How to make Carrie Lam’s ‘starter homes’ truly affordable for Hong Kong people
Maura Wong says the chief executive-elect’s proposal for this type of social housing can only work if prices are regulated, and there are ways to make such projects attractive to developers
First, we must acknowledge that, as conceived, this is a type of social housing. The scheme is therefore much closer in philosophy to public housing and the Home Ownership Scheme (HOS) than measures introduced by the Leung Chun-ying administration to rein in private housing excesses, such as the special stamp duty measures, which have failed to check speculation or halt property price hikes.
Leung also introduced a “Hong Kong Property for Hong Kong People” scheme for one housing project in Kai Tak, restricting flat sales in that development to Hongkongers for 30 years, but the scheme has been dormant since.
Lam’s starter home plan needs to target those in need, and impose restrictions on household income for both initial and subsequent buyers. Affordability must be at the core of the policy. This means the starter homes should be priced with government participation and at levels referencing buyers’ income levels, rather than market prices. This will make them more affordable than HOS housing, where prices are set at the market rate with a 30 per cent discount.
Without appropriate government oversight or participation in price-setting, the scheme will either repeat the same mistakes as the “Hong Kong Property for Hong Kong People” plan, where units were recently sold at buoyant market prices, pricing out many local homebuyers, or fail to differentiate itself from HOS.
For the policy to deliver value, buyers have to be able to purchase units at significantly lower prices than HOS buyers. At the same time, they should not enjoy the same degree of upside potential as HOS flat owners.
Currently, HOS flat owners can sell their units freely in the secondary market at market prices, subject to a land premium top-up. Starter homes should only be sold back to the government at price levels that are managed by the government.
Officials can study an appropriate pricing mechanism for a buyback scheme, perhaps akin to the system for international school debentures. Many international schools in Hong Kong sell debentures that can be traded in the secondary market. Some allow free trading at any price – as long as the school gets a cut of the proceeds – indirectly encouraging debenture price increases, or speculation.
Other international schools require all debentures to be redeemed by the school at the original value or some other set value, indirectly discouraging a money-driven culture.
If starter homes are supposed to be a type of social housing, then the second debenture approach would seem more appropriate as a reference point.
However, this creates a problem. How do you get private developers to take part in a scheme with limited upside?
Lam has proposed a public-private partnership scheme, which would allow private developers instead of the Housing Authority to develop and construct the starter homes. If these homes are essentially a more upscale version of public housing, permitting ownership but regulating pricing, how will the private developers make money?
One idea is project finance. Private developers could be compensated with a fixed fee or a more moderate return on capital, in exchange for a “take-or-pay contract” from the government for the completed units. In other words, the government could provide all or part of the capital for a housing project. Subject to a bidding process, a private developer would be selected to partner the government to provide project management, design and construction services, and possibly part of the capital.
All completed units would be purchased by the government at a fixed price to generate a moderate return. Thus the developer gets paid a reasonable return that is justified by the much lower risk and capital requirement involved.
If big property developers turn their noses up at the idea, there may well be new market entrants who would be interested in pursuing the business model, which has been well tested around the world.
Second, starter homes could be integrated into certain private residential developments through land lease requirements. For example, the government could stipulate that, say, 25-35 per cent of the units of a new residential development must be starter homes, to be sold at a fixed price. The rest of the units could be sold by the developer in the free market.
Instead of awarding the land to the highest bidder, as happens at traditional land auctions, the government could pick the winner based on a combination of price, the amount of social housing promised and other design elements related to liveability and sustainability. This practice is also common in other big cities around the world like London and Paris. It could unleash the creativity of the private sector to offer potentially higher quality and more inclusive housing solutions.
Solving Hong Kong’s housing crisis requires out-of-the-box thinking as well as collaboration between the public and private sectors. We need fresh ideas to deliver a housing solution for all segments of Hong Kong.
Lam seems keen to try, and has said she might start with one or two larger plots in this year’s land sale programme. Let’s hope she can deliver and that Hong Kong finds a new way forward.
Maura Wong is founder of The IDEA, a platform for policy innovation and civic engagement. She is a former CEO of Civic Exchange and producer of Walk21 Hong Kong and was in private equity and finance for over 20 years