Hong Kong Housing Authority and Housing Department

Mr Chan, Ladies and Gentlemen,

I am most grateful to you for both the delicious lunch and the opportunity to share a few thoughts with you on developments in the public housing field.

This time last year, I gave another speech. In it I did some thinking out loud about proposals we were then beginning to develop for selling flats to sitting tenants. At the end I said that I hoped we would be able to announce details of the scheme and accept first expressions of interest by the end of the year.

Well, we missed that target by a couple of weeks, but as you know ExCo gave us the green light in December and last Friday morning I had the pleasure of formally launching the Housing Authority's new Tenants Purchase Scheme.

Between noon and 5 p.m. last Friday over 500 families signed and returned to us formal expressions of interest. By last night that number had already climbed to just over 10,000 or 37% of flats offered under this first phase. That is very encouraging and confirms the enthusiastic, less formal response to the scheme which residents of estates all around the territory have been conveying to us since it was announced on 8 December. Over the next few weeks we will be explaining purchase arrangements to individual families, and by early April the first proud new home owners should have taken formal possession of their homes.

Today, I would like to indulge in a little more thinking-out-loud about where we go next. I will do this under three broad headings:

• first, next steps for the Tenants Purchase Scheme (TPS);

• second, a few words on other initiatives currently under consideration to complement the TPS; and

• third, some thoughts on how all of these various measures will expand the housing market.

As with last year's speech, I will preface my remarks with the general "health warning" that the views expressed represent the personal opinion of the Director of Housing rather than the formally approved policy of the Housing Authority!

Next Steps for the Tenants Purchase Scheme

In his October Policy Address, the Chief Executive invited the HA to devise a scheme which would provide the opportunity for ownership to at least 250,000 families over the next ten years and to offer no fewer than 25,000 public rental housing units for sale to tenants in the first year. Well, we have devised the Scheme. Prospective purchasers seem generally pleased with it. And I am happy to say that the first phase now underway involves some 27,000 flats in six estates scattered around the territory.

Already tenants in some 30 other pre-1992 estates have asked when theirs are to be offered for sale. This is encouraging and we are of course working on a programme of sales in line with the CE's request. There have been some suggestions that we drastically accelerate the sales programme. There have also been some voices expressing caution. From the HA's perspective, it would seem prudent to see how the first phase proceeds and iron out any teething problems before moving to a second phase.

Our initial thinking is that each phase should be about the same number of flats, i.e. around 25,000, and that, as with the first phase, we should try each time to ensure an even geographic spread. There are two reasons for this. First we want there to be the widest possible range of choice as regards location, when flats sold under the Scheme become available for sale and purchase in the open market. Second, we want to avoid a glut in any particular place.

There are, of course, some constraints as to how fast we can proceed. One of these is the task of formalizing estate boundaries, and drawing up leases and Deeds of Mutual Covenant. Several other Government Departments are involved in assisting with this work. There is the processing of individual sales documentation, which involves both banks and lawyers in addition to HA staff. And, equally important to both the HA and its customers, it would seem sensible to complete programmed maintenance planned for each estate before offering them for sale.

These constraints aside, however, I see no good reason for delaying the sales programme artificially. Assuming tenants are eager to buy, then I can see every advantage in moving the programme along as quickly as practicable. As regards sequencing, we will to some extent be guided by the response of the individual estates. Clearly, it would make sense for the HA to give some priority to those estates where an overwhelming majority of residents indicate a desire to buy.

The Scheme is designed to cover the pre-1992 estates, concentrating initially on those built after 1985. That does not mean that older blocks will not eventually be sold, but clearly, there will be some which by reason of age and condition we will not offer for sale. Generally speaking, these are estates already scheduled for demolition under our Comprehensive Redevelopment Programme. As soon as is practicable, we will let residents of such estates know so that they can consider other options. Which brings me to the subject of complementary initiatives.

Complementary Initiatives

In his October address, the CE referred to a Rent or Buy Scheme. The reference attracted little attention at the time, which surprised me, because it represents quite a significant change in our approach to public housing and is a very positive response to the community's clearly expressed aspiration for ownership. It is also a logical development following on the Tenants Purchase Scheme, and part of a series of changes designed to ensure that our policies are consistent and mutually supportive. Allow me to explain.

In the past, families applied for public housing assistance and expressed a general preference for a district. They then waited until their turn came up and basically took whatever rental accommodation was offered. There was no other option. Now that we have started selling rental flats to sitting tenants, in addition to selling flats under the HOS, why should we continue to offer only rental accommodation to those on the waiting list or involved in development clearances? Would it not make more sense to use the same resources to create new opportunities for ownership?

That is what the Rent or Buy Scheme is about. What we are working on now is devising financial arrangements which will make it possible for the majority of waiting list families and other new entrants to public housing to enter as owners rather than tenants. The idea would be that they could choose to buy, subject to affordability, from a range of flats from HOS, through transfer blocks to vacant flats in estates scheduled for sale under the TPS, and eventually flats available in the secondary HOS and TPS markets.

Similarly, when in future we redevelop estates not sold under the TPS, it would seem more sensible and more beneficial to all parties if we can offer those affected a range of opportunities for ownership instead of simply re-housing them as tenants in new rental estates. At present, tenants of estates due for redevelopment are encouraged to buy HOS flats. Some do, but for many this option is not affordable. So we are looking at other options including, some form of mortgage subsidy having a similar incentive effect to the special credit under the TPS, or something similar to the rent or buy arrangements mentioned earlier. Again the aim is to put ownership within the reach of the ordinary family, rather than perpetuating payment of rent and depriving them of the opportunity to invest in the asset they will in any case occupy.

There have been comments in the press to the effect that the Tenants Purchase Scheme will result in lower demand from public housing tenants for HOS flats. Initially, that may well be so. Green Form applicants have already shown a tendency to drop out once the larger flats have been chosen by others. In the long run, however, I do not see any real cause for concern. The change in our production mix and the quality of the new HOS "Concord" block designs will better match our customers' expectations. And the trading-up option provided for under the TPS will rapidly create an additional pool of potential demand for HOS flats.

White Form applications for HOS flats have always been heavily oversubscribed. The substantial increase in HOS production over the next few years will also allow us to offer a larger number of flats for purchase by them. Nevertheless, I see considerable merit in continuing to look at ways of encouraging tenants, who can afford it, to opt directly for HOS. With this in mind, we will be considering giving Green Form applicants greater priority in flat selection so as to ensure a steady supply of existing flats for refurbishing and re-letting to waiting list families, who can afford nothing else.

One final thought and that relates to the Home Purchase Loan Scheme (HPLS). To date the HA has been able to make only limited use of this means of assisting home ownership. It has, however, proved quite popular and since its inception in 1988, some 21,300 interest free loans, amounting to $7 billion, have been granted under the Scheme.

In the past the principal constraint on the number of subsidised loans offered has been the HA's limited resources. Given current financial forecasts, there is, I believe, no reason why the HA should not make progressively more loans available to its tenants to purchase flats in the private sector as an alternative to purchasing HOS flats. In practical terms this will help free up public housing units for those who need them more, while enabling tenants to climb the ladder into private housing.

Loans of this sort are in any case the most flexible and efficient form of subsidy, but we could also make it more flexible. Thus for the same absolute cost subsidy, we could offer the choice of loans of smaller amounts over longer periods, or larger amounts over shorter periods, whichever best suited the needs of our clients. With prices in the private market down, such loans should now be especially attractive. I stress that this increase in HPLS loans would be separate from and additional to any other loans made available by the Government to non-public housing tenants under its Sandwich Class and Home Starter Loan Schemes.

We will be talking these and similar ideas through within the HA over the next few months. They may not all emerge in their final form at the same time. However, I would hope to have decisions on the majority of this package of measures by mid-year.

Expanding the Housing Market

How is all of this going to impact on the housing market, and in particular the public sector? The answer to that question demands that we look at the current structure of the market before examining the speed at which publicly built flats, whether HOS or TPS, become available for sale on the open market.

The public sector dominates the bottom half of the market. Very crudely, Hong Kong has 2 million units of housing. Half of these were built by the private sector, one third were built with public funds for rent, and one sixth for subsidised sale. However, restrictions on re-sale mean that so far only 87,000 of the 230,000 HOS flats are potentially available for sale on the open market. If, as is intended, the HA reduces the re-sale restriction period for HOS flats from ten to five years, that number would increase immediately to around 140,000.

On present plans, assuming that we achieve no more in terms of production and sales than the CE has asked of us, then in five year's time just over half of all publicly built homes will be privately owned, and of these roughly one quarter, that is 250,000 flats, will potentially be available for sale and purchase on the open market.

I have heard suggestions that this may have a negative impact on the existing private market. I reject this entirely. Let me explain why.

First, we are talking about what are currently two totally different market segments. As I noted earlier, this bottom third of the market is dominated by public sector rental units. They have not previously been available for sale. What we are doing is creating a market for property sales in a sector where no sales market previously existed. That market will, in the nature of things, develop quite gradually.

The pattern of HOS sales so far illustrates this point. In 1992/93 when the first second-hand HOS flats came on the market, only 1% were sold. That figure has climbed quite steadily, but as of last year fewer than 10% of the total stock of 10-year old HOS flats had changed hands. The secondary market for 3-year old HOS flats introduced in mid-1997 has shown a similar slow but steady start.

Secondly, while we know that some public housing tenants have previously purchased private property, the vast majority simply cannot afford it. For them the next step up has been the purchase of an HOS flat. As I noted earlier, we will continue to look at ways of encouraging those who can afford it to buy direct in the private market through the various subsidised loans schemes. We will not be poaching customers away from the private sector.

Thirdly, the new opportunities to buy will put home ownership within the reach of a whole new group of families. It will enable them, for the first time, to increase their assets and ultimately trade up through the system. All of this should have a positive impact on the market, expanding equally both its size and the potential number of families for whom ownership is possible.

Lastly, and this is just as important for a healthy market as the balance of supply and demand, we will be increasing mobility. I mentioned earlier that fewer than 10% of HOS flats potentially available for sale have been sold on the open market and that the secondary market for HOS flats is also relatively young. Nevertheless, in comparison with Public Rental Housing they are models of mobility. Fewer than 2,000 of our 670,000 tenants manage to move house in any one year. That is less than 0.3%. I know of no other market sector which is so frozen.

I am convinced that we should and could be doing more to un-freeze it. In the long run, possibly the simplest and most effective means would be to allow purchasers of flats under the HOS and TPS to buy and sell freely among themselves during the five year period before flats can be sold on the open market. It would involve no loss to the HA and yet would both considerably enhance the attractiveness of the schemes and encourage development of the secondary market.

In the private sector, at least 5% of families who own homes move each year. They change homes as the family expands or contracts, or because of job changes, or for the convenience of schooling, or because they want extra space or better facilities, or any one of several other reasons. As more and more publicly built flats become privately owned, so the number of such normal movements will grow. People will be able increasingly to live where they choose to live, rather than where chance and bureaucracy place them. This must be healthy for society, as well as good for the real estate business.

Conclusion

The Tenants Purchase Scheme thus marks a turning point in the provision of public housing assistance in Hong Kong. Taken with the other initiatives currently being developed, it will put home ownership within the grasp of the majority of the population, 70% by 2007. For the individual family, it marks the beginning of an era of greater choice, both on first entry into public housing and thereafter on each rung of the housing ladder. For the economy as a whole, it will lead to a market driven, more rational and more efficient allocation of resources, and will enable us to focus public subsidies more and more clearly on the minority who need them most.