HK Government invasion of the housing market
2 July 2018
Concluding her first year in office, HK Chief Executive Carrie Lam Cheng Yuet Ngor announced a raft of new interventions in the housing market which build on a crumbling foundation of mistakes by her predecessors and take HK further away from free-market principles.
The Government's obligation
The government of any society has a role to play in ensuring that its people have access to housing, other basic necessities and a social safety net. These are covered in Article 25 of the UN's Universal Declaration of Human Rights (UDHR):
"Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control."
The wrong and outdated policy
The "CE's Housing Policy" is stated on page 3 of the annex of a paper tabled in the Legislative Council on Friday (29-Jun-2018). The first paragraph of her policy is consistent with the UDHR:
"housing is not a simple commodity. It is one of the pillars of a caring and inclusive society. While respecting free market, the Government has an indispensable role to play in providing Hong Kong people with adequate accommodation;"
But it is the second paragraph that causes problems:
"we will focus on home ownership, and will strive to build a housing ladder to rekindle the home ownership hopes of families in different income brackets;"
It is a government's role to ensure that people have a home, not that they own one. If the Government really respects free markets as she claims in the first paragraph, then she would appreciate this important distinction. Whether a person, or a family (and her policy's emphasis on families is irrelevant) owns or rents a home should be of no concern to government, as long as that person or family has adequate housing.
Home ownership is not a human right. In fulfilling the government's role, it is sufficient to provide means-tested financial support for people to rent adequate housing if they cannot afford to do so. There is no need to go beyond that by subsidising home ownership, any more than there is to subsidise share-buying or car ownership. If people are fortunate enough to be able to save up the equity to own property and hand it on to their children when they die, then good for them, but they shouldn't expect taxpayer support to do so. In providing rental support (and sufficient land supply to the market, which is beyond the scope of this article), a government can fulfill its obligation to ensure that nobody is homeless unless they choose to be.
Public Rental Vouchers, not Public Rental Housing
In providing rental subsidy, a government does not need to be on the other side of the tenancy as a housing landlord. The HK Government persists with an outdated policy, introduced in an emergency in the 1950s, of building, owning and providing "Public Rental Housing" (PRH) at deeply discounted rents, providing the subsidy via the discount. This is a highly inefficient way to provide the subsidy because, when households shrink as children grow up and leave, or spouses separate or die, the remaining members tend to stay in the same unit, paying little or nothing for rental, resulting in underused properties. Downsizing to a smaller unit would mean receiving a smaller subsidy.
In the 10 years to 31-Mar-2017, the stock of PRH flats increased by 91,548 (13.5%) from 677,804 to 769,352, but the "authorised population" in those units only increased by 106,573 (5.4%), from 1,987,900 to 2,094,473 (source: Housing Authority annual reports). So each additional unit has housed on average just 1.16 people and the average PRH household size has dropped from 2.93 to 2.72.
If the Government simply provided a voucher for rental subsidy based on a household's size, income and assets, allowing the household to rent a home from the private sector (including the privatisation of all existing PRH units), then when the household shrinks, so would the voucher, and there would be an incentive to downsize.
This artificial segregation between "public housing" and "private housing" results in several things:
- Endless debate about how much land should be allocated for "public housing" relative to "private housing", with a perception that the allocation favours either rich people or poor people, rather than just a debate about how much land should be allocated for "housing";
- Poor people living in designated ghettos of "public housing", with resulting social problems, rather than mixing with the general community;
- It is politically difficult to evict tenants who have moved up the income scale, because the Government is also their landlord, whereas a means-tested rental voucher could simply be withdrawn or reduced when the recipient's income level rises. So the Government doesn't test incomes for 10 years after occupation of PRH, and after that, under the "Well-off Tenants Policies", tenants with incomes of 3-5 times the limit only pay double-rent, which is still far below market rent levels. It is only when their income reaches 5 times the PRH limit (or assets 100x) that they must vacate. And if you make it to 60, there are no further tests.
Indeed, in her latest proposals, the CE has announced the diversion of land from private to public housing for 10,600 units at Anderson Road Quarry and Kai Tak, thereby reducing the supply of land for private housing and increasing the Government's footprint in the housing market.
The Government should break the habits of the past and replace "public housing" with "Public Rental Vouchers" (PRV), provided based on regular declarations of income, assets and household size of the recipients. All the existing PRH stock could be converted into Real Estate Investment Trusts (REITs) and sold on the stock market, and every tenant who qualifies could be given a voucher equal to the difference between market rents and what they have previously been paying. They would be free to use the voucher to rent their current unit, or take the voucher and rent a unit anywhere else in HK, providing greater mobility. The privatised owners would similarly be free to rent the properties to anyone, with or without a voucher. There would no longer be "public housing", and the Government would no longer have the conflict of interests between being both a landlord and a provider of subsidies.
No ownership subsidies
Carrie Lam has embarked on yet another layer of home-ownership subsidies, for households too rich for the Home Ownership Scheme (which has an income limit of HK$57k per month), which she calls the "Starter Home". Eligible households can have incomes up to 130% of the HOS limit, or about $74.1k for a household with 2 or more persons. As a reality check, look at the latest (Mar-2018) Quarterly General Household Survey by the Census and Statistics Department. This shows (PDF p112) that only 14.3% of economically active households had incomes of $80k or more, with a further 9.7% in the range of $60,000-79,999. So her proposal would qualify some 80% of economically active households for some kind of ownership subsidy, if they haven't already owned a home. If that isn't interventionist, then what is? And yes, if you have made the mistake of previously owning a home, then you won't qualify for the new lottery, regardless of income.
She also announced larger discounts for Home Ownership Scheme sales. The reality is that every time a Home Ownership Scheme goes on sale, it is massively over-subscribed by people who do qualify, under existing thresholds, to buy the units at the existing discount of 30% below market price. There is clearly no affordability problem for these applicants, otherwise they would not be buying and would not get mortgages - so by lowering the prices further, she will just increase the application ratio and the "lottery winner" effect, as more people on lower incomes will qualify. For sure, the market prices and even the 30% discounted prices may currently or retrospectively look ridiculous, but they are plainly not unaffordable to those who apply.
There is simply no need for any of these schemes. Step back and let the free market function. Focus on expanding land supply, not on layer after layer of market-distorting subsidies that favour the lucky few.
Land lease reform
Of course, when we talk about home ownership (or any other kind of real estate ownership) in HK, what we really mean is "leasehold ownership". The Government leases land to the private sector on 50-year land leases, and a home buyer doesn't get the freehold, but a fractional interest in the land lease and the buildings upon it for the remainder of the lease. That's a whole different subject - the fact that many leaseholds in HK expire on 30-Jun-2047, less than 29 years from today. We've covered the need for land lease reforms in our articles of 2010. The nearer we get to 2047, the harder it will be for the government to change owners' expectations of a free renewal from whomever is governing Hong Kong at that time.
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