I have written over the past several weeks about the source of Hong Kong’s housing sector woes. What it comes down to is homeownership. Hong Kong needs a long-term housing strategy to increase homeownership over the next 10 years and beyond if it wants to address not only the housing problem but the economic and political issues with which it is intertwined. Currently 52.1% of households own their own homes (36.2% own private units and 15.9% own subsidized public units). Setting a goal of 80% homeownership in the population will make it possible to address problems related to housing policy, with spillover benefits for the political and economic environment.
By homeownership I mean those who have full title to their unit and can sell it on the open market without having to settle an unpaid land premium. At present Homeownership Scheme (HOS) and Tenant Purchase Scheme (TPS) occupants have to first settle this premium, which can be prohibitively expensive. Cooperative housing units, including those built by government and the Housing Society, also have restrictions on disposal. Units in the private sector do not, and HOS and TPS units that have settled the premium are classified as private sector, meaning they transfer ownership without restriction.
A long-term housing strategy that expands homeownership needs to address five key related issues: (1) satisfy the demand for affordable housing, (2) recognize the critical role of housing assets as a store of value and for upward social mobility, (3) minimize systemic risk arising from periodic property market bubbles, (4) ensure land and property development are aligned with the economic strategy of dual integration with the Mainland and the global economy1, and (5) recognize that land values will be an important component of fiscal revenue for many years to come.
Why Increase Homeownership?
Hong Kong is a prosperous society with a growing economy situated in fast rising Asia. Property and land values will in the long run rise faster than production due to both domestic and overseas demand. Households without property to protect their savings will likely fall behind as society continues to grow and prosper. As a totally open economy tightly integrated with the global financial and monetary system, Hong Kong is also vulnerable to inevitable macroeconomic shocks. These shocks make it hazardous for individual households to risk their savings in property whose value may rise or fall quickly in the market.
The high value of Hong Kong’s real estate today is the product of a rising China and our unique position as a Special Administrative Region under a common law jurisdiction. China’s growing prosperity enhances the value of our land to the detriment of less well positioned residents. If not properly addressed, this situation will hinder our ability to achieve dual integration with the Mainland and the world market economy.
It is worth appreciating that a whole generation of Hong Kong residents left China for an uncertain future in Hong Kong after the People’s Republic closed its doors in 1949. That generation struggled to create a successful economy that is fully integrated with the global world market. After China reopened its door in 1979, Hong Kong residents had to readjust to the requirements of dual integration. Readjustment was made additionally difficult at times by our adherence to a linked exchange rate system. Not everyone was well prepared to adjust with equal agility and luck, and this has led to a sense of insecurity among those left behind. Unless we appreciate such insecurity it will not be possible to understand why some people in Hong Kong still bite the hand that feeds them.
Since the 1950s the government has been a major provider of housing and the huge clamor for this to continue reflects not just a lack of shelter, but a deeper malaise. People are insecure about their future in this place. Such insecurity manifests itself in different ways – concern about jobs, family, future lifestyle, retirement protection, health, the next generation, environment and heritage, relations with our neighbors, and so on and so forth. These insecurities are therefore not confined to concerns about property ownership, but the lack of ownership makes them much worse.
Having property may not be the answer to everything, but it helps to allay some of the fears. It provides households with another means to deal with the many other problems they have to manage.
Hong Kong is not the only place in the region to face insecurity over shelter and property. On the eve of the independence of the Republic of Singapore, Mr. Lee Kuan Yew’s People’s Action Party understood what had to be done and resolutely tackled it.
In order to avoid Hong Kong becoming increasingly polarized into a society of “haves” and “have-nots”, it makes sense for the government to help permanent residents, especially those who are less well-off, to become property owners. This will provide them with not only housing, but also a stake in the future of the community. As it stands now, many households regard the prospect of entering the market as a remote possibility because land values have become so expensive.
Government assistance in this specific manner would go a long way towards sustaining the confident, stable, and undivided community that has characterized Hong Kong for many years. An 80% homeownership goal has to be the primary goal of a long term-housing strategy today. How, then, can it be achieved?
A Revised Subsidized Housing Scheme for Hong Kong Residents
Targets for homeownership have been set in the past in Hong Kong. A 60% target was laid out in the policy document A Review of Public Housing Allocation Policies (1984.) The target was reset to 70% in the Ten-Year Housing Plan (1998). Despite these goals, we know from the 2011 Census that of the 2,369,000 households, only 858,000 of homeowners were in the private housing sector and 377,000 were in the subsidized housing sector. These numbers represented, respectively, 36.2% and 15.9% of the total number of households – collectively 52.1% of households. This is not a proud achievement.
Moreover, one-third of the homeowners are at best only partial homeowners because they own subsidized HOS flats and will have to settle the unpaid land premium charged by the government before they can sell their flats. The issue will become more complicated over time. In less than a quarter century some of the HOS blocks will be physically deteriorating and redevelopment will have to be seriously considered. But is this feasible without full ownership title? Who after all is the bona fide property owner who can agree to the redevelopment? A responsible government would have to step in to facilitate redevelopment, perhaps even to take over the whole process. And what will that imply about homeownership under the HOS?
The housing situation in Hong Kong needs to be addressed as a priority. As a first step towards a sound long-term housing strategy, I propose to revise and unify the existing Public Rental Housing (PRH) and HOS programs into a single Subsidized Homes Scheme (SHS) for Hong Kong residents. The key features of the proposed changes are:
1. Housing units under the SHS may be provided by the government and conceivably operated by the Housing Authority, perhaps working together with the Housing Society.
2. The rental and purchase prices of these homes should be set at levels that are affordable to lower and lower-middle income households. As long as there are eligible households the government will continue to operate the proposed scheme.
3. SHS units would be available either for rent or purchase to eligible households. It will no longer be necessary to operate the PRH and HOS as two separate programs.
4. Applicants for SHS units who choose to rent first would have the option of purchasing their units later. The SHS tenants may also opt to purchase newly available SHS units instead of the original unit they are occupying.
5. SHS homeowners would not be allowed to sell their purchased units on the open market within 5 years of the initial purchase.
6. SHS units can only be rented to Hong Kong permanent residents and must satisfy eligibility criteria.
7. SHS units under the possession of the government must be sold to Hong Kong permanent residents. The SHS homeowner, however, can sell the units on the open market to any individual 5 years after the initial purchase. Any capital gains from the appreciation of land values would be retained by the SHS homeowner.
8. The unpaid land premium on existing HOS units should be settled using a new formula. At least two options could be considered.
(a) First, recalibrate the value of the property to the original market value at the time of purchase and apply a 70% discount2. The discount on value is justified on the grounds that the original HOS was intended to be a form of subsidized housing. The unpaid amount of land premium should accrue an interest charge. The interest rate shall be preferential because such a loan is essentially risk free since it would have secured a government guarantee.
(b) Second, recalibrate the value of the property to a fixed percentage of the qualifying income for eligible households and then multiply it by 30 years. The unpaid land premium is calculated as the difference between this value and the amount paid at the time of the purchase. The unpaid amount shall accrue an interest charge at a preferential interest rate.
9. Existing PRH units could be sold to the sitting tenant in a manner similar to the TPS, except a new formula would be devised for setting the sale price.
(a) A possible approach is to adopt a method analogous to that proposed in paragraph 8b above.
(b) For TPS units that have been sold, the unpaid land premium could be settled again in a manner analogous to the proposal in paragraph 8b.
10. The disposal restrictions on cooperative housing units would be relaxed, including those built by the government and the Housing Society, based on variations of proposals 8a or 8b.
Under the SHS proposal there would be a lot of low hanging fruit that could be plucked at little cost to society. First, we could sell the 63,400 TPS units that have been unsold since 1998. Second, all the PRH units built since that year (amounting to 281,000) could be earmarked for sale to the sitting tenants. This would immediately increase homeownership by 14.5% and bring the total homeownership rate in the population to 66.6%. Third, all new public housing sector units built in the next decade would be SHS units. If the government increased the homeownership rate by only 1.3% a year, the 80% target would be readily achieved by 2023. This translates to about 31,656 units in 2011, when the number of households was 2,369,000. Fourth, the remaining stock of PRH units in 2011 (i.e., 373,600=718,000-63,400-281,000) could be converted into SSH units either by inclusion in the TPS or when they are redeveloped in the future.
Bear in mind that we have not counted the contribution of the private housing sector. There is thus no reason why a homeownership target exceeding 80% cannot be achieved in 10 years.
Full Homeownership for Hong Kong Residents
Conceptually, the redevelopment of the remaining stock of PRH units could even be undertaken as an urban renewal initiative. For example, households in an entire public housing estate or a subset of buildings could be empowered with ownership of the unit they occupy for the purpose of redevelopment. They could then negotiate the redevelopment initiative as a group subject to the requirement that each household must possess a unit in the future redeveloped estate. For this to happen it would be necessary to create some facilitating institutional arrangement, which we will not discuss here. The cost of redeveloping these estates and any interim housing arrangements could be financed entirely out of the land values that the occupants could unlock. As a self-financing project it does not have to cost the taxpayer anything.
People today see property as more than a form of shelter. They desire to own property as an asset to insure against an insecure future yet they know that a private sector home is unaffordable for many of them. That is why they try to climb through the PRH and HOS public housing ladder, but here their aspiration is constrained because that ladder leads only to a compromised future of partial and incomplete property ownership, where they cannot sell their unit on the open market without paying an exorbitant land premium. Should this be the ultimate prize that the people of Hong Kong have to look forward to? More importantly, can Hong Kong afford to allow this situation to continue? Next week in the final article in this series I will look at another factor affecting homeownership –– land development –– and the wider benefits to society of increasing homeownership.
1. For an elaboration of the meaning of dual integration please read Chapter 1 in YCR Wong, Diversity and Occasional Anarchy: On Deep Economic and Social Contradictions in Hong Kong, Hong Kong University Press (forthcoming).
2. This is the original discount provided in the first batch of HOS units.
No post during July-August.
Weekly Commentary continues again on
6 September 2012.
- YueChim Richard on Economic Integration with the Mainland – Pregnant Mainland Mothers and the Right of Abode
- Jonathan on Economic Integration with the Mainland – Pregnant Mainland Mothers and the Right of Abode
- Ernest Chu on Dolce Gabbana, Apple and Nike — the Economics of Discrimination
- Scott Sumner on Easy Money, Tight Money, and Market Monetarism
- Aaron D. Hall, Twin Cities, Minnesota Lawyer on The Global Economy Shifts East