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Published: 01:44, June 28, 2021, Updated: 10:19, June 28, 2021
What will happen if the modified HOS is adopted?
By Ho Lok-sang
Published:01:44, June 28, 2021 Updated:10:19, June 28, 2021 By Ho Lok-sang

Last week, I explained why former chief executive Leung Chun-ying’s proposal for a modified Home Ownership Scheme would work better if each flat was downsized to 400 square feet (37 square meters).

I fully support the idea of helping the target group households through self-selection by requiring owners to live in the flat and not hold any other property in Hong Kong, and by limiting the size of the flat. This stands in sharp contrast to the traditional HOS that requires a means test. I shall now explain the full implications of such a plan on Hong Kong’s housing market. 

Provided that this modified HOS is adopted as a long-term policy with the full commitment of the Hong Kong Special Administrative Region government, I would argue that its benefits will be far-reaching and immediate. 

If the HKSAR government is fully committed to adopting the modified program, I expect the housing market to cool down, so that all starter-level homes immediately become more affordable. Because the modified HOS flats are small and do not carry much investment value, investors will shift their focus to private flats that can serve as investment properties. Developers will give up the “nano flat” market and focus on developing bigger and better flats to attract those with the resources to buy better homes.

PRH (public rental housing) flats should not be privatized. It may be a good thought if more people can share the growth in wealth associated with home price appreciation. But we should ask who are the buyers who pay steep prices in the second-hand market for privatized PRH flats? Typically, these are taxpayers who do not qualify to apply for PRH

The beneficiaries will not be limited to those who buy the modified HOS flats, but will also include all others who buy entry-level flats. Because the government has shown commitment, and because the modified HOS flats are cheaply priced and tied to income rather than market prices, potential homebuyers will be in no hurry to buy. Instead of rushing to buy for fear that prices might go through the roof, they can afford to wait. Although entry-level homes will become much more affordable, the housing market will not collapse, because unlike the modified HOS housing, the private market flats have investment value and Hong Kong non-permanent residents can buy them. 

Since many buyers would rather wait, prices of private entry-level homes will come down because demand has fallen. Those who prefer not to wait will be able to buy these homes at lower prices. This demonstrates that the benefits extend beyond the direct beneficiaries of the modified HOS developments.

Will the program engender a major housing price collapse? It might — if the flat sizes of HOS units are bigger and the quality is comparable to that of private flats. This is why it is important to keep the flat size small and the quality basic.

Today, the Housing Authority maintains a standard of 75 square feet per person in public rental housing flats. The proposed modified HOS is intended for families with one or two children. For a four-member flat, the minimum size would be 300 square feet. Since HOS flats should be better than PRH flats, presumably 30 percent bigger, that will translate to 390 square feet. This will give PRH tenants an incentive to move out of their flats and to buy the new HOS flats.

In 2020, the median household income for a family of three was HK$32,500 (US$4,187) per month; that of a family of four was HK$42,000. The average of these two figures multiplied by 12 months multiplied by eight years is HK$3.576 million. If the price as a multiple of income is 10, the price would be HK$4.47 million. These prices certainly would be much higher than Leung’s proposed per square foot price of HK$6,000 based on construction cost alone. But the higher pricing and smaller flat area will mean less fiscal pressure on the government, and stands a much better chance of being sustainable. Only if there is credibility for the policy to be implemented in the long term will the benefits spill over to other entry-level homes. Moreover, the higher pricing will drive away those who want to buy just because the price is so low. Higher pricing also means moderated downward pressures on other entry-level homes, and will avoid a disastrous price collapse that could hit thousands of households that have spent much more to buy tiny flats. We need to remember how the collapse in housing prices from 1998 to 2003 led to negative equity homeowners, deflation, and multiyear fiscal deficits in Hong Kong.

I would stress that the terms of ownership requiring owners to live in the HOS flat and not to own other properties in Hong Kong should be stipulated on the land lease of these homes. This is to ensure that such homes never become investment properties.

PRH flats should not be privatized. It may be a good thought if more people can share the growth in wealth associated with home price appreciation. But we should ask, who are the buyers who pay steep prices in the secondhand market for privatized PRH flats? Typically, these are taxpayers who do not qualify to apply for PRH. It would not be fair, having contributed to PRH tenants’ low rents, if they have to further contribute to their wealth in exchange for the right to live in PRH flats.

The author is a senior research fellow at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily. 

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