(This essay was published in South China Morning Post on 19 April 2017.)

 

The housing malaise in Hong Kong is often seen as a problem of demand growing faster than supply. Government policy aims to (1) manage demand by discouraging transactions through high stamp duties and mortgage down payments in the shorter term, and (2) increase housing supply in the longer term.

 

Accordingly, the housing malaise is interpreted as a straightforward problem of insufficient housing units. This appears to account for why existing housing units in the private sector are being sub-divided to meet the excess demand and the waiting time for public sector units has lengthened. Such an approach assumes that once enough public and private housing units are built, the malaise will disappear.

 

But our current housing malaise is not only about insufficient units, it is also about high prices. Three decades of rising property prices have made a very large number of households wealthy because their properties have appreciated greatly in value.

 

At the same time the present income eligibility criteria to qualify for Homeownership Scheme units is set at a monthly household income of $52,000 or less which, according to government surveys, applies to about 80 per cent of households.

 

By implication, the government is saying that in principle four in five households qualify for public housing subsidies. If this is correct (!), then it is not at all obvious that government policies are delivering on this goal (“only” 45.7 per cent of households currently are in the public sector).

 

Our housing malaise has so many complex interconnected dimensions that simply building more public and private units will not suffice as a solution. How can we possibly balance the ratio of private and public housing, ensure public housing does not act as an incentive to divorce and remarriage because of the convenience of cross-border marriages, or keep spending on public housing under control?

 

And how can we prevent housing from aggravating the growing economic and social divide between the property-owning haves and have-nots?

 

Obviously a new public housing strategy has to be devised. This can be undertaken in four steps.

 

Step 1: Sell most new public housing units (instead of renting them) using a new financing arrangement to assist households that are not well off.

 

Most newly supplied public housing units should be available for sale. The sales price could bethe market price and be divided into two parts: the development cost and the land value.

 

Households that choose to purchase the units will first pay the development cost. An initial 5-10 per cent down payment will be required and the balance paid with a mortgage loan from a bank. Government will provide a guarantee to banks to facilitate mortgage lending. Units bought cannot be transferred on the open market for 5 years, subsequently they can be freely transferred on the open market and the owner will receive all capital gains.

 

The land value, meanwhile, will be fixed at the time of initial purchase and be paid for as a loan from government at a fixed interest rate of 2 per cent, with the charge starting after five years. It can be repaid by installments on fairly long flexible terms so that individual households can afford the payments. If the owner fails to make payment, then the sum will be deferred and charged to the outstanding loan.

 

This approach is in effect a government intervention to correct capital market imperfections confronting the less well-off when they seek loans from banks. It exposes no party to any risk.

 

All individuals will only be eligible once in a lifetime for ownership financing by government.

 

Step 2: Extend the new financial arrangement to existing public housing units.

 

After successfully taking the first step, the government can advance towards the second step, which would allow a much larger pool of eligible households currently occupying public housing units to become homeowners. The same principles of original values at time of completion adopted above shall be used. There will also be a depreciation rate on the estimated development cost, but not on land values.

 

Step 3: Facilitate redevelopment.

 

To reduce the transactions cost of redevelopment, stratified titles shall be defined for each building and not on the entire housing estate. Provision for forced sales could be triggered if at least 80 percent ownership shares vote in its favor.

 

Step 4: Think about old estates.

 

Some older public rental housing estates will have to be redeveloped within say two decades. The pos and cons between redevelopment as a public versus private housing estate needs to be considered. If privatization is chosen the triggering level for redevelopment should be at most 70 per cent ownership.

 

Privatizing the entire stock of public housing will improve economic efficiency, foster social harmony, and empower citizens politically. It will narrow the divide and disparity that is plaguing communities. If land values are so released, our community will be enriched and invigorated. Our valuable land resources should not be left to waste.

 

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