Starter Home Premium and Housing Affordability

Siu Kei Wong (), Kuang Kuang Deng () and Ka Shing Cheung ()
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Siu Kei Wong: University of Hong Kong
Kuang Kuang Deng: Shanghai University of Finance and Economics
Ka Shing Cheung: University of Auckland

The Journal of Real Estate Finance and Economics, 2024, vol. 68, issue 1, No 3, 52-73

Abstract: Abstract Capital constraints are a major obstacle that holds back cash-poor households from purchasing a home. A workaround is to compromise the housing size and quality by buying a starter home one can marginally afford first. This study aims to investigate how capital constraints distort the pricing of starter homes. In Hong Kong, the government builds subsidized starter homes, which can be resold either to any households at full market prices through the privatized submarket or to households of limited affordability at lower prices through the affordable submarket. The subsidy in the latter case comes from the equity contribution of the government. If there were no capital constraints, the price gap between the two submarkets should simply be the government’s equity. However, our empirical analysis reveals a much smaller price gap, indicating that households with limited affordability are willing to pay a starter home premium in order to relax their capital constraints. Our estimation shows that the premium is in the range of 4.5% to 6.8%, and enlarges when the housing market becomes more unaffordable. The pricing of starter homes is based not only on their quality but also on their ability to relax capital constraints.

Keywords: Capital constraint; Credit rationing; Starter homes; Housing ladder; Housing subsidy (search for similar items in EconPapers)
JEL-codes: E51 H81 R38 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11146-022-09935-8

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