How Hong Kong's old buildings can live on
Carine Lai says a certification scheme could convince banks that not all old buildings are too much of a risk to offer mortgages to potential buyers
Recent debates over the direction of the Urban Renewal Authority, sparked by the resignation of managing director Iris Tam Siu-ying in March, have raised valid points about the conflict between its social mission and the need to make a profit. While these discussions are necessary, they sidestep the fact that the URA is essentially a band-aid applied over large-scale market failure.
Banks in Hong Kong usually require that the sum of the age of the property and the repayment period of the loan do not exceed 60-70 years. Even the government-owned Mortgage Corporation follows a similar rule for its mortgage insurance scheme. This is an inconvenient truth about urban renewal in Hong Kong, one that policymakers have not yet been willing to grapple with: an important reason our old buildings are crumbling is because middle-class homebuyers who might otherwise find the price affordable cannot get financing for them.
This has knock-on effects. In fashionable neighbourhoods such as SoHo, small developers and individual investors might transform old buildings into chic serviced apartments.
In less desirable old districts, the pool of buyers basically consists of developers assembling land for redevelopment, landlords who convert flats into subdivided units, and the URA. As long-term residents move out and the buildings fill up with short-term, often impoverished renters, the buildings fall apart. The increasingly absent owners lack the funds or motivation to invest in maintenance, reasoning that they only have to hang on for a few more years before the building is demolished.
If there were better incentives for proper maintenance, the need for an interventionist entity like the URA would be reduced. Moreover, the URA's compensation policy may be exacerbating the problem. By offering above-market compensation equivalent to a seven-year-old flat in the same neighbourhood, owners are encouraged to sit on unsafe and deteriorating properties in the hope of attracting a URA buyout.
What solutions are there? The structural problem is that banks have an incentive to steer customers towards new, rather than old, properties. Having lent money to developers, they naturally want the developers' sales to be a success.
There is little that can be done about this, but the government can push back at the edges. Banks say that they are unwilling to give mortgages for old properties because they are worried the building might collapse or become worthless before the mortgage is repaid.
However, there is no need to tar all old buildings with the same brush. The government should set up a certification scheme in which potential buyers can access Buildings Department inspection records or hire a certified building surveyor to prove to the banks that a building is structurally sound and properly maintained.
The Mortgage Corporation can take the lead by revising its own rules to this effect. Older buildings in good condition would become desirable to buyers, which in turn would encourage owners to keep up the maintenance. This would hopefully create a positive spiral to offset the decline in which so many of our old neighbourhoods are trapped.
Carine Lai is project manager of Civic Exchange