Housing at crossroads
James Lee and Lawrence Lau
HOUSING POLICY, under review by the government, is at a crossroads. The existing system, comprising mainly public rental housing (PRH), the Home Ownership Scheme (HOS) and subsidised home purchase loans, is inefficient in the use of resources.
By tailoring aid to actual need, billions of dollars could be saved, helping to resolve the budget deficit and fuel a recovery.
Two ways in which housing resources are mismatched and could be better spent have been well publicised. Instances of major defects in subsidised housing construction suggest that the private sector could do a better job. There are also cases of premium-land allocation for subsidised housing that could be located cheaper elsewhere. Mismatch between land value and land use inevitably arises when the government, rather than the market, decides the allocation.
Another resource mismatch occurs because for any particular housing benefit, all households below a certain income limit currently receive the same quantity of aid. Actual need differs widely between the recipient household that is just $1 short of being able to afford private housing, to the household that needs every dollar of the benefit.
Better-off families can afford larger flats and receive not just equal, but greater benefits under the HOS and subsidised loan schemes. Taking the HOS as an example, discounts have historically equalled 30 per cent to 60 per cent of the price of a flat.
Another mismatch surfaced when housing costs fell sharply. Mortgage costs fell by about 70 per cent. Meanwhile, qualifying income limits for housing benefits remained unchanged or even increased. As a result, many families could afford private housing and yet received aid. It impeded the shift of demand to private sector housing as prices fell. The HOS price discount further undercut market prices. A depressed property market, in turn, affected the various types of property-related revenue to the government. The Budget was hit on both the cost side and revenue side.
Qualifying incomes for housing benefits have now been lowered, but only recently, and, given the understandable resistance, do not fully reflect the drop in housing costs.
Another mismatch arises because HOS buyers and recipients of subsidised loans are only means-tested once - at the time of purchase.
They get the full benefit at the outset, even though incomes usually rise over time, often substantially, as careers progress.
A further mismatch between aid and need is also very substantial. In recent years the government has sold existing PRH units to the occupants. The number sold is about the same as new PRH units built.
Prices and terms of sale are so favourable that the units, with no down-payment, are fully paid for by affordable instalments over 7 to 10 years, instead of the usual 15 to 25 for other home buyers. The deductibility of interest on home mortgages for income tax purpose, too, involves a mismatch of resources. The richer beneficiaries receive the same, or even more help, than poorer ones.
One mooted strategy is to replace all or part of the HOS with subsidised loans. Another plan is to provide, as an alternative to PRH, subsidies equal to 60 per cent of the rent for private housing. By leaving the supply of housing to the private sector, both alternatives avoid the first two types of inefficiencies mentioned above. Yet they embody the other, more substantial types of mismatch.
The way forward is to replace existing forms of aid with housing allowances, which are periodically means-tested.
In broad terms, households could opt to receive either a rental allowance or mortgage assistance, in amounts sufficient to rent, or buy basic housing that could accommodate the household size concerned. The amount, by reference to standard scales, is whatever shortfall, for rent or mortgage payment, after household income is first applied to meeting basic non-housing needs.
To encourage upward mobility, higher standards of basic housing and non-housing needs are applicable at higher income levels. Tests of financial means would include essential declarations with random checks backed by the muscle of criminal prosecutions.
Mortgage assistance would be subject to some low minimum income requirements. Its amount would be calculated on the basis of 95 per cent, 30-year fixed rate loans. While mortgage insurance is already available, a long-term fixed-rate bond market would develop. All existing PRH would be for rent or sale at market price, except those with significant redevelopment potential, which would not be sold but reserved for redevelopment.
Empowered by the allowances, existing PRH tenants could rent or buy the units they occupy, or other housing in the market.
Public housing bodies would be among the market's key suppliers of small rental units. Available in some Western countries, 85 per cent mortgage insurance should be made available to private investors in rental apartment buildings.
Allowances fuelling demand for housing, falling inventories, no more cut-price competition from the HOS, and property-related activities boosting the economy should see a strong increase in transaction volume along with a slight recovery in prices in the property market.
This increases the various property-related revenues to the government, which in turn enables higher allowances to be paid out.
Yet any excessive rise in property prices and interest rates could impose too heavy a fiscal burden, since both the amount of allowances per new recipient and the number of new recipients would increase. To curb an overheating market, the government could sell a large quantity of land, stipulating that buyers complete the buildings within a short period.
Moreover, mortgage assistance and rental allowance amounts should be determined stringently. The assumption is that, after meeting just basic non-housing needs, the household's income is then devoted entirely to housing.
A modest 15 per cent property gains tax would also help prevent excesses. It is important that housing allowances, along with 30-year fixed rate mortgages, be implemented as soon as possible, so that the maximum number of households can buy homes and lock into current low housing prices and interest rates before they rise.
With the HOS, the cost of the benefit essentially comes out of the developer's margin foregone by the Housing Authority. Once the HOS is replaced, whether by subsidised loans as was partly the case last financial year, or by housing allowances as proposed here, an additional cost would be borne by the Budget.
The housing allowance model, excluding all the resource mismatches mentioned above, would achieve annual budgetary cost savings of about HK$10 billion compared with the 'PRH plus HOS' model, and savings of HK$20 billion compared with a 'PRH plus subsidised loans' model.
Healthy property transactions on slightly firmer prices should produce a HK$20 billion recovery in land sales and other property-related revenues. Sales and redevelopment over time of the 670,000 PRH units at market prices would bring in about HK$400 billion.
These savings and gains would not just reduce the Budget deficit. Above all, they should be used to increase Hong Kong's long-term competitiveness.
In this regard, fresh pragmatism would be helpful in examining possible ways and means such as lower tax rates, infrastructural construction, and incentives for endeavours that enhance the territory's competitiveness.
James Lee is an independent observer. Lawrence Lau is a chartered accountant in Vancouver.