Hong Kong Housing Authority and Housing Department

President Yuen, Ladies and Gentlemen,

It was very kind of you to treat me to lunch today. I feel both honoured and challenged. Honoured that you should see fit to invite a non-professional to address you; challenged by the knowledge that you all know so very much more about the market than I do. I must also confess that I find myself in a somewhat curious position today. Let me explain.

Long Term Housing Strategy Review

As you know, the Secretary for Housing recently published the Long Term Housing Strategy Review. The Review carries three clear messages on future housing policy direction:

• first, it gives the ideal of home ownership a big push forward;

• second, it recognizes the work which the Housing Authority has done in recent years to ensure that public housing is rationally allocated, and suggests a few more measures which might be taken; and

• third, it urges that we do more for those in our society who, for whatever reason, need assistance.

Interested parties have until the end of May to respond to the recommendations in the consultative document. Obviously, the Housing Authority is an "interested party". However, while the Authority has welcomed the general thrust of the recommendations, it will be some time before it is in a position to submit a comprehensive, collective response to central government.

So you see my dilemma. Since I cannot prejudge the Housing Authority's formal view on the details, what can I tell you? Should I simply repeat all of the recommendations and say that the Authority is considering them? That would be safest. It would also be boring. Alternatively, I could go through all of the recommendations and set out for you the pros and cons of each and the likely costs and benefits of implementing them, in as neutral and bureaucratic way as my 25 years of training permit? That would also be safe. But it would take quite a lot longer and would probably be only marginally less boring.

Another approach might be to run through some of the various comments and criticisms leveled against the consultative document and attempt to answer them. This might be more amusing, but it might also confuse because it would look as though I was trying to defend the Government's position instead of adding any new Housing Authority perspective.

In the end all this agonizing became too tedious. I decided to throw caution to the winds and enjoy myself with a little bit of kite flying. With your indulgence, I will first venture a personal perspective on the general thrust of the Review and the need to loosen up public housing. Secondly, I would like to focus on one particular recommendation - the Sale of Flats to Sitting Tenants - and offer a few thoughts on how we might proceed. At the end, I would of course be happy to take questions on any other aspects of the LTHS Review which you care to raise.

However, in deference to the Secretary for Housing, to the Chairlady and other members of the Housing Authority, allow me to add a health warning. None of the ideas which I express today should be taken as representing the established policy of either central government or the Housing Authority. I offer them only in the spirit of provoking further thought and discussion while the Authority formulates its response to the LTHS Review. Likewise, the fact that I focus on only one recommendation in the Review does not mean that I attach any less importance to others, in particular the need to do more to provide for those who are least well-off.

Towards Greater Choice

It seems to me that a key factor in improving housing conditions, at what you ladies and gentlemen customarily refer to as the lower end of the market, will be our ability to increase the range of choice available to our clients. Allow me a few minutes to explain what I mean.

In very general terms, the more any government intervenes directly in an economy, the more individual freedom of choice is constrained. As taxes go up, disposable incomes go down. The more the government takes from its citizens in order to accomplish collective goals, the less they have to spend on individual pursuits.

Hong Kong has always prided itself on being an open market, a place where the role of the government in the economy is deliberately kept small in order to maximize freedom of individual choice. This freedom to save, invest or spend lies at the heart of our economic success. Yet in the area of housing we find, oddly, that the Government has become a dominant player. Why is this?

Government originally got into housing in response to an emergency. Millions of refugees had streamed across the border. The United Nation's ban on trade with China had cut off our traditional means of livelihood. The economy was in desperate straits. There was no other developer big enough to do the job. There could be no clearer example of market failure. Successive waves of migration compounded the problem and it was not until the mid-seventies that developers emerged who were capable of mustering the capital needed to undertake developments on anything like the scale required. Their contribution is now taken for granted in the shape of the large private estates constructed in the new towns. But we should not forget what a novelty Mei Foo was at the time and its successors, for example, at the dockyard sites at Tai Koo and Whampoa.

In the late seventies, Government introduced the subsidized Home Ownership Scheme. Ostensibly this fulfilled two purposes. First, it encouraged mobility. Every flat sold to an existing tenant of public rental housing freed up a rental unit for a family which needed it more. Secondly, it encouraged ownership by introducing a rung up the ladder from public rental to privately owned accommodation. There was a third motive which is less often acknowledged, and that was to set a standard for ownership properties as a challenge to private sector developers. The scheme succeeded on all counts.

The Housing Authority has sold 230,000 flats to date. Almost half of them have gone to previous public housing tenants. Every new HOS development is over-subscribed by about ten times. And the re-sale price of those flats over ten years old, now available for sale in the open market, shows that they compete very well with private sector equivalents. They have demonstrated that they are an excellent investment.

Nevertheless, Government's intervention in the market remains massive. The Housing Authority dominates the bottom third of the market - 35% of families still live in public rental housing. One of the consequences of this, as I have noted on other occasions, is that the pump has clogged: the system is inflexible, choice is constrained, and, unlike the open market, mobility is almost non-existent. Allow me to elaborate on this a little because it is important for what I will say later concerning the sale of flats to sitting tenants.

For those at the bottom of the housing market the choice is stark. There is almost no private sector accommodation for rent other than in the oldest, most dilapidated properties, in bed-space apartments and the like, or in squatter shacks. That is where most of our tenants come from. On application they can choose a preferred district. But with waiting times still in excess of 6 years for most districts and far longer for more central urban estates, this "choice" is fairly academic.

Once the wait is over, applicants must take what they are offered. Flats are allocated according to family size at pre-determined rents regardless of location in the block. A high floor facing South pays the same as a low floor facing North. Balloting for priority in choosing the location of flats within a new estate is a very recent innovation.

Once installed in a flat, there they stay. Transfer between estates is almost impossible to arrange other than by mutual agreement and only 110 out of 620,000 households manage such swaps in any year, i.e. less than 0.02%. On average only around 1700 more families are allowed to transfer each year on grounds of overcrowding.

Thus although the Housing Authority has a range of flats of different ages, sizes and locations, and although families change in size and composition over time, the vast majority of tenants never move from the flat they are first allocated unless and until the whole estate is redeveloped. The result, inevitably, is a mis-match and an inefficient use of resources.

For the tenant, the only way out, the only choice we offer is up, through patient balloting for the right to buy a limited number of HOS flats. Then and only then can they break out of the endless cycle of paying rent. Some families who prosper do, of course, buy property on the open market, but few of these inform the Housing Authority, preferring quite naturally to hang on to whatever low rent accommodation they can, while they can. Thus youngsters move out when they marry and leave their parents behind, but that is a different problem for discussion on another day.

The point that I want you to focus on is that, as a result of Government's massive intervention in the housing market, over one third of the population are treated as though they are all exactly the same. Barring the very poor, and from this year the very much better-off, we charge them the same rents regardless of income. We give them no choice as to flat size or location. The basic choice is between paying rent at around 9% of median family income for as long as they want, or, for those who can afford it and strike lucky in a ballot, paying roughly six times as much each month to purchase an HOS flat which they may not sell on the open market until ten years have passed.

In a normal market the range of choice both in terms of size, quality and location, and in terms of price whether by sale or rent, is much more varied. There is a smooth progression from bottom to top. In our case, it is not so much a slope as a small number of widely separated rungs on a steep ladder. The HOS scheme has provided a rung up the ladder, but it is still quite a jump up from rental flats. In fact, it seems to me that several rungs of the ladder are missing.

A Wider Choice of Property

If the HOS flats are still too far up the ladder for many of our tenants, then allowing them to buy the flats which they already occupy would seem be the most practical way of introducing an additional in-between rung. So I welcome the proposals on Sale of Flats to Sitting Tenants in the LTHS Review. Assuming such a scheme finds favour following consultation and both the HA and ExCo agree on the details, I hope that we will be able to move quickly from recommendation to implementation and invite expressions of interest from our first potential purchasers before the year is out.

The main question I have had from tenants I have spoken to since the Review was released is "How much ?" That to me is a healthy attitude and suggests that we have caught their attention. However, several commentators have been less bullish and have raised practical problems and criticisms. So allow me to spend a few minutes on these.

Of course there are a number of technical and practical problems which will have to be addressed. What will we do if not all of the tenants in a block want to buy? What about future maintenance and management ? None of these is insuperable. Mixed ownership and tenancies occur in private sector blocks. They may be a nuisance, but sensible management arrangements can be put in place. More to the point, what excuse could we possibly have for not selling if the majority of the tenants of a block, or even a substantial minority came to us and told us they wanted to buy. As with purchase in the private sector or under the HOS, ownership brings with it responsibility for maintenance. Establishment of maintenance funds to which owners subsequently contribute seems the most sensible way to get things off to a good start. Clearly, we will need to consult residents on these practical details. My only worry on the practical side is about our ability to deal expeditiously with the legal paperwork as demand for sales picks up, which it will.

I have heard some other comments which strike me as a bit odd. What about defaults? What happens if the head of household is a gambler or drug addict, uses the flat as security for a loan and loses it all ? How can we be sure that some purchasers wont end up back on the public housing queue ? Such comments strike me as extraordinarily paternalistic. There is an implicit assumption that public housing tenants are an irresponsible group who have become a burden on society and must be dealt with differently. It is rather like saying we should not allow the less well-off to eat sea-food because they are not used to it an may choke on the bones. There will always be a small minority of problem families in any society who will need particular help. But the need to help them should not be allowed to stand in the way of allowing the vast majority to help themselves.

Then there are the criticisms that on the one hand we are forcing people to buy homes and on the other that we are encouraging speculation. Neither has any logic to it. Our tenants' aspiration for ownership could not be more clearly evident than in the over-subscription for every HOS sale. Most families recognize that property is the best store of wealth, the ideal way of securing the family's fortunes from one generation to the next. The sale of flats to sitting tenants is one means of facilitating this. As regards encouraging speculation, economists generally regard increasing the supply of a commodity as a means of cooling an over-heated market.

While on the subject, I note that some commentators have suggested that while selling flats to sitting tenants is alright, they should never be allowed to re-sell them in the open market. Re-sale to other tenants they can accept, but not re-sale to anybody else, ever. I find this extraordinary. Why would anybody want to buy something which they cannot subsequently sell in order to trade up into a more desirable property, or another property more suitable to the family's needs? What is the point of ownership, if it is constrained ? Again, it smacks oddly of a desire to perpetuate a two class society.

Clearly, the same sort of arrangements will need to apply to flats sold to sitting tenants as to flats sold under the HOS. Thus, for example, land premium would have to be paid before open re-sale. Similar arrangements might apply for secondary market sales. However, in general terms I would urge that we try to keep restrictions to a minimum, first because, as a general rule, artificial restrictions only encourage cheating, and secondly because ultimately it is only by removing restrictions that we will be able to reduce the scale of Government's intervention in the market place and restore freedom of individual choice.

A Wider Choice of Payment Facility

The sale of flats to sitting tenants should thus allow us to introduce a new rung on the housing ladder. It should allow us to offer our tenants good quality property, not as high a standard as those we currently sell under the HOS and, obviously not as expensive, but nevertheless good quality. The LTHS Review proposes and here I quote : "that prices should be set at a level which would enable the Housing Authority to recover the replacement cost of the concerned flats. Adjustments could be made to reflect depreciation and the relative value of, say, location".

While the Housing Authority still needs to look at the longer term financial implications of using such a formula, it seems to me a very sensible one. To give you some idea of what this would mean in practice - and I stress that these are not prices which the Housing Authority could be held to ! - it works out at around $0.6 million for a ten year old "Y Block" in somewhere like Ma On Shan, plus or minus 30% for the older urban area and the remoter new towns respectively.

Which brings me conveniently to the question of payment and the possibility of introducing some other rungs on the housing ladder.

Currently, again, the choices on offer are rather limited. True, tenants who purchase HOS flats generally enjoy preferential mortgage terms from the lending institutions because the HA has provided a full guarantee against defaults. Nevertheless as mortgage repayments are around six times higher than monthly rentals, this still means that the tenant family has both to reach a certain income level and amass sufficient capital for a downpayment before they can make the jump to an HOS purchase.

In the private sector, a range of flexible payment options are now available. I think it therefore only sensible that the Housing Authority explore whether, in future, tenants could be given greater choice. One possibility might be some form of low-start mortgage under which tenants who wish to buy their flats could elect to convert from monthly rental payments to a larger amount as part of a long-term mortgage arrangement. As the family's financial condition improved, they might increase this monthly payment progressively, thus gradually shortening the overall mortgage period. Instead of simply paying rent, tenants would thus be investing with the Housing Authority at a pace which they could afford. Other means of monetizing tenant occupancy should also be explored.

I also welcome the LTHS Review recommendation that the Authority consider expanding assistance provided under the Home Purchase Loan Scheme. In economic terms, subsidized loans are the most efficient means of encouraging ownership. The Housing Authority's experience since the HPLS rates were enhanced in 1995 has been that this very flexible form of assistance is extremely popular. This is especially so among tenants whose estates are being redeveloped. They are now given the option of either interest free loans or cash subsidies to purchase accommodation in the private sector. The loan amount is currently set at $600,000 and the monthly subsidy rate is set at $5,100. Subject to resources, there is no reason why such loans or subsidies should not be made more widely available.

Greater Choice - Greater Flexibility - New Possibilities

The combined effect of these various reforms will not be that all existing tenants become owners overnight. Rather it will be to open the opportunity of eventual ownership to all families who enter public housing. The aim of these reforms should be to ensure that there is a range of types, sizes, ages and prices of flats available to our clients and a range of financing options so that families move around and trade up within the system one rung at a time, or more if they are able. What we will be offering them is a way through subsidized public rental housing and into ownership in an increasingly private market which for many simply is not there at this time.

In the longer term, this transformation of tenants into owners will have an impact on the way in which the redevelopment of estates is carried out. This is an area which requires further thought and perhaps a little experimentation. The suggestion for mixed development contained in the LTHS Review may provide a suitable framework. It is in any case worth further consideration on its own merits as a means of increasing the production of subsidized housing through greater private sector involvement. I am happy to confirm recent press reports that my staff are working on these ideas.

Conclusion

I have concentrated today on ownership. This should not be taken to mean that I regard the other two broad strands of the LTHS Review as any less important. Quite the reverse. In particular, I feel strongly that we must look for ways of doing more and faster for those who have the least choice of all; those who are in greatest need of the community's assistance. Much of what I have had to say about expanding the range of choice will in any case indirectly benefit them by freeing up rental units for new applicants. However, my main purpose today has been to suggest some of the possibilities which I believe deserve further consideration during the LTHS Review consultation period. Properly and promptly implemented the sale of flats to sitting tenants is a key which could open a new door for many, a door to the pride of ownership at a price and a pace which suits their individual needs.

Thank you.