(This essay was published in the South China Morning Post on 25 July 2018.)


Chief Executive Carrie Lam Cheng Yuet-ngor has made homeownership, particularly subsidized public homeownership, the centerpiece of her government’s public housing policy. This is very wise. She has carried it forward by proposing a Starter Homes Scheme, regularizing the Green Form Subsidized Home Ownership Pilot Scheme (GSH), and increasing the discount on Homeownership Scheme (HOS) sale flats from the present 30 per cent to 48 per cent off the market prices of private housing flats.


There was no mention of reviving the Tenant Purchase Scheme (TPS) to sell public rental housing flats, despite calls from some quarters. Still, many pundits surmise that her policies represent a significant shift towards Singapore’s Housing Development Board (HDB) model.


HDB flats are sold at a discount to permanent residents, which are adjusted for affordability as economic conditions change. After a period of restriction during which the flat cannot be sold, the owner can sell the flat on the open market at a market price to any permanent resident who does not own a flat. Leasing out the flat is also permitted. Any appreciation in value accrues entirely to the owner.


In Singapore, the owner of an HDB flat buys, at a discount, 100 per cent of the user right, leasing right and transfer right to the flat.


In Hong Kong, by contrast, the buyers of HOS, TPS and GSH flats effectively receive only the user right to their flat.


At the time of purchase, the eligible buyer receives a 30 per cent discount, which is based on the market valuation of a privately owned flat. After a period of restriction, the owner can sell the subsidized flat in the future on the open market, but must pay back the unpaid 30 per cent discounted premium to the government.


The value of this discount is calculated at the time of sale, not the time of original purchase. So if the flat has appreciated in value, the unpaid premium will increase.


The owner also does not possess any leasing rights until the 30 per cent transfer value is paid up.


This arrangement is an inefficient use of public housing resources because the owner has no reason to move, even when it might be in the family’s interest to do so, when she gets 100 per cent of the use value but only 70 per cent of the transfer value of the flat. This also reduces the geographic mobility of the population and imposes many other costs on society and the economy.


The Singapore HDB scheme does not have these inefficiencies, but there is one right that the Singapore government has retained: HDB owners cannot redevelop their estates into private estates. When the structure becomes old, they can only allow the government to redevelop it into new HDB flats. In this way, these estates will never become foreign-owned.


Neither Hong Kong’s nor Singapore’s approaches are perfect. But while Singapore could conceivably justify its limitation on nation building grounds, what justification does Hong Kong have?


Amazingly, Hong Kong’s restrictions were introduced only in 1982 after Phase IIIA of the HOS flats – around the time the Volcker Fed increased interest rates in a bid to curb inflation. Hong Kong property prices dropped sharply in 1982, by 24.5 per cent after adjusting for inflation. Presumably the government was worried about selling the flats at deflated prices and at a discount.


What a terrible mistake this was and what a huge price the Hong Kong public has had to pay ever since.


Property prices have since soared and housing is no longer affordable for most. Increasing the market discount from 30 per cent to 48 per cent is fine, but what if the transfer value that has to be shared with government increases to 48 per cent at the time of future sale? It would further deaden the incentive to become geographically mobile.


If the Hong Kong government were to someday to follow Singapore’s model, we would need to create a better regime. Instead of the share tenancy arrangement, the government could adopt a fixed payment for the unpaid discount so that transfer and leasing rights would not have to be locked up. Actually, this reform is surprisingly easy to do.


If a genuine 30 percent discount were offered, then the remaining unpaid value would only be 18 per cent since the sale price was set at 52 per cent of market value. This 18 per cent could take the form of a deferred loan from government to be repaid when the property is transferred. This deferred loan would have a fixed value and could even accrue interest.


Such an arrangement would not be a sharing of the future transfer value. It would avoid all the disincentive effects and inefficiencies and even inequities of the present mutant public housing scheme.


How property rights are defined over public sales flats will have profound effects on the economy and society, and ultimately politics. The wrong path could cost us 1-2 per cent of GDP and further worsen inclusiveness in our society.

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