(This essay was published in the South China Morning Post on 25 April 2018.)
Hong Kong’s current public housing policy was devised in the 1970s when the central housing problem was overcrowding in the private rental sector. Many of the tenants then had very low incomes and it made sense at the time to focus policy on affordable low-rent public flats.
By the 1990s, however, the situation had changed completely. The number of units per household among private renters had dropped from 0.54 in 1971 to 1.00 in 1991 (see Figure). Overcrowding was mostly eliminated and a host of economic factors had increased the attractiveness of homeownership.
Unfortunately, the original public housing strategy did not change under these new circumstances. There was no systematic review of public housing strategy to reprioritize from a tenancy heavy model to an ownership heavy model, with the possible exception of the ill-fated and partially flawed Tenant Purchase Scheme (TPS) in 1998.
Today, as private home prices continue to rise and the shortage of private rental housing has led to the mushrooming of sub-divided units, more and more households have shifted their demand back to more spacious, more affordable public rental flats.
I believe this situation has obfuscated the real housing issue, which is the unsatisfied demand for homeownership.
The high down payment and high land values have made it extremely difficult for those with modest means to own a home in prosperous Hong Kong. But we can do something about this. I propose a method to sell new public flats and privatize the existing stock of public flats that would be fair to everyone and without setting a bad precedent that encourages a nanny state.
This proposal involves dividing the market value of public flats into the development cost and the land value.
The Housing Authority could offer the public flat for sale to eligible households at a price that would cover the cost of development, say, $1 million with a 5-10 per cent down payment. The household then could apply for a mortgage loan from a bank with government guarantee, as is the current practice with Home Ownership Scheme flats. The successful occupant would not be allowed to alienate the flat for the first 5 years.
The outstanding land value owed to the government would be calculated on the average land value for that site in the market over the past 10 years from today, to smooth out fluctuations. Repayment of the land value would not kick in until after the 5-year moratorium is up and will incur an interest charge of 2 per cent.
My proposal means that the government becomes a creditor instead of a joint equity holder in the flat. It could also perform an insurance role if a household’s financial circumstances deteriorate unexpectedly, by allowing the owner to service the interest charge on the outstanding loan without paying down the principal.
This arrangement should give hope to the owner that there is a realistic chance of repaying the loan eventually, and allow him to reap the full capital appreciation of his property.
Under my proposal, most new flats would be for sale and not for rent, and those who do not want to buy now and wish to rent should have the option to buy later. The Home Starter Scheme and the Green Form Subsidized Home Ownership Scheme could adopt these principles immediately as pilot schemes.
Moreover, the arrangements could also apply to existing public flats. This would restore circulation for an existing stock of 1.2 million public flats. The same 5-year sales moratorium would also apply, but renting out and subletting the flat to tenants on the Applications Waiting List for public rental housing should be exempted. This would provide substantial immediate relief to the overcrowded private rental market. It would help perform a service to which the government is committed.
I realize there would be objections. I have heard it argued that the middle class would object to giving low-income households such a lucrative deal, but this is based on a false premise because the land value and development cost are currently not recovered in the rents of public rental housing flats. The middle class is already paying for public housing through taxes. Furthermore, the flats are not sold at a discount to the market, but at a 10-year average price to remove business cycle price fluctuations.
Others say the government should not encourage low-income households to take unusual risks, because what if the property market crashes? But the substantive threat of foreclosure and an inability to reschedule debt payment can be resolved if the creditor is the government.
A third objection stems from the government’s troublesome experience in operating the TPS with public rental in the same building. This is a management nightmare because owners generally do not see their units as fully owned since the unpaid premium is so unaffordable. The interests of owners and renters are not well aligned. My proposal provides a way of resolving this problem.
A program that facilitates flat sales would revive hope for both the low- and middle-income strata, make better use of existing scarce housing resources immediately, be sustainable for the long-term, and narrow the economic and social divide in Hong Kong.
Refocusing public housing policy towards homeownership would, however, represent a major policy shift. Why is it imperative that the government does so today? And what would happen if it fails to do so? This is the subject of my next article.