grants from Government to HDB.

5

Assuming 1US$=1.70S$.

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Zhu Xiao Di, Lan Deng and Hao Hu

The Functions of the Central Provident Fund

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Another important factor that helped increase homeownership was the Central Provident Fund (CPF), set up in 1955 by the colonial government to provide financial security for retired workers or those who are no longer able to work. Over the years, it has evolved into a comprehensive social security system, which takes care of retirement, homeownership, healthcare, and education. The CPF is simply a forced savings program: a certain percentage of an employee’s income, including both salary and bonus, is placed in his or her CPF account (currently the contribution rate is 20 percent). The employer is also obligated to contribute to the employee’s CPF account (usually a similar percentage to the employee’s). The government also contributes to the CPF account as an award in a fiscally “good” year, with lower-income people given proportionally more. At the end of FY 2000, a total of $1 billion had been distributed to Singaporeans in the form of government contributions to CPF (MITA, 2001). The homeownership rate rose after the Central Provident Fund (Amendment) Act of 1968 allowed people to use their CPF savings for their down payment and monthly mortgage to buy HDB flats. Purchasers can choose between mortgages of 5, 10, 15, 20, 25 or 30 years. The HDB interest rate for mortgages is set at only 0.1 percent above the floating CPF interest rate and therefore still lower than the market rate. Families are allowed to withdraw up to 75 percent of their monthly contribution to their CPF accounts to pay for public housing. People can buy the HDB flats without mortgages if they have enough savings or cash. Even if they have to finance it through an HDB mortgage, their cash flow from the CPF accounts may often be sufficient enough to cover their mortgage payment. This makes ownership even more attractive, for it does not reduce disposable monthly household income. The CPF policy thus provides double mortgage insurance to the owner-occupied public housing units: It guarantees that homebuyers can pay their housing mortgages taken out from the HDB, and that the HDB as the developer will get back its investment in the housing projects. Figure 6 shows structurally how the CPF helps Singaporeans own their HDB units.

Figure 6. CPF Helps Singaporeans Own Their Homes.

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Table 5 shows two examples of the typical purchases of HDB flats. Families could end up paying no cash yet owning their HDB units if they have already contributed enough to their CPF accounts. Table 5. HDB Flats Purchase Examples Monthly CPF Allowed Down Family Monthly CPF Flat for Public Price payment Income Type Contribution Housing s 4-Room $138,000 $27,600 $2,500 $1,000 $750 5-Room $232,000 $46,400 $4,000 $1,600 $1,200

Monthly Installment for Repayment of 25 years $560 $941

Note: Data used in this table are in Singapore dollars and assumed according to the current market price and average household income. 1 US$ = 1.70 S$.

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A Few More Recent Trends Recently constructed public housing in Singapore is more decentralized and located in various towns. By design, different sizes of flats for households of different income levels are located in the same block to reduce income segregation (Chua, 1988). In particular, rental flats for low-income households are mixed with the majority of owner-occupied flats. Altogether, Singapore now has about 25 towns. A town is comprised of 5 to 7 neighborhoods, each with 2 to 4 precincts. Each precinct is composed of 4 to 8 blocks, with about 100-200 housing units in a typical block. The average family has 3.9 people. The development of a town takes about 5 to 10 years to complete, and about 12 percent of Singapore’s land has been allocated for residential use (Tan, 1999). With a reduced demand after most of the population has been housed, the HDB has slowed down its pace of public housing construction. The number of housing units built has dropped from 36,609 in 1998 to 34,836 in 1999 and 27,678 in 2000. More attention has been given to upgrading and redeveloping older housing. In March 1992, HDB launched the 15-year Main Upgrading Program (MUP) to improve the real estate assets of its residents and to give them a higher quality lifestyle. Improvement work has been done at the precinct, block, and unit levels. The flat owners can opt to add space, such as a new utility room, an additional toilet, a new balcony, or extend their kitchen or living room. The government subsidizes up to 92 percent of the cost of upgrades for Singapore citizens (HDB, 1997). Starting in 1990, the Singapore government shifted its policy to provide better quality housing with a greater variety of housing forms. In the early 1960s, the demand for private housing was restricted to the few affluent people. Private developers constructed bungalows, semi-detached houses and terraced houses for the rich. But in the 1970s, steady economic expansion led to the growth of a middle class with a greater demand for private housing (Sim & Yu, 1992). Many of them were too rich to qualify for public housing but too poor to afford the traditional private housing on large lots of land. Because land-constrained Singapore required a more economical and efficient residential land use, the government promoted condominiums to help preserve green and open space for recreational facilities and other

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communal amenities. Between 1983 and 1988, about 173 country-club style condominiums with approximately 16,600 units were completed (Sim & Yu, 1992). The government also promotes courtyard-style cluster housing and high-density low-rise townhouses as alternative forms of private housing. These new types of private housing and condominiums now account for 80 percent of private housing while the traditional landconsuming types only account for 20 percent. Since 1990, the Singapore government has experimented with a couple of ways to privatize public housing (Tan, 2000). The first is to convert the leases of some existing semipublic housing units into private titles. These units were developed by the Housing and Urban Development Corporation (HUDC) and incorporated as a private company in 1974 to provide housing for those whose total household incomes exceeded the income ceiling for HDB flats but who were unable to afford private estates. The HUDC was dissolved in 1982 and its units were transferred to the HDB. The second is called the Executive Condominium Housing Scheme. Owners of these condominiums have strata titles, but for the first five years they have to occupy the units. After that, these flats can be resold to Singaporeans or permanent residents. Ten years later, they will be fully privatized and can be sold to foreigners. Unlike the old private housing, all the new private housing units were integrated with public housing. The government achieved this shift by selling more land in the new towns to private developers. Meanwhile, as the HDB continues to improve the quality of its products; the physical differences between the high-end HDB units and the private housing units are gradually disappearing. Increasing wealth has generated a demand for more, better quality, and more diverse private estates (SNP and JLWP, 1997; Tan, 2000). The difference in the legal rights between private and public housing has also contributed to the continued interest in private housing (Tan, 1998). Many tenants in public housing have upgraded to private properties and even more want to do so. In 1995, owners of 2,300 HDB flats moved out to private properties; in 1996 that number rose to 2,600. The Singaporean government is planning to reduce the percentage of high-density public housing from currently sheltering 86 percent to 75 percent and then to 65 percent of its people in the future. Meanwhile, the share of medium- and lowdensity private housing will increase to 25 to 30 percent, with 5 to 10 percent remaining semipublic housing (Straits Times, 1996). Behind this shift from public housing to private housing is the fundamental ideological change that corresponds with a worldwide trend of shifting towards a more market-oriented economy. Thus, even in Singapore, concerns are emerging regarding the efficiency of the existing housing supply system. Some scholars, for example, started to question whether the dominance of public housing has led to an underdevelopment of the private housing sector in Singapore (Chua, 1997). As more and more households can afford to live in private housing, it is not clear whether the government should continue to provide public housing for a very large population, or it might just be a waste of public resources. Have some of the households become so used to public housing that they did not have the incentive to move to private housing? Finally, what are the consequences of a restrained private sector? Has the undersupply of private housing resulted in speculation and an inflated housing price in private market? Such concerns led to a recent shift of rolling back in public housing and expansion of private housing. Yet, on the other hand, critics of this recent trend of public-to-private housing mobility and consumption has pointed out that this “may prove to be a new form of

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inequality within homeownership” and asked: “how realistic is it to continuously increase the stock of private housing” (Yuen et al. 2006). In short, Singapore also faces new housing challenges that will further test the government’s creativity in providing decent housing in a tiny country facing severe land constraints. One particular challenge is to address the housing needs and tastes of an increasingly diverse population. Can it satisfy the demands of an affluent younger generation, while at the same time, take care of the large number of aging seniors? How can it deal with the rising income gap in the society and continue to provide affordable housing for lowincome families (Asher and Nandy, 2008)? As a matter of fact, in order to maintain the competitiveness of its economy under the pressure of globalization, the Singapore government has decided to reduce gradually the contribution of employers to the CPF system. Currently the employee’s contribution is still 20% and that of the employer’s is just 13%. The government believes that Singaporeans have to rely more on themselves than in social welfare. However, simulations once showed that the adequacy of CPF is a problem, given the rising home price and medical care cost with changing demographics towards a “gray” society (Chen et al. 1997). How to reform the CPF policy to be sustainable becomes an issue. Nevertheless, one could hardly deny Singapore’s remarkable achievements in public housing during the past four decades.

DISCUSSIONS With the above historical review of international perspectives, we are ready to discuss three issues: •

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• •

Affordability and sustainability: what does Singapore’s innovative public housing financing have to offer in helping solve that dilemma? The past and the present: how should current reforms be shaped by historical experience and existing political structure? Possibility and feasibility: could nations learn from each other after all?

Affordability and Sustainability: What Does Singapore’s Innovative Public Housing Finance Have to Offer in Helping Solve that Dilemma? Public housing was a response to a housing shortage and an affordability crisis, but sooner or later the dilemma developed between low-income families’ desire to live in decent housing and the sustainability of government programs to achieve that goal. This occurred in two of the three nations we have studied. In China, the response after the 1949 Revolution was complete public urban homeownership, rational distribution, and rent control, after some initial slum clearance and construction of new apartments. It worked for a short period but was not sustainable. The political turmoil and economic slowdown during the Cultural Revolution only made things worse, but even afterwards, the well-intentioned new construction by work units for their employees during the 1980s could only help relieve the housing shortage temporarily. It was not sustainable and work units soon ran out of resources.

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The policy shifted to market oriented private housing since 1998. While this policy successfully helped over 50 percent of urban households achieve homeownership, the market home price soon became unaffordable for those who did not benefit from the one-time sellout, which came at a heavy discount. The ratio of housing price to household income, an indicator commonly used to evaluate the housing affordability, has been greater than 10 through the 1990s in Shanghai, much higher than the reasonable range of 3 to 6 (Tian, 1998). In the United States, housing shortages affecting the poor in inner cities triggered the 1949 Housing Act, which had a goal to provide decent housing for every individual. To make housing more affordable, the government put ceilings on rent that public housing tenants had to pay and enforced a low-income requirement. Local housing authorities consequently did not have sufficient revenues for proper maintenance and public housing units deteriorated rapidly. In more recent years, funding for low-income housing became more diverse and included federal grants matched by state and local resources, tax incentives and CRA bank loans for developers, and Section 8 vouchers. But the basic affordability and sustainability dilemma still exists, and a shortage of affordable housing stock is inevitable as over one million apartments through Section 8 contracts are facing impending expiration (Bodaken, 2001), and the preservation of affordable units remains quite a challenge. The booming housing price during the recent past years further eroded affordability for middle and lowincome households. Singapore’s response was quite different, and its expanded public housing dramatically covers over 80 percent of its population. With the average price of a 4-room new public unit of 1,000 square feet at about S$140,000 (HDB, 2000) and an average household income of S$4,940 per month in year 2000 (Singapore Department of Statistics, 2001), housing price was roughly 2.4 times of the average annual household income. And housing cost was generally less than 20 percent of the average household income (HDB, 1998). Although housing in Singapore may not be as spacious as what private housing provides in the United States, the success of Singapore’s public housing is quite impressive. One of the reasons that housing affordability is sustainable in Singapore is its innovative financing for public housing. Thanks to the accumulation through their CPF accounts, many homebuyers can easily afford the 20 percent down payment. In contrast, despite its large, efficient, and flexible housing finance, about one in five first-time homebuyers in the United States had to rely on receiving financial assistance from relatives, mostly from parents, to help them meet the down payment requirement (Di and Yang, 2002). The CPF in Singapore assists homeowners beyond the down payment, and many households use cash from their funds to cover their monthly mortgage payments. The HDB plays the role of a developer and a banker, receiving the development loans to construct new public housing units and paying back through selling the units, while receiving the financing loans to help purchasers and paying back as homeowners pay their mortgages. Because those units are sold at a discounted price, with the agency subsidizing the upgrading of old estates, the HDB has to receive an annual grant from the government to cover its deficit. But the efficiency of such public financing is still remarkable. Two factors notably contribute to Singapore’s success. First, the strategy of building up a large public housing stock has the advantage of economy of scale. Second, most public subsidy in Singapore went towards sales of public housing units rather than the maintenance of rental units. As households become owners of public housing units, the government no longer needs to carry a rental subsidy. In contrast, as China enlarged its public housing stock,

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rental subsidy increased sixteen times between 1978 and 1995 (inflation adjusted). If the United States had expanded its public housing program, it would have come across the same problem in terms of subsidy for operational cost, unless it took the Singapore model or focused on the HOPE program type that promotes homeownership among low-income households. The promotion of both public housing and homeownership in Singapore benefits public housing dwellers in the form of capital gains. They can sell their units in resale market after they have occupied the units for a certain time. Purchasing directly from the HDB costs only about half of the resale market price. As all Singaporean households have the right to purchase public units directly from the HDB twice in their lives, it is a fair policy and poses no particular harm to the low-income people. In the United States, on the contrary, while most homeowners can use housing to accumulate wealth (Di, 2001; Di et al., 2007), those lowincome homeowners can hardly do so, because there are restrictions on how and when they can sell and how much capital gains they may keep. When they eventually sell, it is deemed as a loss to the rare affordable housing stock, posing an unnecessary conflict between homeownership and affordability, whereas in Singapore such a conflict does not exist. Evidently, the share of public housing in total housing stock varies among the three nations. As the United States decided to let the private market be the major force of housing production, certainly the expected outcome would not be the same as that in Singapore. While the housing achievement in the United States through tax policy and the creation of financial institutions to help Americans become homeowners are highly respected by the rest of the world, this success also contributed to the difficulties in helping those poor Americans who also deserve a decent living condition, as less public support remains for public and affordable housing (Di, 1999). It remains to be tested how the current strategies in lowincome housing assistance will work out and to what extent housing can remain affordable. But the signs so far suggest a lack of resolution to serve more than a fraction of the poor who need housing assistance.

The Past and the Present: How Should Current Reforms Be Shaped by Historical Experience and Existing Political Structure? As we observe current reforms in public housing policy in the three nations studied, we inevitably notice how strongly they are shaped by historical experience and existing political structures. In fact, each new wave of reform aims at correcting the results of a previous political process or event, so that the waves of reforms behave much like a pendulum. Yet, as the three societies have quite different political structures, that pendulum could only swing as far as each society would allow. In China, nothing but a communist takeover could result in a complete conversion from private to public urban homeownership during the 1950s and 1960s. The huge reactive political response to the earlier communist approach also made the over 50 percent homeownership rate possible to achieve during the recent decade. In Singapore, post-war independence allowed its new government to pursue a housing policy favoring public housing development and private homeownership simultaneously. The lasting stability of Singapore’s ruling administration over three decades allows for such ambitious plans to be implemented continuously. In fact, only after a new leader from the same regime took power, the

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suppressed private housing market began to see its long overdue growth. In the United States, counterbalancing political powers with an open public process assure that it would not have invoked the radical changes that have occurred in China or have embraced public housing as in Singapore. The waxes and wanes of limited public housing mainly shift within the balance and exchange of power between Republicans and Democrats. The involvement in housing policy by various levels of government may also have helped determine its outcomes. Singapore’s status as a small city-state has perhaps accounted for much of its success. Even there we observe some recent trend of decentralization in splitting the management of public housing between the HDB and the smaller town councils. In the United States, it is a painfully learned experience that state and local government are often more suitable than the federal government in dealing with housing issues. The history of slum clearance, urban renewal, and the public housing programs all had strong support and high momentum at the national level, but only left behind controversial legacies and undesirable outcomes. More recent efforts in affordable housing with local and state governments and a growing participation of non-profit organizations had less public attention but produced arguably more effective results. China has also provided similar lessons in central vs. local controls. The Cultural Revolution highlighted the devastating consequences of policy mistakes at the central level. The difficulties faced by the central government in curbing the home purchasing power of work units during the late 1990s and its consequent compromise allowing local variations in implementing housing reform are further examples illustrating the importance and influence of local controls. Given the large impact of housing policy, however, it did not interfere with a nation’s fundamental political and economic structures as some feared. Despite early ideological fears in the United States that public housing would lead to communism, evidence from Singapore shows that even such a dominant public housing does not prevent the country from remaining a market economy with a non-communist government in power. In China, the housing shortage from the failures of public housing contributed to the incentives for economic reforms since 1970, but the conversion from public to private urban homeownership did not sabotage the nation’s fundamental political structure and stability. This should alleviate some of the fears of a radical housing policy changes for the future and should encourage new ideas for more paradigm shift. Needless to say, great housing policy shifts often occur at times with major political and economic changes in a society. The advancing of public housing in the United States after the Great Depression is an example. China’s decision to reverse to private urban homeownership is another. In both China and Singapore, indeed, it took the mandate of a brand new government to instill either a gradual although complete conversion of urban homeownership from private to public or a blunt and continuous expansion of public housing to dominate the nation’s housing market. Policy affecting private housing sometimes also has a great impact on public housing. In the United States, for example, the mortgage deduction in tax policy has effectively promoted homeownership, but consequently reduced possible resource for public or affordable housing, because the political strength of homeowners makes it very difficult to mobilize a large pool of political constituents for more favorable and radical changes for public or affordable housing. Many people took comfort in thinking that sooner or later they may benefit from mortgage deductions and thus did not need affordable housing policy that is deemed for the poor or unworthy only.

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Given the powerful historical influence in the past and existing political structures in each country, any reforms in housing policy have to be shaped with realistic goals. In the United States, for example, one observer expressed his belief that “Despite the expensive baggage of past blunders, the three core elements of current low-income housing assistance policy-vouchers, block grants, and tax credits—seem to be securely in place. As always, future Congresses and presidential administrations will still have plenty to fight about in the housing policy arena, but I do not believe that we are near another major turning point in housing policy. For low-income housing advocates, this outlook suggests that the most prudent political strategy is to push for a steady expansion of all the three program elements as the most promising path to the ‘realization as soon as feasible’ of the nation’s housing goals” (Orlebeke, 2000. pp.516-517).

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Possibility and Feasibility: Could Nations Learn From Each Other After All? As international communication increases, nations are better able to evaluate and learn from the practices of other nations when making policy. This explains why studies with international perspectives become popular among researchers and policy makers. In the following space, we will discuss how the three nations we have studied have learned or could possibly learn from each other. China’s current housing policy is certainly influenced by Singapore for at least two obvious reasons: Singapore’s achievements in public housing and its close cultural and historical ties with China. Rosemann and Hu (2001) investigated the influence of Singapore on Chinese housing development and identified cooperation at three levels: (1) policy transfer, (2) project cooperation, and (3) comprehensive program transfer. An example of a policy transfer is the Housing Provident Fund (HPF), modeled from Singapore’s Central Provident Fund (CPF). The HPF provides housing finance for individuals to promote homeownership, and helped the transition from welfare housing to market housing. At project cooperation level, Singapore has been involved in many low-cost housing projects in Shanghai, Beijing, Fujian and Liaoning in China. A typical case is the Sanlin Yuan project in Shanghai, jointly developed by the Shanghai and Singapore governments where the former provided the land and the latter provided construction fund. The development was comanaged by both parties, and the completed housing units were sold to three local authorities. Singapore was guaranteed with fixed-rate revenue for its investment. The project also got a tax break from Shanghai municipal government. A more comprehensive program transfer occurred in 1994 when China and Singapore decided to develop a modern industrial township in Suzhou. The project is known as ChinaSingapore Suzhou Industrial Park (CS-SIP), involving a three-phase development of 72 square kilometers of land. When fully developed according to its original plan, it would accommodate a population of 600,000 and provide 360,000 jobs (Di et al., 2000). The central government of China also wanted Singapore to transfer its “soft” knowledge in areas such as financial management, housing and urban development, long-term master planning, and probusiness services, so that other Chinese cities could also benefit from learning. One of the consequences of this comprehensive program transfer is that a Singapore-style provident fund was implemented in the park, where both employees and employers are required to contribute

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22 percent of employees’ income, much higher than the 5-7% rate for HPF in other Chinese cities.6 Most of employees have been using the provident fund for homeownership. In addition to learning from Singapore, China has also attempted to learn from the United States. The success in the United States in private housing market has no doubt influenced China’s decision to switch to private urban homeownership. Recent evidence of China’s learning from the United States are visible in its policy shift from supply side to demand side subsidies, and its intention to establish a housing finance mechanism such as home mortgage security. Researchers and policymakers showed great interest in mortgage securities in the U.S. and many research papers (for example, Yuan et al., 2001 and Wang, 2001a) advocate the establishment of a similar system in China. The recent troubles in the secondary mortgage market in the U.S. certainly provide lessons for China to learn as well. As its economic development generates more inequality it should pay more attention to the U.S. lesson and Singapore success in avoiding residential segregation. Singapore also seems to be learning from the U.S. and the traditional view of public housing has undergone a change in Singapore that is gradual but quite fundamental (Tan, 2000). With increasing affluence and greater aspirations, Singaporeans now have higher expectations and demands for housing; it is no longer just a roof over their heads. Although the quality of public housing has improved, public housing flats are still perceived as low-cost housing, and many Singaporeans now prefer private housing for its better image. But Singapore has yet quite a challenge to build more private housing in such a tiny country with great land constraints. The success in the United States with its large land resource is not something easily transferable to a tiny city-state such as Singapore. On the other hand, could Singapore’s innovative financing of public housing be an inspiration for the United States? At least in terms of ideology and philosophy, there should be no reason why the U.S. cannot learn from Singapore. The Singapore-style CPF fund receives half of its contributions from employees and the other half from employers, similar to the social security system in the United States. What may even better suit the general American philosophy is that it is accumulated in personal accounts. Instead of a universal welfare system, it stresses the role of individuals, and has provided an incentive for better individual performance. Even though the government sometimes grants money to individuals’ accounts, the prerequisite is that the account holders must save money first. In a sense, the Singapore-style CPF is just a form of employer assisted housing (EAH), which is not entirely foreign to the United States. The roots of EAH date back to the 19th century when New England mill owners provided housing for their workers. EAH gained some momentum in the late 1980s in its modern form (Pill, 2000). It is estimated that $20 billion corporate money was spent annually on direct housing subsidies for their employees, but $13.5 billion was spent on the relocation costs of management (Schwartz and Hoffman, 1989). As a strategy for dealing with recruitment and retention issues, corporate interest in EAH has waxed and waned along with the economic cycle (Hoffman, 2000). As housing growth does not match the rapid job growth in many metropolitan areas, prohibitive housing price has forced many employees to live far away from their jobs. Long commuting time, crowded traffic and severe environmental pollution have become issues. Local governments often have to battle for a balance between jobs and housing. In places where a few institutes employ a large number of people, discussions about employers’ role in housing naturally 6

Web site of CS-SIP: www.sipac.gov.cn.

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appear and appeal. A few employers even take active roles in helping local governments build more affordable housing. Under this circumstance, the employer’s role in housing in Singapore may provide relevant reference. Institutes such as universities in Singapore usually provide housing allowance or rental units for employees who are permanent residents or foreigners. This fits its national goal to attract foreign talents to Singapore. So far, this type of subsidy is limited, and as tenants become citizens or homeowners, they have to move out and become no longer eligible for the subsidy. Currently, private companies in Singapore do not directly provide housing for their employees, but government agencies often run programs to assist groups such as foreigners and newly married couples looking for housing. The Scheme for Housing of Foreign Talent (SHIFT) managed by the Jurong Town Corporation (JTC) is one such program. JTC bought public housing resale units at market prices and rented them to foreigners with about 30 percent subsidy. This kind of employer assisted housing also deserves China’s attention, especially when China wants to attract overseas talents to work for China. As a concluding remark, we would like to point out that our descriptions of public housing in the United States, China, and Singapore underscore a fascinating and diverse human response to some common problems, and that there is no universal fix all solution. The three nations represent remarkable differences and offer a variety of experiences. Yet they also reveal striking similarities in the basic issues of public housing and how nations can handle these issues. All the three had more or less an ambitious goal to provide decent living conditions for every citizen. They all faced the dilemma between housing affordability for households and sustainability for government housing programs. In all three nations, advocates understood the importance of economic scales and strived for a larger share of public or private housing stock, depending on whatever they advocated for. And each nation’s historical experience and political structures strongly affect ongoing housing policy reforms. Finally, from time to time, it occurred in all the three nations some needs and incentives for employers to get involved in assisting their employees’ housing. While people in each country have to find suitable solutions to their own problems, this chapter may at least help with communication, increase awareness, and stimulate creativity.

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Di, Zhu Xiao and Yang, Yi. 2002. Intergenerational Wealth Transfer and Its Impact on Housing, Joint Center for Housing Studies Working Paper Series, W02-2. Cambridge: Harvard University. Di, Zhu Xiao, Eric Belsky and Xiaodong Liu, (2007), “Do Homeowners Achieve More Household Wealth in the Long Run?” Journal of Housing Economics, Vol. 16, Numbers 34 Doan, Mason C. 1997. American Housing Production 1880-2000: a Concise History. Lanham, Maryland: University Press of America. Dong, Li-ming and Deng, Lan etc. 1999. The transition of China’s housing allocation system, in Cheng, Si-wei (ed.), China’s Urban Housing System Reform –Target, Model and Difficulties. Beijing: Democracy and Construction Press. Dong, Li-ming, Deng, Lan, Deng, YaoDong and Zhang, Mingye 1999. The transition of China’s housing allocation system, in Cheng, Si-wei (ed.), China’s Urban Housing System Reform –Target, Model and Difficulties. Beijing: Democracy and Construction Press. Duda, Mark, Zhang, Xiulan, and Dong, Mingzhu 2005. China’s Homeowenrship-Oriented Policy: An Examination of Two Programs Using Survey Data from Beijing, Joint Center for Housing Studies Working Paper Series, W00-4. Cambridge: Harvard University. Ford, James. 1936. Greenwood. Reprinted ed. Conn.: Negro Universities Press, 1972. Friedman, Lawrence M. 1968. Government and Slum Housing: A Century of Frustration. Chicago: Rand McNally. Gangatharan, R. D. 1990. Sale and Management of Flats in Singapore. Singapore: Singapore National Printers Ltd. Guangzhou Real Estate Administration Bureau. 1990. Guangzhou Real Estate. Guangzhou: Guangzhou Science & Technology Press. Guggenheim, Joseph. 2003. Tax Credits for Low Income Housing. Opportunities for Developers, Non-Profits, Agencies and Communities Under Expended Tax Code Provisions. 12th. Edition. Simon Publications. Hamer, Andrew Marshall and Steekelenburg, Ester van. 1999. Urban housing reform in mainland China: a new chapter, Review of Urban and Regional Development Studies, 11(2): 91-99. Han, Qiang. 1999. The dilemma and solutions in China’s housing financial system, China’s Real Estate, 1999 (1): 58-61. Harloe, M. 1996. Cities in the transition, in G. Andrusz, M. Harloe and I. Szelenyi (eds), Cities after Socialism, Urban and Regional Change and Conflict in Post-socialist Societies. Oxford: Blackwell. Hayes, R. Allen. 1995. The Federal Government and Urban Housing. 2nd ed. Albany, NY: State University of New York. Hoffman, Daniel. 2000. Another Look at Employer-Assisted Housing and How Do Employers View Employer-Assisted Housing, American Affordable Housing Institute. http://www.policy.rutgers.edu/eah Hong, Ya-ming. 1999. Look back at China’s urban housing system reform, in Cheng, Siwei (ed.), China’s Urban Housing System Reform –Target, Model and Difficulties. Beijing: Democracy and Construction Press. Housing Development Board (HDB). 1997. Facts on Public Housing in Singapore. Singapore: Housing & Development Board.

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Housing Development Board (HDB). 1998. Training Notes for Sanlin Housing Project at Shanghai. Singapore: Housing Development Board. Housing Development Board (HDB). 2000. HDB’s Annual Report 1999/2000. Singapore: Housing & Development Board. Housing Development Board (HDB). 2001. HDB’s Annual Report 2000/2001. Singapore: Housing & Development Board. Jackson, Kenneth T. 1985. Crabgrass Frontier: The Suburbanization of the United States. Oxford: Oxford University Press. Joint Center for Housing Studies of Harvard University. 2005. The State of the Nation's Housing 2005, Cambridge, Massachusetts. Kai-ko Press. 1996. China’s Land Reform Act of 1950, Article 27. [Cited in Chung-hua jen min kung ho kuo chien she pu wen chien hui pien (A Collection of Documents by the China Construction Ministry)]. Beijing: Kai-ko Press. Kim, Joochul. 1990. Housing development and reforms in China, in Gil Shidlo, (ed.), Housing Policy in Developing Countries. London: Routledge. Lau, J.M., Tan, K.B. and The, P.S. 1997. Prefabrication for public housing - the HDB experience, in the 1st Distinguished Civil Engineer Symposium. Singapore: Nanyang Technological University, Mar 31 – April 1 1997.

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Lin, Zhi-qun. 1990. Housing problems in China. Beijing: Tsinghua University Press. Liu, Zhi-Feng and Xie, Jia-Jing. 2000. The Speeches at the Meeting about the Progress of Housing Monetary Allocation in 35 Large and Middle Size Cities. China: www.cin.gov.cn. McDonnell, Timothy L. 1957. The Wagner Housing Act: A Case Study of the Legislative Process. Chicago: Loyola University Press. Ministry of Information and the Arts (MITA) (2001) Singapore: the Last 10 Years. Singapore: the Ministry of Information and the Arts. NAHB, 2001, Homeownership: Strength of the Nation. (See http://www.nahb.com/housing_issues/strength.htm.) National Low Income Housing Coalition (NLIHC). 2001. Out of Reach: America’s Growing Wage-Rent Disparity. Washington, D.C. Olsen, Edgar O. 2001. Housing Programs for Low-Income Households. NBER Working Paper No. 8208. Orlebeke, Charles J. 2000, The evolution of low-income housing policy, 1949 to 1999, Housing Policy Debate, 11(2): 489-520. Pendall, Rolf. 2000. Why vouchers and certificate users live in distressed neighborhoods, Housing Policy Debate, 11(4), pp. 881-910. Pill, Madeleine. 2000. Employer-Assisted Housing: Competitiveness Through Partnership, Joint Center for Housing Studies Working Paper Series, W00-8. Cambridge: Harvard University. Popkin, Susan J., Buron, Larry F., Levy, Diane K. and Cunningham, Mary K. 2000. The gautreaux legacy: what might mixed-income and dispersal strategies mean for the poorest public housing tenants? Housing Policy Debate, 11(4), pp. 911-942. President’s Third Annual Report on National Housing Goals, 1971. Washington, DC: U.S. Government Printing Office.

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Quigley, John M. 2000. A decent housing policy in perspective, Brookings-Wharton Papers on Urban Affairs, 1(1): 1-47. Radford, Gail. 1996. Modern Housing for America: Policy Struggles in the New Era. Chicago: University of Chicago Press. Rosemann, Jürgen and Hu, Hao (2001) “Participation of foreign investment in Asian housing market”, Proceedings of the Sixth Annual Conference of Asian Real Estate Society, 1-3 August 2001, Keio University, Tokyo, Japan. Schwartz, David C. and Hoffman, Daniel. 1989. Employers help with housing, The Journal of Real Estate Development. 1989, 5(1):18-23. Sim, Loo Lee and Yu, Lai Boon. 1992. Private housing in Singapore: Districts 9 & 11: Condominiums, Luxurious Apartments and Landed Properties. Singapore: SNP Publishers. Singapore Department of Statistics. 2001. Household Income Growth and Distribution (Singapore Census of Population, 2000 – Advanced Data Release No. 7). Singapore: Singapore Department of Statistics. SNP and LJWP. 1997. Guide to Private Residential Properties in Singapore – Central/Suburban. Singapore: Singapore National Printers References Pte Ltd (SNP) and Jones Lang Wootton Property Consultants Pte Ltd (JLWP). Straits Times. 1996. Said by Minister for National Development Lim Hng Kiang. Singapore: Singapore Press Holdings, August 5 1996. Su, Ming. 2000. Why does the commercial housing become vacant. China Real Estate News, May 29, 2000. Szylvian, Kristin M. 1999. Industrial housing reform and the emergency fleet corporation. Journal of Urban History, 25(5): 647-689. Tan, Guong Ching. 2000. Meeting the millennial challenge: re-inventing housing, in Proceedings of HDB 40th Anniversary International Housing Conference. Singapore: Times Publishing Group. Tan, Sook Yee. 1998. Private Ownership of Public Housing in Singapore. Singapore: Times Academic Press. Tan, Sumiko. 1999. Home . Work . Play. Singapore: Urban Redevelopment Authority. The Institute of Finance and Trade Economics (IFTE) of the Chinese Academy of Social Sciences (CASS) and the Institute of Public Administration (IPA) in New York. 1996. China’s Urban Housing Reform. Beijing: The Economic Management Press. The Office of China’s Planning Committee. 2001. The Notice about the Progress in Housing Rental Reform in 2000. Beijing: China’s Planning Committee. The Second Department of Commerce. 1958. Report on Urban Private House Transformation. Beijing: The Second Department of Commerce. Tian, Donghai. 1998. Housing Policy: International Experience and China’s Selection. Beijing: Tsinghua University Press. UBS Warburg. 2001. Global Equity Research. China: Residential Mortgage Loans. U.S. Government Accountability Office (GAO). 2005. HUD Can Improve Its Process for Estimating Fair Market Rents. Report to the Ranking Minority Member, Subcommittee on Housing and Transportation, Committee on Banking, Housing, and Urban Affairs, U.S. Senate. GAO–05–342. Washington, DC. Van Order, Robert. 2000. The U.S. Mortgage market: a model of dueling charters, Journal of Housing Research, 11(2), pp. 233-255.

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Zhu Xiao Di, Lan Deng and Hao Hu

von Hoffman, Alexander. 2000. A study in contradictions: the origins and legacy of the Housing Act of 1949, Housing Policy Debate, 11(2): 299-326. Wang, Chunmin. 2001a. Paying attention to the establishment of real estate security. Chinese Real Estate, 2001(2), pp. 63-64. Wang, Jing. 2001b. A discussion on the ratios of housing price and rent to household income, Chinese Real Estate Study, 2001(1), pp. 41-57. Wang, Ya-ping and Murie, Alan. 1999. Housing Policy and Practice in China. New York, N.Y.: Macmillan Press. Winnick, Louis. 1995. The triumph of housing allowance programs: how a fundamental policy conflict was resolved, Cityscape, 1(3): 95-121. Wong, Francis K.W., Yeung, Stanley C.W., Hui, Eddie C.M., Howes, Rodney and Kong, Lucy S.P. 1998, A Study of Welfare Housing Development in Major Cities in China, (Research Monograph). Hong Kong: Department of Building and Real Estate, The Hong Kong Polytechnic University. Wood, Elizabeth. 1982. The Beautiful Beginning, the Failure to Learn: Fifty Years of Public Housing in America. Washington, DC: National Center for Housing Management. World Bank. 2000. World Development Report 1999/2000: Entering the 21st Century. Geneva, United Nations: United Nations Publication. Wright, Gwendolyn. 1981. Building the Dream, a Social History of Housing in America. Cambridge: The MIT Press. Xie, Jiajin. 2001. The Speech in the National Meeting About the Current Real Estate Market Situation. Beijing: The Ministry of Construction. Yuan, Guoyu, Liu Mingang and Nao, Jiangang. The essentiality of mortgage security in China. Chinese Real Estate, pp. 60-62, No. 2 of 2001. [in Chinese] Yuen, Belinda, Kurnianingrum, Kwee and Tu, Yong. 2006. Housing Affordability in Singapore: Can We Move from Public to Private Housing?. Urban Policy and Research, Vol. 24, No. 2., 253-270, June 2006. Zhan-wang Press. 1988. Chung-kuo jen kou tung chi nien chien (China Population Statistics Yearbook. Beijing: Zhan-wang Press.

In: Housing: Socioeconomic, Availability & Development Issues ISBN 978-1-60692-371-9 Editor: Edward P. Hammond and Alex D. Noyes ©2009 Nova Science Publishers, Inc

Chapter 2

HOUSING, AMENITY AND SPATIAL ECONOMIC GROWTH OF A SMALL OPEN INTERREGIONAL ECONOMY Wei-Bin Zhang∗ Ritsumeikan Asia Pacific University, Japan Jumonjibaru, Beppu-Shi, Oita-ken 874-8577 Japan

ABSTRACT

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This study proposes an interregional economic growth model with housing and environment for an open economy in a perfectly competitive economy. The economy consists of multiple regions and each region has two - industrial and housing - sectors. The model is a synthesis of the three most well-known models in the growth theory and urban economics in a multi-regional context. Industrial production and capital accumulation follow the Solow model. Regional population distributes over the urban area according to the Alonso model and regional housing production follows the Muth model. The microeconomic foundation for determining time distribution, savings, spatial location and consumption follows by Zhang’s approach proposed in the early 1990s. Following the traditional literature of small open economies, we assume that the rate of interest is fixed in international market. Households move freely among regions, equalizing utility level among regions by choosing housing, goods and saving. A region’s amenity is endogenous, depending on the region’s output and population. We explicitly solve the equilibrium of the multi-regional economy. We also simulate the model and examine effects of changes in the rate of interest, the preference, and amenity parameters. We show, for instance, that a productivity improvement in the region with lowest productivity reduces the GDP and GNP and a rise in the preference for large cities may accelerate agglomeration of the population and economic activities into a region with high productivity.

∗

Office Tel: 0977-78-1020; Fax: 0977-78-1123; E-mail: [email protected]

46

Wei-Bin Zhang

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1. INTRODUCTION It is a common sense that there are close interactions between housing market and economic development. Economic growth encourages demand for housing and affects prices and availability of land for housing. On the other hand, changes in housing market affect economic growth as demands for different services and goods and prices for different services and goods will be affected. Housing is closely related to the rest of economy. For instance, in the United States, real estate investment account for over 50 % of total private investment and real estate assets represent just under 60% of the nation’s wealth. Almost 70% of U.S. real 1 estate is residential. Housing has a set of intrinsic properties, which make it significantly 2 from any other goods. There is a large literature on durable housing in spatial context. Given the obvious interdependence between housing market and economic growth, one may be surprised to note that there are few economic models which deal with the interdependence with micro-behavioral foundation in the literature of economic growth or urban economics. As argued by Zhang (2005), it is analytically difficult, if not impossible, for the traditional economic theories to deal with the issues related to economic growth with housing market on the basis of micro-behavioral mechanism. To effectively model housing, one should be concerned with economic geography. Land is an important input in housing supply. Since land is immobile and cannot be augmented at a given location, it limits intensity of human activities and affects cost of human interactions. Irrespective of their importance in shaping economic activities in geographical space, aspects of dynamic spatial economies have received only scant attention in modern theoretical economics. A main reason for this negligence is that it is difficult to take account of economic space within the well-established analytical frameworks. It has become clear that addition of explicit consideration of spatial factors such as neighborhood effects and transportation costs may cause some essential changes in basic results of general economic theory in which spatial effects are explicitly omitted. It is important to develop analytical frameworks for examining spatial economic growth with housing, transportation systems, and environment. Without such a framework, it is difficult to properly understand economic dynamics. Nevertheless, only a few economic models study issues related to growth and residential distribution within a comprehensive framework. In particular, contemporary formal economic growth theory with capital accumulation has almost neglected housing markets. Over the past three decades, the study of the economic growth with housing and economic geography has caused a lot of attention in 3 urban economics and regional science. Yet, it is argued that urban economics still needs an analytical framework for spatial evolution and growth with capital accumulation. As early as in 1980, Arnott (1980: 53) points out: “In the last decade the static theory of residential urban location and land use has been extensively developed. The theory has generated many useful insights, but because it ignores growth and durability of housing and urban infrastructure there are many urban phenomena it cannot explain.” This description is still applicable to 1

DiPasquale and Wheaton (1996). See, for instance, Muth (1973), Anas (1978, 1982), Hockman and Pines (1980), Brueckner (1981), Arnott (1987), Brueckner and Pereira (1994), Arnott et al (1999), Braid (2001), and Brito and Pereira (2002). 3 We refer on the literature surveys to Henderson and Thisse (2004), Capello and Nijkamp (2004), and Andersson and Johansson (2007). 2

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Housing, Amenity & Spatial Economic Growth of Small Economy

47

(most of) the current literature. Numerous contributions to urban economics have followed the equilibrium theory of urban land market pioneered by Alonso (1964). This approach has been extended in many directions. The earlier important contributions are made by Muth (1969), Mills (1967), Beckmann (1969), Solow (1973), and others. There are many contributions in the literature in the last two decades. However, one of the limitations of the urban land-use models is that most of the models deal with residential location and urban structure and neglect production aspects of urban dynamics. On the other hand, urban growth theory is also an important theoretical approach to explain spatial phenomena. There are 4 many studies of urban growth and dynamics. The development of this approach has been influenced by growth theory and theory of international trade. From the point of view of economic geography, one of limitations in most of the urban growth models is that they omit urban land use. The urban economics studies economic geography with wages and capital accumulation fixed and urban growth theory concentrates on growth factors such as capital accumulation, omitting spatial structures of urban systems. We will develop a dynamic growth model in which the main ideas in the two approaches are synthesized in a comprehensive framework. As argued by Lucas (1988), it is necessary to analyze urban configuration and economic growth as a connected whole. Partial equilibrium models fail to explain interactions among various sectors of economic activities over time and space. Our approach to regional economic growth is strongly influenced by the neoclassical growth theory. Most of the models in the neoclassical growth theory are extensions and generalizations of the pioneering 5 works of Solow (1956). The model has played an important role in the development of economic growth theory by using the neoclassical production function and neoclassical production theory. The Solow model has been extended and generalized in numerous 6 7 directions. But almost all these studies do not have spatial dimension. The purpose of this study is to introduce the neoclassical growth theory into spatial economics. The production side of our model is based on the neoclassical growth approach; nevertheless we use an alternative approach to consumer behavior as explained later on. This study describes dynamics of a small country economy with economic geography. There are many economic models concerned with growth and capital accumulation of small 8 open economies. Nevertheless, this analytical framework has not been extended to spatial economics with land use and housing market. It is important to study economic growth of small open economies, like Singapore and Hong Kong, with economic geography, as economic growth and land markets are strongly affected by global markets in those economies. We model the economic geography by following the Alonso residential location model. Von Thünen developed a theory of the location of agricultural products in concentric 4

See, for example, Richardson (1973), Rabenau (1979), and Henderson (1985). A few theoretical models are proposed to deal with urban growth with economic geography. Nevertheless, these approaches are different from the model in this study in that this study is based on an alternative approach to household behavior. 5 The Solow model is sometimes referred as to the Solow-Swan model because Swan (1956) proposed a model similar to the Solow model. 6 The literature of the neoclassical growth theory is referred to Burmeister and Dobell (1970). 7 As far as I know, there are only a few models with capital accumulation and space (for instance, Baldwin and Martin, 2004, Capello and Nijkamp, 2004). 8 Refer to, for instance, Obstfeld and Rogoff (1999), Lane (2001), Kollmann (2001, 2002), Benigno and Benigno (2003), and Galí and Monacelli (2005), for the literature on economics of open economies.

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48

Wei-Bin Zhang

rings around a central market. Isard (1956) noticed that the ideas of von Thünen could be reinterpreted in the context of urban land-use. Since then, there are some works, which mark a conceptual transition between the earlier work of land economists and modern urban 9 economists. The availability of a well-developed microeconomic theory provided the theoretical foundations for the growth of modern urban economics. Beckmann (1957) studied the determination of equilibrium residential land rents and quantities in a monocentric city, where all employment and services are concentrated in the CBD (central business district) surrounded by a residential area. But it may be argued that the development of modern urban economics has been strongly influenced by the work of Alonso (1964). In his bid-rent theory, Alonso pioneered the adaptation of von Thünen’s work on an urban context. The central market was replaced by a central business district, and agricultural products by alternative urban lands. According to Papageorgiou and Pines (1999), Alonso’s greatest contribution was his proposal for the matching between spatial analysis and microeconomic theory that was necessary for the development of modern urban economics. Similar to the Solow-Swan model for neoclassical growth model, the Alonso model provides a simple mathematical structure based on which many articles have been published. The model has inspirited further development of urban economics mainly because of its logical consistency, simplicity, possible extensions and rich implications for important phenomena. Since the publication of Alonso’s seminal work, urban economic has become an established field through the works of urban economists. The Alonso model provides a prototype of urban systems. It is partial in the sense that it takes the number of jobs at the CBD as given. The spatial structure of our model will follow the Alonso model. Not only to integrate the two core models – the Solow growth model and the Alonso residential location model - in the neoclassical growth and urban economics, we also take account of environment upon housing market and economic growth. We attempt to introduce amenity into the neoclassical growth theory in a spatial context. The productivity advantages of one region may be offset to some extent by the higher wages that must be paid in a system where people are free to choose where they work and live. Higher wages are often associated with some kinds of disamenities (such as noise, pollutants, and densely populated neighborhood) and high living costs. It is well observed that a country in the beginning of its economic development will be experiencing a worsening of the environment, while a country in which growth has taken place over a longer period of time will be adjusting its patterns of growth in such a way that the environment in fact improves. Tradeoffs between economic growth and pollution have been extensively analyzed since the publication of the seminal papers by Ploude (1972) and Forster (1973). Issues related to interdependence between 10 economic growth and environment have been examined in the economic literature. Nevertheless, it may be argued that only a few attempts have been made to introduce environment (also called amenity in this study) into formal dynamic economic analysis with rational assumptions of profit and utility maximization in a regional context. We are concerned with the residential land use pattern and determination of goods production, capital accumulation, housing price, land rent under given transportation conditions over time and space. The economy consists of any number of regions. Each region 9

For instance, Beckmann (1957), Mohring (1961), and Muth (1961). See, for instance, Gruver (1976), Kennedy (1994), Cropper (1976), Mäler (2000), Ayong Le Kama (2001), and Wirl (2004).

10

Housing, Amenity & Spatial Economic Growth of Small Economy

49

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consists of one CBD and one residential area. Spatial configuration of a region is described by a one-dimensional model of residential location with a central business center. The paper is based on the urban models proposed by Zhang (1993, 2008a) and the interregional growth models by Zhang (1998, 2007). This paper differs from the previous studies mainly in that this model is concerned with an open economy, while the interregional model by Zhang (2007) is concerned with a closed economy. This study treats regional amenity as endogenous variables; while the previous study considers amenity as exogenous variable. Moreover, as far as the interregional economic issues are concerned, this paper is similar to the GTAP model which is a multiregion, multisector, computable general equilibrium model, with perfect competition and constant returns to scale (see, for instance, McDougall, 2002). Attempts have been made to extend the standard static GTAP model to dynamic model (Ianchovichina and McDougall, 2001). There are many other models developed by regional scientists. For instance, some models based on the input-output system or/and the gravity theory are 11 proposed to examine interregional trade patterns. Nevertheless, this paper differs from these approaches in that we model behavior of households differently. The paper is organized as follows. Section 2 defines the basic model with the absentee landownership. Section 3 demonstrates how to solve the equilibrium economic structure with the general production functions and any number of regions and shows the existence of a unique equilibrium with the Cobb-Douglas production function for a 3 regional economy. Section 4 studies the impact of technological change upon the spatial equilibrium. Section 5 demonstrates how changes in the rate of interest, the preference, or the transportation conditions affect the entire national economy. Section 6 concludes the study. Appendix A1 proves the main results in Section 3. Appendix A2 shows how to find spatial equilibrium in the model with the equally shared landownership. Appendix A3 shows how changes in some parameters affect the spatial economy.

2. THE MULTI-REGION TRADE MODEL WITH CAPITAL ACCUMULATION In describing economic production, we follow the neoclassical trade framework. The system consists of multiple regions, indexed by j = 1, ..., J . It is assumed that the regions produce a homogenous commodity. Regions trade because of differences in household behavior and productivity. We assume that the economy is too small to affect the world interest rate. The households hold wealth and land and receive income from wages and interest payments of wealth. Land is only for residential use. Technologies of all the production sectors are characterized of constant returns to scale. All markets are perfectly competitive and capital and labor are completely mobile between the sectors and capital is perfectly mobile in interregional and international markets. We neglect possible international emigration or/and immigration. Most aspects of production sectors in our model are similar to the neo-classical one-sector growth model. Households own assets of the economy and

11

See, for instance, Isard (1953, 1956), Hewings and Jensen (1986), Batten (1982), Boomsma and Oosterhaven (1992), and Canning and Wang (2005).

50

Wei-Bin Zhang

distribute their incomes to consume and save. Production sectors or firms use capital and labor. Commodities are traded without any barriers such as transport costs or tariffs. Let prices be measured in terms of the commodity and the price of the commodity be unity. We denote wage and interest rates by w j (t ) and r j (t ) , respectively, in the j th *

region. The interest rate is identical throughout the national economy, i.e., r (t ) = r , where

r * is the rate of interest fixed in the international economy. We assume a homogenous population. A person is free to choose his residential location. We assume that any person chooses the same region where he works and lives. Each region has fixed land. We assume a homogenous population. A person is free to choose his residential location. Land quality, climates, and environment are homogenous within each region, but they may vary among the regions. We neglect transportation cost of commodities between regions. As become evident later on, although it is conceptually not difficult to introduce transportation cost functions and to provide balance conditions for demand and supply and for price equalization conditions with transportation costs, the problem will become analytically too complicated. The assumption of zero transportation cost of commodities implies price equality for the commodity among regions. As amenity and land are immobile, wage rates and land rent vary among regions. Any region is built on a flat featureless plain. All economic activities are concentrated in the CBD. First, we describe production behavior. We introduce:

N ⎯ the given population of the economy; L j ⎯ the given (residential) area of region j;

K (t ) and K (t ) ⎯ the capital stocks employed by and the total wealth of the national economy at t ;

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F j (t ) ⎯ the output levels of region j ’s production sector at time t ; and

K ij (t ) and N j (t ) ⎯ the levels of capital stocks and labor force employed by region j ’s production sector.

Behavior of Producers We use production functions to describe the physical facts of a given technology. We assume that there are only two productive factors, capital K ij (t ) and labor N j (t ), at each point of time t . The production functions are given by

(

)

F j K ij (t ), N j (t ) , j = 1, ", J , where F j are the output of region j. Assume F j to be neoclassical. We have

51

Housing, Amenity & Spatial Economic Growth of Small Economy

(

)

f j (t ) = f j k j (t ) , f j (t ) ≡

F j (t )

N j (t )

, k j (t ) ≡

K ij (t ) N j (t )

.

(1)

The functions, f j , have the following properties: (i) f j (0 ) = 0; (ii) f j are increasing, +

strictly concave on R , and C

++

( )

on R ; f j k j > 0 and

2

lim k j → 0 f j' (k j ) = ∞ and lim k j →+∞ f j' (k j ) = 0.

'

f j" (k ) < 0 ; and (iii)

Markets are competitive; thus labor and capital earn their marginal products, and firms

earn zero profits. The rate of interest, r , and wage rates, w j (t ), are determined by *

markets. For any individual firm, r

*

and w j (t ) are given at each point of time. The

production sector chooses the two variables, K j (t ) and N j (t ), to maximize its profit. The marginal conditions are given by

( )

( )

( )

r * + δ kj = f j' k j , w j (t ) = f j k j − k j f j' k j , where

(2)

δ kj is the depreciation rate of physical capital in region j .

As r is fixed, from r + δ kj = f j and w j = f j − k j f j we obtain that both k j (t ) *

*

'

'

and w j (t ) are functions of r as *

( )

( )

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k j = φkj r * , w j = φwj r * .

(3)

We see that k j and w j are invariant in time. It is straightforward to show

dφkj / dr * = 1 / f j" < 0 and dφwj / dr * = − φkj < 0 . As the rate of interest rises, both the capital densities and the wage rates fall.

Behavior of Consumers Each region’s economic geography follows the Alonso model. In its simple form, the static model of monocentric city assumes that all economic activities are concentrated in central business districts, which are surrounded by residential suburbs. It involves a density of consumers, identical with respect to income and tastes. Preferences are defined over the consumption of a composite good, which is found at the CBD and land. Land is considered as a commodity. Each consumer must occupy land at one and only one location. Since the disposable income of consumers varies with distance from the center due to differences in transportation costs, so does consumption. In equilibrium consumption and prices are such that everyone has the same utility level. It should be noted that there are many extensions of the model. Beckmann (1969) published a path-breaking paper in 1969. His paper incorporated

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52

Wei-Bin Zhang

many of the key assumptions in contemporary urban economics such as centralized CBD employment, a dense radial road system, and malleable housing. The paper introduced a distribution of income among households and explored how income and housing consumption vary with distance from the CBD. It is shown that if all households have an identical preference structure, then the wealthier households live further out and consume more space in equilibrium. Beckmann made another pioneering work in 1976. He considered a linear bounded landscape without a predetermined center (Beckmann, 1976). There is a single type of agents who derive utility from their interaction. Crowding which is a function of residential density has a negative impact on utility. At the initial state agents are distributed uniformly over the land and thus crowding is equal over space. On the other hand, it is assumed that those in central locations will enjoy higher degree of accessibility. It is shown that competition for land will eliminate this advantage through agglomeration. A bell-shaped population profile in equilibrium results from the trade-off between the propensity to interact and the aversion to crowding. Beckmann’s model excludes the polycentric city as a possible outcome. As an extension of Solow and Vickrey (1971) and Beckmann (1976), Ogawa and Fujita (1980) introduced multiple types of interactions. Their model includes possible 12 existence of multiple urban centers. Since then, there are many works on polycentric cities. As the other aspects of our model are already complicated, we will use a simple form of spatial structure. In our dynamic model, we also assume that all residents in a region work in the region’s CBD. People travel only between their homes and the CBD. Travel is equally costly in terms of time or/and money in all directions. An individual may reside at only one location. The only spatial characteristic of any location that directly matters is the distance from the city center. Due to the complexity of taking both space and time in a general equilibrium framework, at this initial stage we simplify the structure of the regional economic geography. The regional system is geographically linear and consists of two parts - the CBD and the residential area. The geography consists of a finite strip of land extending from the CBD with constant unit width. We assume that the production sectors are concentrated in the CBD. The households occupy the residential area. We assume that the CBD is located at the left-side end of the linear territory, as illustrated in Figure 1. As we will get the same conclusions if we locate the CBD at the center of the linear system, the specified urban configuration will not affect our discussion.

residential area: transportation, lot size consumption and saving residential location

CBD

Lj

ωj

Figure 1. The Spatial Configuration of a Region. 12

See, for instance, Asami et al. (1990), and Papageorgiou and Pines (1999).

53

Housing, Amenity & Spatial Economic Growth of Small Economy We now describe housing production and behavior of households. First, we introduce

ω j ⎯ the distance from the CBD to a location in the residential area in region j ;

(

)

(

)

R j ω j , t and Rhj ω j , t ⎯ the land rent and housing rent per household at location

ωj;

(

(

)

)

k j ω j , t and s j ω j , t ⎯ the wealth owned by and the saving made by the household at location

ω j , respectively;

( ) n j (ω j , t ) and Lhj (ω j , t ) ⎯ the residential density and the lot size of the household at

c j ω j , t ⎯ the consumption of the household at location ω j ; location

ω j ; and

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K hj (t ) ⎯ the capital stocks employed by the housing sector in region j . We assume that all housing is residential housing. Residential housing assets play a dual role in the economy. First, residential housing assets are used as a durable consumption good. They are the source of housing services. Residential housing assets are used as a mechanism for the intertemporal transfer of wealth, which generates both rents and capital gains through housing appreciation. We limit ourselves to a simple case of housing technology. To explain space-dependent gradients for residential density and capital-land ratios, Muth introduces a commodity “housing” rather than land in describing dwelling conditions. Housing is produced with land and non-land inputs. Households have a derived demand for land, dependent on both preferences for housing and technical characteristics of housing production function. We follow this approach in explaining decision making of dwelling sites of households. The housing industry supplies housing services by combining land and capital. Let us denote chj ω j , t housing service received by the household at location ω j . We

(

)

specify the housing service production function as follows

(

)

(

) (

)

chj ω j , t = Ahj khjα ω j , t Lβhj ω j , t , α h + β h = 1, α h , β h ≥ 0 , where khj

h

h

(4)

(ω j , t ) is the input level of capital per household at location ω j . Here, we assume

that housing capital can be instantaneously adjusted. All the characteristics of houses such as the size of a lot and the size of a house can be changed instantaneously without costs. Hence 13 the capital-land ratio is always perfectly adjusted. The marginal conditions for the housing sectors are given by

13

Our approach is mainly based on Anas (1978), even though the Anas housing production also includes the labor input. Further issues related to the durability of real estates and its costly conversion and replacements are also discussed by Anas. See also Arnott (1980), Arnott et al. (1999) and Glaeser and Gyourko (2005) for introducing more realistic aspects of housing market to the growth model. A recent literature review is referred to Lin et al. (2004).

54

Wei-Bin Zhang

r * + δ kj =

α h Rhj (ω j , t )chj (ω j , t ) β R (ω , t )chj (ω j , t ) , R j (ω j , t ) = h hj j , 0 ≤ ω j ≤ Lj . khj (ω j , t ) Lhj (ω j , t ) (5)

According to the definitions of Lhj

(

)

nj ω j , t =

(

1

Lhj ω j , t

),

(ω j , t ) and n j (ω j , t ), we have

0 ≤ ω j ≤ Lj .

(6)

The total capital stocks employed by region j' s housing sector is equal to the sum of the capital stocks for housing over space at any point of time. The relationship between khj ω j , t and K hj (t ) is thus given by

(

)

Lj

(

) (

)

K hj (t ) = ∫ n j ω j , t khj ω j , t dω j , j = 1, ", J .

(7)

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0

Each worker may get income from land ownership, wealth ownership and wages. In order to define incomes, it is necessary to determine land ownership structure. It can be seen that land properties may be distributed in multiple ways under various institutions. To 14 simplify the model, we accept the land-ownership absentee assumption. In Appendix A2, we provide a procedure for determining equilibrium with the assumption that the land is equally owned by the population. Consumers make decisions on choice of lot size, consumption level of commodity as well as on how much to save. This study uses the approach to consumers’ behavior proposed by Zhang in the early 1990s. This approach makes it possible to solve many national, international, urban, and interregional economic problems, such as growth problems with heterogeneous households, multi-sectors, and preference changes, which are analytically intractable by the traditional approaches in economics. Let

(

)

k j ω j , t stand for the per capita wealth (excluding land) owned by the typical household at location

(

ω j . Each household at ω j obtains income

)

(

)

y j ω j , t = r *k j ω j , t + w j + r (t ), 0 ≤ ω j ≤ L j , from the interest payment, rk j , and the wage payment, w j . We call y j

(8)

(ω j , t ) the current

income in the sense that it comes from consumers’ wages and current earnings from ownership of wealth. The sum of income that consumers are using for consuming, saving, or 14

This assumption is often used in the literature of urban economics (see Fujita, 1999). Another popular assumption in the literature of spatial economics is the public ownership, as accepted in Kanemoto (1980). The city government rents the land from the landowners at certain rent and sublets it to households at the market rent, using the net revenue to subsidize city residents equally.

55

Housing, Amenity & Spatial Economic Growth of Small Economy

travels are not necessarily equal to the current income because consumers can sell wealth to pay, for instance, the current consumption if the current income is not sufficient for buying food and touring the country. Retired people may live not only on the interest payment but also have to spend some of their wealth. The total value of the wealth that a consumer at location

ω j can sell to purchase goods and to save is equal to pi (t )k j (ω j , t ), with

pi (t ) = 1 at any t . Here, we assume that selling and buying wealth can be conducted instantaneously without any transaction cost. The disposable income is then equal to

(

)

(

)

(

)

yˆ j ω j , t = y j ω j , t + k j ω j , t , 0 ≤ ω j ≤ L j , j = 1, ", J .

(9)

The disposable income is used for saving and consumption. It should be noted that the value, k j

(ω j , t ), (i.e., pi (t )k j (ω j , t ) ), is a flow variable. Under the assumption that selling

wealth can be conducted instantaneously without any transaction cost, we may consider k j as the amount of the income that the consumer at

ω j obtains at time t by selling all of his

wealth. Hence, at time t the consumer has the total amount of income equaling yˆ j to

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distribute between consuming and saving. It should also be remarked that in the growth literature, for instance, in the Solow model, the saving is out of the current income, y j , while in this study the saving is out of the disposable income which is dependent both on the current income and wealth. The implications of this approach are similar to those in the Keynesian consumption function and models based on the permanent income hypothesis, which are empirically much more valid than the approaches in the Solow model or the in Ramsey model. The approach to household behavior in this study is discussed at length in Zhang’s recent books (for instance, Zhang, 2005, 2008b, 2008c). Zhang has also examined the relations between his approach and the Solow growth theory, the Ramsey growth theory, the permanent income hypothesis, and the Keynesian consumption function, which are the main approaches to household behavior with wealth accumulation in the modern economic growth theory in details. It can be shown that the behavior generated by the traditional approaches can also be observed in Zhang’s approach by specifying certain patterns of preference changes. At each point of time, a consumer at location ω distributes the total available budget

(ω j , t ), housing, chj (ω j , t ), saving, s j (ω j , t ), consumption of c j (ω j , t ). Here, we assume that the leisure is only dependent on the

among the leisure time, Thj industrial goods,

residential location as the work time is fixed and equal for each household, in disregard of residential location. After the work time is decided, the households decide the time distribution between leisure and travel to work. As we assume that the travel time from the CBD to the residential location is only related to the distance and neglect any other effects such on technological change, infrastructure improvement, and congestion on the travel time form the CBD to the residential area, the leisure time, which is equal to the fixed total time minus the travel time, is only related to location. Let T0 and Γ j ω j respectively stand for

( )

56

Wei-Bin Zhang

the total available time for travel and leisure and the time spent on traveling between the residence and CBD. We have

( )

( )

Thj ω j = T0 − Γ j ω j . The budget constraint is given by

(

) (

)

(

)

(

)

(

)

Rhj ω j , t chj ω j , t + c j ω j , t + s j ω j , t = y j ω j , t , 0 ≤ ω j ≤ L j , j = 1, ", J , (10) where

(

)

(

)

( )

y j ω j , t ≡ yˆ j ω j , t − Γcj ω j , 0 ≤ ω j ≤ L j , j = 1, ", J . Equation (10) means that the consumption and saving exhaust the consumers’ disposable personal income. Location choice is closely related to the existence and quality of such physical environmental attributes as open space and noise pollution as well as social environmental quality. We assume that utility level, U (ω , t ), of the household at location ω j is dependent on Thj

(ω j , t ), chj (ω j , t ), s j (ω j , t ), and c j (ω j , t ) as follows (

)

(

) (

) (

) (

) (

)

U j ω j , t = θ j ω j , t Thjσ ω j , t cξj ω j , t cηhj ω j , t s λj ω j , t , σ , ξ 0 , η0 , λ0 > 0 , 0

0

0

(11)

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in which

σ , ξ0 , η0 , and λ0 are a typical person’s elasticity of utility with regard to

leisure time, industrial goods, housing, and saving at

ω j . We call σ , ξ 0 , η0 , and λ0

propensities to use leisure time, to consume goods, to consume housing, and to hold wealth, respectively. As argued by Glaeser et al (2001), consumption amenities have increasingly played more important role in urban formation. Public services, accessibilities, local transportation systems, pollution, and human relations such as discrimination all involve externalities and affect amenities. In this study, we incorporate amenity into the consumer location decision by 15 assuming that amenity is a function of residential density. Distance from the CBD reflects two elements: the inconvenience of the distance and the value of the amenity of the surrounding area. The urban dynamics is influenced by many changing characteristics of environmental quality such as air quality, levels of noise pollution, open space, and other physical and social neighborhood qualities at each location. Environmental quality can be 15

This study does not take account of externalities for producers. For instance, firms often prefer to locate to other firms. An explicit introduction of externalities will make the spatial structure far more complicated. In the literature of urban economics, various externalities have been analyzed (see, Henderson, 1974, Upton, 1981, and Abdel-Rahman, 2004).

Housing, Amenity & Spatial Economic Growth of Small Economy

57

reflected in part by its effect on the location choice of the individual. Many kinds of externalities may actually exist at any location. Some may be historically given, such as historical buildings and climate; others such as noise and cleanness, may be endogenously determined by the location of residents. Households may prefer a low-density residential area to a high one, as there tend to have more green, less noise, more cleanness and more safety in a low-density area. This study considers that residential densities may have positive or negative agglomeration effects. We specify the amenity, θ j ω j , t , at ω j as follows .

(

θ j (ω j , t ) = θ 0 j n μj (ω j , t ), θ 0 j > 0 . The function,

)

(12)

θ j (ω j , t ), implies that the amenity level at location ω j is related to the

Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

16

residential density at the location. Labor and capital are easily mobile between regions in industrialized economies. As capital mobility becomes high and costs associated with capital movement among regions become low, it is reasonable to assume that capital movement tends to equalize marginal productivities of capital among regions within a national economy. But there are different principles for analyzing temporary equilibrium conditions for labor movement in a dynamic regional framework. For example, in the theoretical literature on regional economics two principles have been proposed to analyze labor movement. One is that labor movement, if costs associated with professional or locational changes are neglected, equalizes wage rates between regions. This assumption is limited in a freely competitive national labor market if various regions provide different levels of amenity (such as regional cultures, climates and pollution) and have different technologies. The other one is that free movement of people equalizes utility levels, which they may obtain in different regions. This approach is invalid in the growth theory based on the Solow model as the theory does not use utility function in analyzing consumer behavior. Although the assumption of equalizing utility level is reasonable for analyzing issues related to movement of people among regions, the traditional approaches to consumer behavior in economic theory often make it analytically intractable to properly model migration with regional differences in life styles and wage rates. If wage rates and life style (including saving behavior) are regionally different and people may freely move within the economy, how to calculate each individual’s capital and his income in a dynamic multi-regional economy is not an easy matter. For simplicity, we restrict the analysis to the case that all households obtain the same level of utility at any point of time. This also comes out of our assumption that the population is homogeneous and people can change their 17 residential location freely without any transaction costs and time delay. The conditions that households get the same level of utility at any location at each point of time is represented by

16

This specified form is a limited case. Locational amenities or disamenities are not only affected by the residential density at the location. For instance, possible social contacts of any individual are spread over the whole space. Air pollution is not limited to locals. 17 In reality, to change housing location costs. Although the condition of utility equalization is often used in the literature of urban economics, the assumption of utility equalization is rarely used in the literature of economic dynamics as the temporary equilibrium condition of population distribution.

58

Wei-Bin Zhang

U j (ω1 , t ) = U m (ω 2 , t ), j , m = 1, ", J , 0 ≤ ω1 ≤ L j , 0 ≤ ω 2 ≤ Lm . Maximizing U j

(

(13)

(ω j , t ) subject to the budget constraint (10) yields

)

(

)

(

)

c j ω j , t = ξy j ω j , t , chj ω j , t =

ηy j (ω j , t ) , s j (ω j , t ) = λy j (ω j , t ), Rhj (ω j , t )

(14)

where

ξ ≡ ρξ0 , η ≡ ρη0 , λ ≡ ρλ0 , ρ ≡

1

ξ0 + η0 + λ0

.

The above equations mean that the housing consumption, consumption of the good and saving are positively proportional to the available income. According to the definition of s j location

(ω j , t ), the capital accumulation for the household at

ω j is given by

k j (ω j , t ) = s j (ω j , t ) − k j (ω j , t ), 0 ≤ ω j ≤ L j .

(15)

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Regional Population and Capital A region’s population is distributed over the whole urban area. Region j' s population constraint is given by Lj

∫ n j (ω j , t )dω j

= N j (t ), j = 1, ", J .

(16)

0

18

The above equation also implies that each region’s labor force is fully employed.

Region j ' s consumption, C j (t ), is given by Lj

∫ c j (ω j , t )n j (ω j , t )dω j

= C j (t ).

(17)

0

18

It is important to examine how regional amenities and regional conditions affect regional differences of unemployment. Zhang (2005) examines growth and unemployment with similar analytical framework as used in this study for national economies without space. It is conceptually easy to extend the ideas for national economies to interregional economies, even though the models will become analytically complicated.

Housing, Amenity & Spatial Economic Growth of Small Economy

59

Region j ' s saving is given by Lj

∫ s j (ω j , t )n j (ω j , t )dω j

= S j (t ).

(18)

0

The total capital stock employed by region j is the sum of the capital stocks employed by region j ' s industrial and housing sectors

K ij (t ) + K hj (t ) = K j (t ).

(19)

The total wealth owned by region j' s households is given by Lj

∫ k j (ω j , t )n j (ω j , t )dω j

= K j (t ) , j = 1, ", J .

(20)

0

National Population and Capital The total capital stocks employed by the economy is equal to the sum of the capital stocks employed by the capital stocks employed by all the regions. That is

K (t ) =

J

∑ K j (t )

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j =1

=

∑ (Kij (t ) + K hj (t )). J

(22)

j =1

The total wealth of the national economy is the sum of the wealth owned by all the households J

K (t ) = ∑ K j (t ).

(23)

j =1

We introduce B (t ) as the value of the economy’s net foreign assets at t . The income

from the net foreign assets, E (t ), which may be either positive, zero, or negative, is equal to

r * B(t ). The national industrial output is equal to the national net saving. That is S (t ) + C (t ) − K (t ) − r * B(t ) +

J

∑ δ kj K j (t ) = F (t ), j =1

where

(24)

60

Wei-Bin Zhang J

J

J

j =1

j =1

j =1

C (t ) ≡ ∑ C j (t ), S (t ) ≡ ∑ S j (t ), F (t ) ≡ ∑ F j (t ). The assumption that the national labor force is fully employed is represented by J

∑ N (t ) = N . j =1

j

(25)

We now explain trade balance in the model. According to the definitions of the national wealth, the capital stocks employed by the economy and the net foreign assets, we have

K (t ) = K (t ) + B(t ).

(26)

Similar to the variable, B (t ), we introduce B j (t ) as the value of region j ’s net external assets at t . We have

B j (t ) = K j (t ) − K j (t ). We have

B(t ) =

J

∑ B j (t ).

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j =1

We have thus built the multi-regional model of a small open economy with multiple regions and capital accumulation.

3. SPATIAL EQUILIBRIUM AND EXISTENCE OF EQUILIBRIUM BY SIMULATION The previous section develops a general model of the national economy with multiple regions and residential distribution. The model is structurally general in the sense that by adding some assumptions, the model can be applied to describe national as well as international economies. For instance, if we allow all the regions have the identical conditions and neglect housing, then the model becomes the standard one-sector growth model of national economy. Although the behavioral mechanism of consumers of our model is different from the Solow model, the model with the identical regions and without housing sector is mathematically identical with the Solow model – it has a unique stable equilibrium. It can be seen that the national model with housing is a two-sector growth model. If we don’t allow people to be interregionally mobile, then our model is mathematically identical with the Oniki-Uzawa trade model with constant saving rates. It should be noted that the Oniki-Uzawa

Housing, Amenity & Spatial Economic Growth of Small Economy

61

trade model and most of its extensions are limited to two national economies and our analytical results are valid for any number of regions. The residential distribution is according to the standard Alonso model and the housing sector is influenced by Muth’s housing model. Although our model is structurally general, it is important to know whether it is analytically tractable. As argued by Zhang (2005), a main reason that the modern economic growth theory (based on the Ramsey approach to households) with capital accumulation has failed, in a consistent and comprehensive sense, to be extended to study economies with heterogeneous households, or multiple sectors, or multiple countries, or multiple regions is that any extension from the standard one-sector one-household model tends to result in a model analytically intractable. The approach based on the utility function of this study has been extended to economies with heterogeneous households and multiple sectors by Zhang. As far as dynamic analysis is concerned, the advantage of our approach over the Ramsey approach is that for similar economic issues, the dynamical dimension of our approach is lower than that by the Ramsey approach. This character makes it possible to deal with many economic issues which are much more difficult, if not impossible, to study by the Ramsey approach. It should be remarked that the recent new growth theory avoids capital accumulation and is concentrated on human capital accumulation. The omission of capital accumulation in economic growth theory is mainly due to the analytical difficulties, rather than conducted on the basis of reasonable justification. This paper is concerned with equilibrium, because a genuine dynamic analysis is too complicated. We now show how to find equilibrium in our model. The following lemma, which provides a procedure for determining the equilibrium values of all the variables, is proved in Appendix A1.

Lemma 1

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For given rate of interest, k j and w j , j = 1, 2 , ", J , are given in equations (2). The labor distribution, N j , is determined as follows

Nj =

mjN

∑ j =1 m j J

, j = 1, " , J ,

where m j are positive parameters defined in Appendix A1. The equilibrium values of all the other variables are given by the following procedure: f j by (1) →

Fij = f j N j →

(ω j ) by (A13) and (A14) → Lhj (ω j ) = 1 / n j (ω j ) → K j by (A20) → Y j by (A2) → khj (ω j ) by (A8) → K hj by (A9) → K j = K ij + K hj → Rhj (ω j ) by (A11) → R j (ω j ) by (A7) → c j , chj (ω j ) and s j by (14) → C j = c j N j and S j = s j N j . ( )

K ij = k j N j → k j ω j

by (A5) → y j

(ω j ) = k j (ω j )/ λ

→ nj

62

Wei-Bin Zhang

For illustration, we will follow the procedure given in Lemma 1 to solve the equilibrium values of the system. In the remainder of this study, we are concerned with an economy with 19 3 regions. We specify the production functions as follows

F j (t ) = A j K ij (t )N j (t ), α j + β j = 1, α j , β j > 0 , j = 1, 2 , 3 , αj

βj

(27)

where A j is region j ’s productivity. We also require that the depreciation rates of capital are equal among the regions, that is,

αj

δ k = δ kj . From f j = A j k j , and equations

(2), we have

⎛ α1 A1k1− β k j = φkj (k1 ) ≡ ⎜ ⎜ α j Aj ⎝

1

⎞ ⎟ ⎟ ⎠

−1 / β j

, j = 2 , 3.

(28)

By equations (3), we have

φwj = A j β jφkj (k1 ), αj

α yˆ j = φr (k1 )k j + A j β jφ j (k1 ), j = 1, 2 , 3 ,

(29)

j

in which we use

φk1 (k1 ) = k1 and φr (k1 ) ≡ α1 A1k1− β + δ 0 , where δ 0 ≡ 1 − δ k . 1

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We specify the travel time and cost functions as follows

( ) Γcj (ω j ) = ν cjω j ,

Γ j ω j = ν jω j , 0 ≤ ω j ≤ L j , 0 ≤ ω j ≤ Lj .

The inverse of the parameter, the value of

(30)

ν j , is the travel speed in region j . Hence, a decrease in

ν j is interpreted as an improvement in region j ' s transportation system. The

parameter, ν cj , is the travel cost per unit of distance in region j . The transportation systems in this study are measured by the parameters, ν j and ν cj . We determine m j and m j as follows

19

As the procedure in Lemma 1 is valid for any number of regions, one can similarly examine the behavior for the system with any number of regions.

Housing, Amenity & Spatial Economic Growth of Small Economy

mj =

∫ (r

rjβ k T0β 0

Lj

0

− r0ν cjω j ) k (T0 − ν jω j ) 0 dω j β

j

1 / ρ − β hη 0 θ 0 j Ahjη 0 m1 ⎛⎜ rj mj = m j ⎜⎝ r11 / ρ − β hη 0 θ 01 Ahη10

β

63

,

1 / ( β hη 0 − μ )

⎞ ⎟ ⎟ ⎠

, j = 1, 2 , 3.

(31)

We have m1 = 1. Following Lemma 1, we can determine equilibrium of the system with the parameter values specified as follows

r * = 0.05 , N = 10 , T0 = 1, μ = − 0.1, δ k = 0.05 , α j = 0.3 , α hj = 0.4 , ρ = 0.5 , ν j = 0.06 ,

ν cj = 0.01, j = 1, 2 , 3 , ⎛ A1 ⎞ ⎛ 0.8 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ A2 ⎟ = ⎜ 0.7 ⎟ , ⎟ ⎜ ⎟ ⎜ ⎝ A3 ⎠ ⎝ 0.65 ⎠

⎛ Ah1 ⎞ ⎛ 0.8 ⎞ ⎟ ⎜ ⎟ ⎜ ⎜ Ah 2 ⎟ = ⎜ 0.7 ⎟ , ⎜ A ⎟ ⎜ 0.7 ⎟ ⎝ h3 ⎠ ⎝ ⎠

⎛ θ 01 ⎞ ⎛ 4.2 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜θ 02 ⎟ = ⎜ 4.2 ⎟ , ⎜θ ⎟ ⎜ 4.5 ⎟ ⎝ 03 ⎠ ⎝ ⎠

⎛η0 ⎞ ⎛ 0.08 ⎞ ⎟ ⎜ ⎟ ⎜ ⎜ ξ 0 ⎟ = ⎜ 0.17 ⎟ , ⎜ λ ⎟ ⎜ 0.8 ⎟ ⎠ ⎝ 0⎠ ⎝

⎛ L1 ⎞ ⎛ 3 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ L2 ⎟ = ⎜ 4 ⎟ , ⎜ L ⎟ ⎜ 2⎟ ⎝ 3⎠ ⎝ ⎠ (32)

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The rate of interest is fixed at 5 percent in the international market. Region 1 has the highest level of productivity. Region 2 ’s level of productivity is the second, next to region 1 ’s. We term region 1 as the advanced region, region 2 the middle region, and region 3 the remote region. We now show that the dynamic system has a unique equilibrium point. It should be remarked that although the specified values are not based on empirical observations, the choice does not seem to be unrealistic. For instance, some empirical studies on the US economy demonstrate that the value of the parameter, α , in the Cobb-Douglas production is approximately equal to 0.3 (for instance, Abel and Bernanke, 1998). With regard to the technological parameters, what are important in our interregional study are their relative values. The presumed productivity differences among the regions are not very large. This is similarly true for the specified differences in the amenity parameters among regions. Region 1' s land area is smaller than region 2' s and region 3' s land area is largest. The three regions have the same transport system in terms of travel speed. Region 1' s amenity parameter is the same as region 2' s and region 3' s amenity parameter is highest. The preference specification implies that the consumer spends 8 per cent of the available income on housing and 17 percent on the other expenditures. Following Lemma 1, we determine the equilibrium values of all the variables. We list the simulation results for the location-independent variables as follows

64

Wei-Bin Zhang

F = 14.596 , Fi = 10.926 , Fh = 3.670 , K = 47.457 , K = 3694 , E = − 0.538 , ⎛ k1 ⎞ ⎛ 3.493 ⎞ ⎟ ⎜ ⎟ ⎜ ⎜ k 2 ⎟ = ⎜ 2.886 ⎟ , ⎜ ⎟ ⎜ ⎟ ⎝ k3 ⎠ ⎝ 2.596 ⎠

⎛ f1 ⎞ ⎛ 1.164 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ f 2 ⎟ = ⎜ 0.962 ⎟ , ⎜ f ⎟ ⎜ 0.865 ⎟ ⎝ 3⎠ ⎝ ⎠

⎛ Fh1 ⎞ ⎛ 2.704 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ Fh 2 ⎟ = ⎜ 0.690 ⎟ , ⎜ F ⎟ ⎜ 0.245 ⎟ ⎝ h3 ⎠ ⎝ ⎠

⎛ w1 ⎞ ⎛ 0.815 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ w2 ⎟ = ⎜ 0.673 ⎟ , ⎜ w ⎟ ⎜ 0.606 ⎟ ⎝ 3⎠ ⎝ ⎠

⎛ K1 ⎞ ⎛ 27.042 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ K 2 ⎟ = ⎜ 6.902 ⎟ , ⎜ K ⎟ ⎜ 2.749 ⎟ ⎠ ⎝ 3⎠ ⎝

⎛ K i1 ⎞ ⎛ 24.277 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ K i 2 ⎟ = ⎜ 5.832 ⎟ , ⎜ K ⎟ ⎜ 2.670 ⎟ ⎝ i3 ⎠ ⎝ ⎠

(

⎛ N1 ⎞ ⎛ 6.951⎞ ⎜ ⎟ ⎜ ⎟ ⎜ N 2 ⎟ = ⎜ 2.021⎟ , ⎜ N ⎟ ⎜1.028 ⎟ ⎝ 3⎠ ⎝ ⎠

⎛ F1 ⎞ ⎛ 8.092 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ F2 ⎟ = ⎜ 1.944 ⎟ , ⎜ F ⎟ ⎜ 0.890 ⎟ ⎝ 3⎠ ⎝ ⎠

⎛ K1 ⎞ ⎛ 35.094 ⎞ ⎜ ⎟ ⎜ ⎟ ⎜ K 2 ⎟ = ⎜ 8.593 ⎟ , (33) ⎜ K ⎟ ⎜ 3.770 ⎟ ⎝ 3⎠ ⎝ ⎠

)

in which E ≡ r K − K and *

F≡

∑ (F j 3

j =1

)

+ Fhj , Fi ≡

3

∑ Fj , j =1

Fh ≡

Lj

3

∑ Fhj ,

( ) ( ) ( )

Fhj ≡ ∫ Rhj ω j chj ω j n j ω j dω j .

j =1

0

The variable, E , measures trade balance of the national economy. If E > (