Public Consultation on Subsidising Home Ownership
15 September 2010
Transport and Housing Bureau
16/F, Murray Building
Garden Road, Central, Hong Kong
Public Consultation on Subsidising Home Ownership
We are writing with our response to the above consultation paper.
We welcome the Government raising the subsidising of home ownership as a possible tool to tackle the present crisis of high flat prices. However, we regret the grudging and negative tone of the paper, which calls into question the Government's sincerity. We would emphasise that the present situation is a crisis, affecting the livelihood of many in our community, and that there is a strong and general expectation that the Government put all possible effort into developing solutions.
We support the immediate resumption of the Home Ownership Scheme (HOS) along more or less the original lines prior to its suspension in 2003. The HOS has the merits of being a familiar and readily available tool and to a great extent a successful one in the 30 years or so in which it operated. Some 18% of Hong Kong households have benefitted from the HOS and other related schemes, and it is well-regarded in the community. A further merit is that the HOS introduces diversity into the sources of supply of flats, so that the community is not wholly reliant upon the small group of developers who dominate the market.
The roots of the problem
At the same time, we believe that the problems of the Hong Kong property market are manifold, and cannot be alleviated by the revitalised HOS alone. A full analysis of the land/property market in Hong Kong is beyond the scope of this submission, but we would draw attention to the following key problems:
The Government's reliance on sale of land in various forms as a key revenue source, and its consequent incentive to restrict the supply of land so as to maximise its revenue.
The Government's policy of requiring payment of land premium in a lump sum upfront (rather than for example through payment of an annual ‘rent'), which excludes all but the largest developers from the bidding.
The Government's suspension of land sales earlier in the decade and its replacement of the former annual list of sites for auction with the present application list system, which has the net effect of slowing down the supply of sites.
The virtual stranglehold the large developers have been allowed exercise on the supply of flats, including their ability to withhold sites from development and completed flats from the market so as to maximise their revenues.
These policy-related factors have sharply constrained supply. This has unfortunately happened at precisely the time when demand is expanding. Two factors in particular are driving demand. One is the present extremely loose monetary conditions (following the global financial crisis), which, at least temporarily, makes borrowing to finance a flat purchase much cheaper. The other is the opening of the Mainland and the attractiveness of Hong Kong residence to many Mainlanders, which increases the pool of would-be buyers.
Given the situation of shrinking supply and expanding demand, the proper response is to expand supply. This is difficult to do except over the long term because of the policy obstacles mentioned above. It will take substantial time to identify solutions and build consensus in the community around them. In the meantime, therefore, we support the resumption of HOS as a feasible step that can be taken in the nearer medium term to boost supply.
We strongly oppose any form of loan or financial subsidy to buyers. This will simply inflate demand further, exacerbating the problem of high prices. Subsidised mortgage loans in the US were the immediate cause of the global financial crisis, and should not be on the agenda.
Relatedly, one aspect of the current crisis that has not received much attention is overstretch on the part of aspiring homeowners. We are not sure about the accuracy of the Consultation Paper's assurances on the current affordability ratios - anecdotally, at least, affordability ratios appear to be at impossible levels - but the crucial point is that interest rates are at present abnormally low. When interest rates revert to normal levels, as must inevitably happen sooner or later, many recent borrowers will face catastrophe. The Consultation Paper's assessment of the affordability issue is too optimistic.
Action to suppress demand for flats (e.g. by targeting speculators) is likely to fail as long as overall monetary conditions remain loose and Hong Kong remains a desirable place to be.
Although we support the resumption of HOS, for the reasons set out above, we believe from a broader perspective that home ownership per se should not be the paramount public policy goal. Home ownership introduces rigidity into the labour market (because owners cannot so readily move house to follow job opportunities as renters). Buying a home involves an enormous investment for the average citizen, which can easily result in a ruinous burden or an unearned fortune - neither outcome being socially desirable. Assuring adequate or decent accommodation for the population should be the goal, not ownership per se. As we have said, we believe HOS has a contribution to make, both now and for the foreseeable future. But the Government's broader strategy should be to facilitate the proper functioning of property market as a whole, in its rented as well as its owned segments.
The first step, as we have stated, should be an immediate resumption of the HOS. At the same time, Government must start to make efforts to increase flat supply on a broader front, or, more precisely, to improve the transmission of demand signals into the process of producing flats. This, obviously, starts with land supply system, but must also include the next step in the production chain, namely the large developers who have a stranglehold on the market.
Two further suggestions for immediate introduction:
Reversion to the former system of land supply, with an annually-announced list of sites for auction.
Introduction of a social responsibility code for developers, including a provision to provide a percentage of housing in each development to meet social needs (to be defined), on the model used in London and other overseas cities.
The above immediate measures, if announced in the policy address and implemented in 2011, should signal the Government's determination to address the roots of the problem. Concurrently, a longer-term initiative needs to be launched to analyse the deeper issues and develop more comprehensive solutions. Such initiative can also be announced in near term, although it will be a multi-year effort.
We hope that our views are useful to you in formulating policy.
Alan Lung Ka-lun
Key Question 1: Should home ownership be subsidised?
If we were to subsidise home ownership, what should the policy objectives be?
The policy objective should be to increase flat supply by immediate reintroduction of the HOS.
For those who can afford to purchase a home in the private sector, should they continue to rely on their own means and the tools available in the market to fulfill their home ownership aspirations?
The tools available in market are not adequate, given the policy-driven restrictions on supply and the developers' oligopoly. Steps must be taken to address these fundamental issues before the market can be said to function properly.
Is there a role for the Government to play a more active part in subsidising home ownership for those who otherwise cannot afford to home buy properties from the private market?
Yes, via the HOS only. Otherwise, effort should be directed to resolving policy obstacles, as discussed in our covering letter.
Is the proposal to subsidise home ownership sustainable in the long run and not for merely addressing short term situations?
The HOS has been, should now be restored as, and when restored will for the long term continue to be a valuable and sustainable policy instrument. It was the cancellation of the HOS early in the decade that was the short-term and unsustainable policy step - in fact it was a major policy error that has contributed to the current crisis. (On page 49 of the Consultation Paper it states, ‘Past experience has shown that there is no correlation between the number of subsidised flats put up for sale and the overall residential flat prices.' If this is the case, the suspension of the HOS in 2003 could not have achieved its objective of stabilising flat prices - even if that had been a valid policy objective, which it was not.)
Key Question 2: Who should be helped?
For the rational use of public resources, should any form of home ownership subsidised by the Government target only at those who are caught between eligibility for PRH and HOS Secondary Market or the private market, but who should be able to afford in the long term to purchase their own homes? Are they those who have been trying to save up for many years but are yet unable to buy in the private market?
It is well recognised that any welfare-type intervention in the economy by the Government needs calibration in terms of eligibility criteria so as to be perceived as fair by the community, and will nonetheless to some extent create a ‘poverty trap' for those who marginally fail to meet the criteria. We do not think these issues should detain the Government, and are certainly not a reason for not proceeding, given that the pre-existing HOS had solutions to them which were found to be satisfactory by the community for many years.
Should any form of subsidised home ownership provided by the Government be targeted at certain income segments only? How can such a group be defined? What are the justifications to single out this group vis-a-vis other groups in the community?
As stated above, the pre-existing definitions and targets of the HOS should be the first point of reference for the resumption of the scheme.
If indeed such a group can be identified for assistance should certain criteria/restrictions apply?
See above responses.
Irrespective of the form of subsidised home ownership, consideration should be given as to whether we should continue to grant priority to PRH tenants and others with GF status so as to encourage the turnover of PRH for allocation to low income families in need.
See above responses.
Key Question 3: What help should be offered?
Which form(s) of assistance will better meet the abovementioned factors (i.e. land resources implications, production lead time for subsidised housing, sustainability, and fair use of public resources, etc.)?
Revival of the pre-existing HOS.
Can reference be drawn to the criteria used in previous programmes for example, domestic properties test (e.g. not owning properties in the past for a certain period of time); 7-year residence in Hong Kong; income and asset limits according to the existing mechanism for WF HOS applicants; live-in requirement, etc.?
Other possible criteria can also be considered, such as restrictions to resell, restrictions to rent, first time home purchase, those who cannot afford downpayment (and who are they given the existing mortgage insurance programme?), young families (target group to be differentiated by age?), etc.
Please refer to the pre-existing HOS - as argued above, these are not new issues and satisfactory solutions were in place for many years.
Reproduction of this paper is permitted with proper attribution to the Hong Kong Democratic Foundation