This study investigates the factors that affect the home-ownership propensity of households using a modified two-period equilibrium model. In particular, the study examines the impacts of some social, political and economic factors that in theory should affect housing tenure choice but have limited empirical evidence so far. To test the impacts of these factors, five sets of Hong Kong Census and By-Census cross sectional data over the period from 1991 to 2011 were used to estimate Binary Logit Models. Further robustness tests were conducted using sub-sample of the entire dataset.

There are three key empirical findings that contribute to the existing body of knowledge in housing tenure choice. First, it is found that the positive income effect on home-ownership propensity found in previous studies can be reversed by political risk. There is strong evidence which suggests that income has negative impact on home-ownership propensity during periods of high political uncertainty. The handover of Hong Kong to China in 1997 was used as an event to study how political uncertainty would influence the effect of household income on housing tenure choice. Before the handover of Hong Kong in 1997, risk-averse households with high income in Hong Kong tended to be tenants rather than owner-occupiers so as to reduce their moving cost and increase mobility. High income households tended to be more internationally mobile and could migrate to other countries more easily, while households with low income were less internationally mobile and hence their housing tenure choice was less affected by political risks. The income effect on home-ownership propensity turned positive after the handover in 1997, when most of the political uncertainties were removed.

Second, this study shows that policies that encourage inflow of capital to Hong Kong has an unintended consequence of depressing the home-ownership rate of local households. Empirical results in this study suggest that local households are less likely to be owner-occupiers after the implementation of Capital Investment Entrant Scheme (CIES) and the Individual Visit Scheme (IVS) in Hong Kong in 2003. These policies have increased non-local demand for housing. Even after temporary suspension of housing as a class of Permissible Investment Assets (PIA) on 14 October 2010, successful applicants under the scheme, who are usually very rich, could afford and tend to buy their own housing units in Hong Kong. Due to the inelastic supply of developable land in Hong Kong, increased demand from immigrants had driven up housing prices, making housing less affordable to many local people. In addition, the IVS implemented at about the same time have also contributed to the surging demand for housing from non-local buyers, since the IVS has made visiting Hong Kong for people from Mainland China much easier than before. Due to the limited supply of developable land and appreciation of the RMB, some visitors from Mainland China find it attractive to buy housing units in Hong Kong for investment or self-consumption purposes. 

Finally, the impact of local language proficiency on tenure choice is another major finding in this study that was not investigated in the past. Compared to non-Chinese speakers in Hong Kong, Chinese speakers, especially Cantonese speakers, are more likely to be owner-occupiers. There are two potential explanations – cultural fit and transaction costs. The cultural fit hypothesis proposes that an individual who is proficient in local language can culturally fit to the society better and therefore has a higher home-ownership propensity. The transaction cost hypothesis suggests that the transaction costs of an individual’s the daily life and economic activities are higher if he/she is not proficient in local language, which made him/her less willing to have longer term commitments to live in Hong Kong. The higher transaction cost applies to all economic activities that involve bargaining, matching and searching. Home purchase is an example of such activities. However, due to the large sum of money involved in buying a housing unit, risk-averse individuals who are not proficient in local language would prefer renting to buying when making a decision on housing tenure choice. Empirical results in the study suggest that transaction cost is more important than cultural fit in explaining the local language proficiency effect on home-ownership propensity.

The above empirical findings are robust across different methods of controlling the effects of other factors that affect housing tenure choice using restricted subsamples.