Time for An Overhaul of Out Housing Policy

Ivan Ko

Following the announcement in July 2000 by Chief Executive Tung Che Hwa about the abolition of the 85,000 housing units production target, the public is left with the questions of whether there will be a substitute production target, whether the other two original targets of reducing the waiting time for Public Rental Housing to three years by 2005 and the increase in home ownership rate to 70% by 2007 still carry.  Certainly, the recent series of scandals about the Housing Authority and the resignation of its Chairman in June 2000 made the issue more complicated and vulnerable.  The suspension of Home Ownership Scheme (HOS) program for this year and the shifting of some completed HOS housing into Public Rental Housing invited further criticism and puzzle.  All of a sudden, it seems to us that we have received confusing or even conflicting signals from the government on its housing policy, if there is still a housing policy at all.  This is in big contrast with the loud and clear messages about the three housing targets we heard at the time when the Chief Executive took his office in 1997. 

        After so many conflicting signals and the scrapping of one of our three housing targets, it is time for us to have an overhaul of our housing policy.  In view of the profound effect of the housing policy on the wealth of the society and the living standards of the general households, the government should not "rush out" a substitute housing policy in the short term but has to allow sufficient time and creativity for an overhaul of the existing housing policy or the formulation of a new one. 

        The current housing policy structure was laid down when the Housing Authority was set up in 1973 under the Housing Ordinance when the government started to implement its ten-year housing program for the resettlement of squatters and to improve the living standards of the general public.  The Housing Authority has been very successful in fulfilling its role as a public housing policy maker and the major supplier of public housing in the past few decades.  However, its role of formulating the public housing policy was "subordinated to" the Housing Bureau which was established in 1996 to lay down the Long Term Housing Strategy which the Housing Authority would have to follow.  But the role as the public housing supplier remains.  Certainly, we also have the Housing Society participating in the supply of public housing but it only plays a relatively minor role of producing only a few thousand units per year compared to tens of thousands produced by the Housing Authority. 

The Intervention - Problem of Short-term Adjustments

        The government started interfering in the property market back in 1978 by producing HOS housing for sales to households with low affordability.  It was a very successful public housing scheme and was widely accepted by the society, driving the Housing Authority to  produce more and more HOS to satisfy the increasing appetite of the general public.  The intervention role of the HOS housing was further enhanced when, in 1997, our  Chief  Executive  wanted to achieve the housing targets of producing at least 50,000 public housing units and 35,000 private residential units per year and increasing home ownership to 70% by 2007.  The HOS housing is thus used to influence the property prices by producing and selling more when the market price is too high or producing and selling less when the market is gloomy so as to achieve a "balanced and stable market price" for property.  The recent suspension of sales of HOS housing within this year and the conversion of some completed HOS housing into public rental housing are good proof of the misuse of the role of HOS housing, which deviates  from its original role of serving the less affordable class.

        The intervention of the government in the property market goes further than this.  In 1997, when property prices reached their all time high due to the longer-than-expected economic growth for the past three decades and the 50 hectares annual limit of residential land supply imposed by the Sino-British Agreement signed in 1984, the SAR government tried to produce 85,000 housing units per year, much more than the market needs.  (The housing production target set by the Housing Bureau in early 1997 was an annual production of 80,000 units which reflected what the market needed up to 2006 and had already included a 7% buffer.)  Once we started using our intervention mechanism, we would be addicted to using it again and again.  Thus, we saw the government suspending land sales in 1998, abolishing the 85,000 housing production target and diverting the HOS supply to Public Rental Housing this year.

        The question here is whether we should have a set target of housing production and whether we should have a property price which we perceive as the "right price" when deciding on our housing policy? 

Housing Authority - Problem of Its Roles

        The second major issue of our housing policy is the structural problem.  Since the establishment of the Housing Authority in 1973, it has grown into one of the largest government departments.  According to its Annual Report 1998/99, it employed more than 10,000 staff, having total net asset of HK$120 billion and managing a total fund balance of HK$30 billion.  These have not even taken into account the land premium of the properties it owns.  The Housing Authority has 670,000 Public Rental Housing units and 14.3 million sq. ft. of commercial properties; a rough estimation of its unpaid land premium is believed to be another HK$180 billion.*    The series of scandals uncovered recently has rendered us to rethink what is wrong with the Housing Authority and whether we want such a "monster" or we want a little nice watchdog. 

        The fatal problem is that the Housing Authority is playing too many roles, thus forced to expand itself without a limit and finally generating all kinds of system errors.  Can we expect the Housing Authority to be good at its policy implementation role and at the same time be able to do a good job at developing property, project management, selling property, maintaining property and managing property for rental income?  It is quite obvious that these roles have put the Housing Authority into running a huge property development business and it has even grown to such a size that the private sector is being threatened or cornered.

Some Possible Solutions

        What we should expect from the Housing Authority is that it should perform well and confine itself to formulating public housing program and qualifications, qualifying applicants, monitoring the soundness and fairness of the system and making allocation of resources.  All other "developer functions" should be left to the private sector which can certainly do a better job than a government organization. 

        One may wonder how can this be achieved.  Following are some possible solutions:

(1)   On the subsidies in public housing, it can be distributed to qualified applicants in the form of vouchers instead of completed housing units so that tenants are free to choose their own homes.

(2)   On the production of public housing, lands designated for government housing programs can be tendered or auctioned to private developers by requiring them to achieve certain minimum design and quality standards but at the same time allowing them the flexibility in the development by not capping them on rental prices.

(3)   To avoid monopoly or dominance by a few developers, the government can introduce structure finance means such as Real Estate Investment Trust, or securitization to invite more varieties of "management-oriented developers" to take part in the public housing development.

(4)   For HOS housing, it can either take a similar approach suggested in (1) and (2) above or the Housing Authority can just grant the financial subsidies and leave the buyers to shop for their home in the private market.

(5)    For the existing rental income properties, they should be privatized to maximize the return for the government by either straight disposal or securitized in the form of Real Estate Investment Trust.

(6)    To generate adequate funding for the subsidies, the Housing Authority can rely on the land premium, the funds from securitization or the disposal of the properties.

        These measures are not exhaustive but definitely offer some creative ways to offload the production and ownership burdens of the Housing Authority. 

Home Ownership - Achievable or Not? At What Price?

        About the target of raising the present home ownership rate from 52% to 70% in ten years time, we have to be especially cautious about this.  As we all know, it took us several decades to increase our home ownership rate to the present level.  There is no sound reason why we have to hurry to achieve the high ownership rate within the next ten years.  It should be understood that home ownership rate is the result of economic growth and the accumulation of wealth.  Hong Kong, due to its change in the economic structure, can no longer expect to have such high growth we have enjoyed in the past.  Even with strong economic growth as in United States, the Housing and Urban Development Department of the US has recently only announced a moderate plan to increase the home ownership rate from 66.2% to 70% in six years.  The home ownership target our government is aiming at is three times the speed of the US.  Can we really achieve it without repercussion?

        With regard to regulating housing supply, the government should adopt a rough target instead of a rigid one.  It should not determine what price level is acceptable when formulating its housing or land supply targets.  The short-term volatility of property prices would trap us into a frequent and never-ending process of adjusting our housing targets on a short-term basis and get ourselves lost in the long run.  It would work better if the government just regulates the market by land supply on a long-term basis and leaves the short-term volatility to market force. 

Notes

l          According to 1998/99 figures, the Housing Authority has 670,000 Public Rental Housing units and 14,300,000 sq ft of Commercial Properties for rental income.  The rough estimation of the land premium is calculated as (assuming each Public Rental Housing unit's average size is 350 sq ft and the accommodation value of the land premium is $700 sq ft for Public Rental Housing unit and $1,100/sq ft for commercial properties): 350 x 670,000 x $700 + 14,300,000 x $1,100 = $178 billion

Mr. Ivan Ko is the Chief Executive Officer of the Advantage Mortgage Services Limited.  He is also a member of the Housing Concern Group of the Hong Kong Policy Research Institute