Next Magazine (Second opinion A004, 2012.8.09)

“Affordable housing” sounds like a worthy objective for the incoming government. Unfortunately, policies so far announced such as reviving the Home Ownership Scheme (HOS) further distort a market where conflicting objectives make for bad policy.

Government somehow wants to achieve higher housing affordability without bringing down the value of existing homes too much. It wants to contain the risks of a property “bubble”, but not slow construction activity. It wants to contain the costs of housing, but imposes often expensive planning requirements on developments. It wants low cost housing options for the poor, but higher standards for the quality of that housing.More affordable housing can only come from lower costs leading to lower prices or higher incomes. Subsidies paid by the government do not change affordability, only who pays for the cost of housing. In fact, a perverse effect of subsidy can be capitalizing those benefits leading to higher prices.A third of people in Hong Kong live in publicly provided rental housing with a further 17% own subsidized housing. Yet the affordability problem is not for existing public housing tenants. Public housing costs between 16% (Island) and 24% (New Territories) of the rent per square meter paid in the private market. Over the last five years, public housing rents are down an average of 4%, whilst private rents are 53% higher.

The waiting list problem in public housing is not insufficient supply, but a price relative to the private sector that is too low. This gap is causing the rapid rise in the demand for increasingly (price) attractive public housing. Expanding public housing is not the answer to the underlying problem of housing costs outside the public sector rising much faster than incomes.In the 1970’s and 1980’s there seemed a virtuous circle in housing. Rising incomes and upward mobility saw public housing as just a stepping -stone to the better quality private housing market. The HOS was envisioned as an interim step on that ladder, leading more people into home ownership so that they could build capital and in time upgrade. By 1998, the creation of the Tenants Purchase Scheme even started the process of letting public housing tenants acquire their own properties.

However, the circle has broken. Real monthly earnings grew an average of 2% in the 1980’s, 1% in the 1990’s and just 0.1% in the most recent
decade. The cycle of upgrading to larger and better quality homes has been broken, with more middle -income households choosing to remain in
the private rental market.Developers are not the core of the problem. Their strategy has been a constant. Average margins from 2001-11 were 4% lower than in the decade before and even in the last 2 years remain below historic peak levels.Recent “prudential” policies aiming to contain prices have only served to make housing less affordable forsalary earners, by mandating extremely high deposits for purchasers.The reality of the HOS is that it creates a second-class ownership market, with less capital appreciation potential and less liquidity. It competes with the private sector for land and resources, driving up the cost for those not able to access the scheme. The scheme runs the risk of inducing people to buy property, when interest rates rise and it is not the best investment for their circumstances. It does provide lower cost housing, for a few, but does not solve core
problems in the housing market.

The government as a developer is not the answer. What the market needs is lower costs of construction, more supply from the existing underused housing stock, and proper pricing of housing. We need more investors in private markets that can increase the supply of private rental properties. Transaction costs should be reduced to enable people to cost effectively upgrade. The supply of land for private housing should be increased.Public housing undermines demand for lower cost housing in private markets. Excess infrastructure spending increases the cost of private construction. A more rational housing policy would resume sale of public housing to tenants, remove government from managing property and if people thought necessary provide rental subsidies for a revived private housing market.

Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.

We are now on Facebook

http://www.facebook.com/pages/Next2ndOpinion/464005150156