Published: 00:50, February 28, 2023 | Updated: 09:35, February 28, 2023
Unintended consequences of SSD continue to mount
By Ho Lok-sang

Last week I expressed my disappointment about the Hong Kong Special Administrative Region government’s decision to keep the Special Stamp Duty (SSD). 

Although the government’s 2023-24 Budget does contain a lot of timely and important initiatives to increase Hong Kong’s competitiveness across various dimensions including the digital economy, green finance, supporting small and medium-sized enterprises, supporting research and development to spur upgrading, and diversification of our industries, in order for Hong Kong’s middle class to have hope and drive, more needs to be done.

The subject of homeownership is a primary concern of middle-class families. Middle-class families who do not qualify for Hong Kong’s public housing programs need help. In the early 1990s, the Hong Kong government invited the Hong Kong Housing Society (HKHS) to develop housing for Hong Kong’s “sandwich class”. The first development under the Sandwich Class Housing Scheme, Tivoli Garden, was completed in 1995. This was followed by 12 other developments. The HKHS says because of “a change of market needs after 2000”, three developments were converted into private housing. But there is obviously still a need to help our middle-class households.

It is noteworthy that from 1986 to 1997, the private housing ownership rate (private homeowners as a percentage of total households) rose from 30 percent to 36.2 percent from 1985 to 1997. Although this rate did dip in some of the intervening years, the number of households that own a home in the private market was increasing every single year. There was a lot of talk about Hong Kong’s homes being unaffordable. But from 1995 to 1997, the number of private homeowners rose by 11,800, 43,300 and 32,300 respectively. The figures do not suggest homes were that unaffordable. 

After 1997, and particularly after the Tenants Purchase Scheme (TPS) was announced, for the first time ever, the number of households owning a private housing flat fell sharply — by 13,500 in 1998. The private homeownership rate was hard hit, falling from 36.2 percent in 1997 to 34.8 percent in 1998. Moreover many who won the lottery to buy Home Ownership Scheme (HOS) housing walked away from their down payments and would not complete the purchase transaction. Because TPS flats were given too deep a discount, selling typically at less than HK$350,000 ($44,600), the prevailing market prices of HOS housing appeared ridiculously high. With equity in their homes falling deeply, HOS owners could not trade up, instigating a domino effect that spread to higher-tier homes. The number of private homeowners fell another 12,200 in 2001. Behind these “cold” figures are homeowners who lost their homes to their lending banks.

Another wave of decline in the number of households who own private flats occurred exactly after the launch of the Special Stamp Duty (SSD). In 2012, the decline was by 13,700 units; in 2013, the decline was by 9,100. The next two years showed miniscule increases, at 4,200 and 4,000 respectively. What happened? 

Secondhand-market transaction statistics indicate that the SSD has impaired the motivation of homeowners to trade up to better homes. This has reduced the supply of starter-level homes, resulting in a sharp rise in their prices. As my column last week (How to Avoid Structural Deficit and Keep Vibrancy, China Daily Hong Kong Edition, Feb 23) shows, the prices of Class A (i.e., less than 40 square meters) homes started to outpace the prices of Class D and Class E. This motivated developers to develop more and more “nano homes” that are less than 300 square feet (27.9 square meters). The proliferation of nano homes after 2011 testifies to the “tragic fate” that awaits the middle class. If they can only spend HK$6 million, they may be able to buy a new flat that has an area of 300 square feet. Alternatively, they could buy a secondhand 446-square-foot HOS flat in Kai Long Court, Kowloon City, at about HK$7 million plus land premium, or a land-premium paid TPS (former public rental housing Kwong Yuen Estate) flat with an area of 407 square feet in Shatin at HK$3.6 million. Either way, this middle-class household will help a former HOS owner or a former PRH tenant to grow his or her wealth; its status as a middle-class hard-working household is worse off than someone who had got a PRH tenant status or who had been qualified to buy a HOS flat.

From 1985 to 1997, in a space of 12 years, Hong Kong saw the number of private homeowners rise by 63.7 percent. From 1997 to 2021, in 24 years, Hong Kong saw the number of private homeowners rise by a mere 37.7 percent. All this notwithstanding the huge efforts from the government to boost homeownership. Looking at the total homeownership (including HOS and TPS) rate, from 1985 to 1997, overall homeowners rose 13.9 percentage points. From 1997 to 2021, overall homeowners rose 4.3 percentage points. What has gone wrong?

It is gratifying to see that the SAR government under Chief Executive John Lee Ka-chiu is committed to improving Hong Kong people’s housing conditions. I hope the SAR government will consider doing away with the SSD, and building new HOS “basic flats” at 400 square feet that allow all Hong Kong families with permanent residency to buy at a price averaging 10 times mean household income. Homeowners of these subsidized flats can resell at any time but must not hold any other property in Hong Kong. If they eventually can afford better homes, they can sell their subsidized homes and move elsewhere. Their vacated homes will be available for other qualified families. 

Once again, abolishing the SSD will increase starter home supply, without the worry that their prices might zoom. This will not happen. But prices of higher quality homes will indeed get a boost because of greater demand as people trade up. That will motivate developers to build better homes. Isn’t this the direction we need to move in, to better house our middle class? 

The author is the director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.