To deal with Hong Kong’s serious fiscal deficit, I would like to propose a new Home Ownership Scheme (HOS) housing reform. The proposed scheme, to be called “HOS II”, is designed to help revive our weak economy, increase revenue, and raise Hong Kong’s home ownership rate at the same time.  

Presently, the government of the Hong Kong Special Administrative Region runs a Public Rental Housing (PRH) program for those who cannot afford to buy a home, and an HOS program for those who will buy their own homes if the prices are affordable. There is, however, a serious problem with the current approach. HOS flats are now typically priced too low, and they are also too attractive to potential buyers, so that the government can hardly expect to satisfy all the demands. Indeed, they are attracting people who otherwise can afford homes in the private sector to “stay low” to be able to qualify as beneficiaries of the HOS scheme. 

Take, for example, the latest Green Form Subsidised Home Ownership Scheme project in Cheung Sha Wan, which is right in the center of Kowloon. Prices are set at merely 52 percent of the estimated market price. Prices of these centrally located flats range from HK$1.54 million ($197,000) to HK$4.61 million with sizes ranging from 26 square meters to 60 square meters.  

For a family of four, the median monthly household income is HK$50,200 ($6,417, Q3 2023), and eight times the annual household income (HK$602,400) is HK$4.82 million. Eight times the annual household income is normally regarded as quite affordable, and it is even more so for Hong Kong given the city’s low tax rates. But the flats are centrally located, and 60 square meters is more than basic for a four-person household.  

If the SAR government really wants to help Hong Kong people solve the housing problem, it really does not make sense to have an HOS scheme that can only benefit some lucky ones and that also offers them the chance to pocket a handsome profit. The lucky winners of the housing lottery now can resell their flats in the secondary market without paying the owed land premium, usually at a handsome profit. The incentive for middle class people to “stay low” to profit from the scheme is just too big to resist. This will sap the vigor from our economy.

Because the Cheung Sha Wan project is centrally located, the opportunity cost of the land must be counted as a social cost. If the land were auctioned, the government would have got proceeds that reflect the value of the land. This is why HOS II projects should be built where the notional land price per square meter of built-up living space costs less than the median.  

Thus, under HOS II, with prices set at more reasonable levels, the flat size capped, and the location less attractive, the government can and should pledge to offer a “right to entitlement”, the entitlement to buy this kind of HOS II flat. All Hong Kong permanent-resident families would be allowed to buy a flat at an average price of eight times the annual income of economically active households. Naturally, homes in better-located projects should be priced higher than less-well-located homes. All locations, of course, should be served by public transport. 

This will provide an incentive for PRH tenants to trade up to these flats. It is suggested that the new generation of HOS II flats should be allowed to be resold any time to any Hong Kong household who agrees to physically live in them and be bound by other terms in the land lease. Because HOS II flats are always “recycled”, the commitment on the part of the government should be affordable

The land lease should stipulate that buyers of these flats must live in the flats and are not allowed to own other properties in Hong Kong or overseas. Buyers cannot expect to profit much from the scheme, because all Hong Kong permanent-resident families are entitled to buy directly from the Housing Authority at affordable official prices. Buyers who choose to purchase an HOS II flat will not be able to benefit from rising home prices in the private homes market. This way we will better target those truly in need. Those who want better quality, bigger or better-located flats, as well as those who want to have a chance to enjoy the gains from the price appreciation of their homes, will have to buy properties in the private market. Private developers will then be interested in bidding for land, because financially capable people will always seek to improve their housing conditions.

The proposal, apart from benefiting more people, will bring back the spirit of self-reliance to Hong Kong. The proposed flats will be better targeted at the needy and will be made available to all who need them. The higher prices and the less desirable locations will allow the government to honor the proposed entitlement. Given the entitlement, the government will build many more flats under HOS II, but these flats should all even return a “profit”, and that will help close the deficit. The “profit” is based on the higher prices for the flats as well as lower land costs that may not even be counted. The Housing Authority used to rely on HOS flat sale profits to subsidize the running of PRH. 

The proposed HOS II housing should be of a higher grade than PRH flats. This will provide an incentive for PRH tenants to trade up to these flats. It is suggested that the new generation of HOS II flats should be allowed to be resold any time to any Hong Kong household who agrees to physically live in them and be bound by other terms in the land lease. Because HOS II flats are always “recycled”, the commitment on the part of the government should be affordable.

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

The views do not necessarily reflect those of China Daily.