CONCRETE ANALYSIS ANGELA WONG

New Home Ownership Scheme measure a boost for housing market in Hong Kong

Move lets so-called sandwich class in Hong Kong buy subsidised flats, and serves as incentive for owners of such flats to sell

PUBLISHED : Wednesday, 15 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 5:34am

Premium is a word with multiple meaning. In the insurance industry, a premium is the monthly or annual financial cost for obtaining insurance coverage. In the financial world, a premium may refer to the monetary difference between a future and a spot price. And in the property market, it is the common term to describe an amount paid above what is regarded as a normal price.

Under the Home Ownership Scheme (HOS), a premium is the fee paid to the Housing Authority by the owners of the subsidised HOS flats to secure the right to sell their properties on the open market.

It was this notion of a premium that came under the spotlight in mid-July when the government announced a plan to let 5,000 eligible applicants buy "premium-not-yet-paid" HOS flats next year. Those qualified are so-called sandwich-class buyers - those with family incomes below HK$30,000 a month.

In essence, this proposal provides more options for such sandwich-class buyers whose earnings are too high to apply for public rental housing, but too low to afford private flats. Since the proposal was made, the market has responded positively and some of the "premium not-yet-paid" HOS flats were even reported to have been sold at a premium.

In my view, however, this plan will boost turnover of such flats rather than price in the long term. As a first step by the new administration in the housing sector, the new measure is leading the housing market in the right direction.

The measure has been hailed by most market participants for several reasons.

For a start, it is flexible. On the face of it, potential supply will increase, as the number of "premium-not-yet-paid" HOS flats is estimated to be around 250,000, or 80 per cent of overall HOS stock. However, it is worth mentioning that the new measure does not come with additional physical completions.

Let's face it, the Hong Kong economy is prone to external shocks, and so is the local property market.

Rigidity of home construction programmes can give rise to unintended consequences when the global economy takes an abrupt turn. Hong Kong learned this lesson the hard way during the prolonged downturn which took place from 1997 to 2003.

By relaxing part of the sales restrictions on the secondary HOS market, the government is able to help the needy without building new flats. More importantly, the measure also gives the government room to micromanage its impact by simply adjusting the quota according to market conditions.

In addition, the new measure, unlike the introduction of a special stamp duty, can unleash secondary home supply. One obvious drawback of the special stamp duty is that it discourages some homeowners from selling. Since its introduction, monthly secondary transactions averaged 6,200 flats - 24 per cent below the level achieved during 2006 to 2010.

Undeniably, the transaction volume of HOS flats as a percentage of the total stock has long been low. Over the past five years, the turnover ratio of the subsidised housing sector was 2.8 per cent, compared with 8.2 per cent for the private housing sector.

One major reason for this low level of activity is that HOS flats are subject to sale restrictions. As mentioned before, about 80 per cent of the owners in the HOS sector have not paid the premium.

Of course, such properties can be sold to the existing and potential public housing tenants, or so-called green-form applicants. Public housing tenants, however, do not have a strong appetite for resold HOS flats, as they have to turn over their rental flats to the government if they become owners of a subsided one.

This can be evidenced by the fact that only about 1,500 "premium-not-yet-paid" flats changed hands last year, while there were as many as 700,000 public flat tenants eligible to buy these properties at a discount.

In the past five years, the average annual transaction volume of resale HOS flats was 9,000. An extra 5,000 potential buyers can translate into a rise of over 50 per cent in sales activity.

So, after the opening up of this particular market segment, more HOS flats will be listed for sale as the odds on selling the properties improve.

Above all, this is a measure which benefits home seekers, but not at the expense of homeowners.

One may argue that allowing 5,000 qualified applicants to buy existing HOS flats without having to pay a premium may undermine the underlying demand for small apartments in the private sector. However, the other side of the equation suggests that sellers under this new scheme will constitute new buying power for the private flat sector.

This multiplying effect that starts from the very bottom of the housing sector may give a modest boost to private home sales activity.

Property prices, however, are not likely to rise sharply as a result. First, the potential housing supply is already on the rise, and second, price growth has been capped by mortgage tightening and the imposition of the special stamp duty.

Undoubtedly, the remarkable increase in prices for some flats in well-located HOS projects has raised some eyebrows. But we have to understand that those who bought the "premium-not-yet-paid" HOS flats recently must be so-called green-form applicants who have to turn in their public rental flats after they make a purchase.

Those buyers are not likely to be speculators in having to make such a trade-off.

Perhaps the major reason they entered the market now was to avoid competing with additional buying power next year. And one side benefit of this phenomenon is that more public housing can be recovered for allocation to families in need.

Prices for secondary HOS flats will not go up continuously, as new HOS projects will be available in the future.

After all, higher prices may encourage more HOS flat owners to sell, providing more choice next year for the 5,000 eligible applicants.

In theory, those qualified buyers will have the privilege of buying secondary HOS flats at an approximate 30 to 50 per cent discount to their market value. So they may have to prepare to pay a relatively small premium to the property owners who sell them the "premium-not-yet paid" flats.

Angela Wong is deputy chairwoman and deputy managing director of Midland Holdings.

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