Hong Kong Housing Authority and Housing Department

Mr. President, ladies and gentlemen,

This is the second time that the Institute has done me the honour of inviting me to lunch. I am both surprised and impressed by your hospitality and your tolerance. Thank you for both.

Your profession is, by definition, keenly interested in measuring, quantifying and assessing. Today, I would like to engage that interest in what I have previously described as the "housing pump". How do you measure the performance and the efficiency of a pump? Presumably it is not measured simply by the volume of the water which it sucks in, but also by what comes out, and the effort required. A couple of years ago, in a speech, I compared the public housing programme with a pump, and argued that we should measure its performance in much the same way.

At the time, I said that the ideal public housing programme should aim not simply to help lift those in need out of shanty or slum accommodation and provide them immediate subsidized relief. It should also in the longer term enable them to become self-sufficient. I suggested that while we were pretty successful at the former, we seemed to be less successful at the latter; that in effect the pump was getting clogged. I went on to describe how I thought the various proposals in the Long Term Housing Strategy (LTHS) consultative document would help remedy the situation.

Quite a lot has happened since then. Indeed, I have occasionally heard it suggested that there have been too many new initiatives and that it is all a bit confusing. So today, I would like to take the opportunity to put the various new policies in perspective and to demonstrate that, as far as the Housing Authority (HA) is concerned, they represent a coherent and carefully targeted package of policy measures, each of which contributes to the overall solution.

The Success of the Public Housing Programme

Allow me first to elaborate on my two part test of a successful housing programme. As regards the first, provision of immediate relief, Hong Kong's public housing programme is acknowledged as a remarkable success. Against a background of massive periodic waves of migration, it has provided shelter and security to millions and enabled many to prosper. It was without doubt one of the foundation stones of Hong Kong's post-war economic development.

As regards the second test, helping families become self-sufficient, the picture is a less happy one. Certainly the number of people living in heavily subsidised public rental housing (PRH) grew very rapidly. In the first two decades it soared from zero to 38% of the population. For the next two decades the rate of growth was slower and less steady, nevertheless the proportion still grew: to 40% in 1980, and 44% in 1991. But making the pump bigger is not necessarily the same thing as making it more powerful or more efficient.

The Clogging of the Pump

Indeed, from the late seventies onwards there was a growing recognition that too much water was simply staying in the pump. There were two aspects to the problem. On the one hand, it was popularly believed that not a few of those living in PRH no longer really needed this form of public assistance and were just taking advantage of low rents. On the other, although this was less widely acknowledged, many more would have preferred to move out if they could, but they simply could not afford the jump onto the first rung of the ownership ladder.

Some of the disadvantages resulting from this situation are obvious and well known. Others less so. So let me list them briefly both for completeness' sake and for reference purposes:

• the cost of maintaining an ever-increasing stock of subsidised PRH involved an ever-increasing burden on the public purse;

• those no longer in need, who chose to stayput, were blocking the way for others in genuine need on the waiting list;

• as a result the Government was forced to spend still more in order to build yet more PRH;

• in so doing the Government was occupying an even larger segment of the housing market;
  [In fact the rental housing market has become completely polarized : corporate and "yuppie" rentals at the top, slums and tenements at the bottom and nothing much in the middle except PRH] and

• over time a larger and larger proportion of the population was finding itself trapped in a tenant relationship with its Government.

I use the word "trapped" quite deliberately to illustrate one of the social disadvantages of PRH which tends to go unnoticed except by those who live in it and who cannot afford to move out.

Once a family has been allocated its PRH unit, there they generally stay until either the estate is redeveloped or they pass away. Fewer than 0.2% of families in PRH manage to arrange a move to another estate in an average year. Compare and contrast with the private sector, where 9% of tenanted-families move each year to suit school nets, or jobs, or transportation, or changes of family size. Although the queue and the wait to get into public housing are both long, not all families end up living where they really want to live. They accept where luck and an impartially blind bureaucracy place them, and there they stay.

Two-Pronged Strategy

As I suggested earlier, the problem faced by the HA was a double-headed one : some tenants, who could afford to move out of public housing, choosing not to; others forced to continue renting public housing because prices outside left them with no real choice. The HA's strategy for dealing with these twin problems has been developed under two headings: "Rational Allocation of Housing Resources" and "Encouraging Mobility".

The strategy takes as its starting point the assumption that most people are rational actors, that is that they take decisions about housing in a rational manner, weighing the relative costs and benefits to the family of staying or leaving, of continuing to rent in the public sector, or buying in either the public or the private sector. Assuming then that the majority of tenants and applicants for housing assistance are rational actors, the challenge has been to re-examine the whole structure of incentives and disincentives, and to re-design them in such a way that people who do not really need long-term rental housing assistance are encouraged to opt for assisted purchase instead.

The emphasis has thus been on, on the one hand, widening the range of choice open to all who qualify for public housing assistance, and on the other, tightening up the conditions under which it is provided. In the following paragraphs I would like briefly to review the various initiatives, both the carrots and the sticks, and see how they are working. I will start with the sticks.

Rational Allocation of Housing Resources

The HA began looking in earnest at ways of dealing with what were termed "Better-off Tenants" in 1987, and in 1995 published a Report on the Rational Allocation of Public Housing Resources for public consultation. This led to a series of measures, the first of which were introduced in 1996, the others progressively following further consultation on the LTHS.

Essentially, all tenants are now required to make periodic declarations of their income and assets. Once these are assessed to have exceeded certain (reasonably generous) levels, (the current income and net asset limits for 4p-households paying market rent are $53,100 and $1.7 million) monthly rents are raised automatically first to one-and-one half times the subsidised rent level, then double and ultimately to market rent level. Those assessed as having income and assets sufficient to justify the charging of market rent, may stay in PRH for up to one more year, after which they will be expected to make alternative arrangements. During that time they may, if they choose, opt to purchase a flat under the Home Ownership Scheme (HOS), or take out a home purchase loan to assist their purchase of a private property.

On the death of the principal tenant, the same test will be applied to the surviving family. A surviving spouse will normally be allowed to take up the tenancy, but once both the principal tenant and spouse have passed away, the children have no automatic right to "inherit" the flat.

These measures have been paralleled by a tightening up of the eligibility criteria for housing benefits. Thus all applicants for public housing and all those cleared from squatter areas in development clearances are also subject to a comprehensive income and asset test. This is designed to ensure that those who do not really merit PRH assistance do not get it. Where appropriate, those whose means exceed the limits set for PRH will be offered home purchase assistance.

Encouraging Mobility

At the end of the seventies, the HA introduced the HOS. It was designed to provide an avenue to ownership for public housing tenants and initially proved quite successful. However, as the older public housing estates were redeveloped, it became clear that the HOS was becoming less and less attractive to rental tenants. Where in 1989 about one quarter of tenants in an estate under redevelopment had opted to buy HOS flats, by 1998 this percentage had fallen to under 10%. It had also become clear that with monthly expenditure for the purchase of an HOS flat running at about 5 times monthly rentals for modern public rental flats, the jump was too great for the vast majority of tenants. In effect there was a rung missing from the housing ladder.

It was therefore agreed as part of the LTHS to devise a scheme for the sale of flats to sitting tenants which would build in this missing rung. As you all know, learning from the lessons of previous aborted attempts, the Tenants Purchase Scheme (TPS) was launched last year and was very well received. Some 20,000 families who started the year as tenants ended it as happy owners, three-quarters of those who were given the choice. I expect a similar response to the second phase this year.

We are committed to offering no fewer than 25,000 flats for sale under this Scheme each year for the next ten. That amounts to over a third of the stock of PRH at the start of the Scheme. In fact, just over half of the HA's rental stock is judged to be of salable quality, by which I mean attractive to purchasers.

It was also agreed as part of the LTHS that once the TPS was successfully launched, we should introduce a new "Buy or Rent Option" for eligible applicants on the waiting list. This Scheme, which has just been approved, uses a little bit of creative financing to enable families eligible for PRH to opt to purchase good quality new flats on easy-start terms, rather than paying rent for comparable accommodation. Indications so far are that this scheme will also be well-received.

Not all families on the waiting list will be able to afford this option, but many will who previously could only dream of ownership. Thus the opportunity for ownership has been opened to families who otherwise would have become dependent on long term rental subsidy. An essentially similar option is also now offered to tenants affected by redevelopment plans.

Again, as part of widening the range of choice both for existing and prospective tenants, the HA last year increased the number of loans it made available under the Home Purchase Loan Scheme (HPLS) to 10,000. Coinciding as it did with a fall in private sector property prices, this quota was massively over-subscribed. Loans were made available from December last year. As of today, 85% have already been used for a purchase, and of these, just under 30% have been used for the purchase of secondary market HOS properties. The remainder have all been used to purchase good quality private sector properties, generally ten years old or less.

Loans are, of course, the most efficient form of housing subsidy and the most market-friendly because they result in purchases at real market price. One other perhaps less obvious point to emphasize is that those taken out by PRH tenants effectively benefit three families: the seller of the flat benefits from the sale and generally speaking trades up; the tenant who buys from him or her benefits by becoming an owner; and, because the tenant is obliged to release his existing rental flat, a family on the waiting list also benefits from earlier allocation.

Greater Choice

The result of all of these changes is a broadening not only of the range of choice, but also of the affordability of options. Prospective applicants for housing assistance who were eligible previously only for PRH, or, if means allowed and they were successful in a ballot, for an HOS flat, may now choose between renting public housing, buying under the Buy or Rent Option, balloting to buy an HOS flat, or applying for a loan under the HPLS.

Existing tenants similarly have a wide range of affordable options. As previously, they have priority for purchase of flats under the HOS, they may apply for a loan to buy in either the secondary HOS market, or in the private market, they can buy under the Mortgage Subsidy Scheme if the estate they live in is to be redeveloped, or if not, they may buy the flat they already live in if it is offered for sale under the TPS.

Giving people more choices, means that the same resources can be used more efficiently, more effectively, in ways which assist a greater number of people and - allow me to underline this last point - in ways which the people involved find more satisfying. Instead of bureaucrats telling them where they are going to live, they are making decisions for themselves, rational informed choices, about the size, location and cost of the homes they are to live in.

Unclogging the Housing Pump

All the new initiatives proposed in the LTHS are now in place. It is early days, but the results are beginning to show. More water is beginning to squirt out of the pump and less is being retained inside. The number of tenants and new applicants for housing assistance who are opting for ownership is gaining ground at an impressive rate.

A total of 42,400 families became owners in 1998/99, comprising 15,000 purchasers of HOS flats, 800 tenants affected by redevelopment who bought flats under the Mortgage Subsidy Scheme, 20,000 tenants who bought flats under the TPS and 6,600 families who took out HPLS loans. In the same year, a total of 17,000 PRH flats were recovered for refurbishment and reallocation to families in greater need of this form of subsidy. Already the number of families on the waiting list, which stood at 148,000 when the LTHS consultative document was published, has been reduced to 120,000. Average waiting times have also been reduced from 7 to 6 years over the same period and we are confident that we will meet the target of reducing waiting times to an average of 3 years by 2005/6.

This year we project that a further 59,000 families will become owners, including waiting list applicants who purchase under the new Buy or Rent Option. And we estimate that around another 17,000 PRH flats will be recovered for reallocation. This is, of course, in addition to the 44,000 new rental flats which will be completed this year.

The pump is not only getting more efficient, it is also becoming smaller. I mentioned earlier that at one point (1991) 44% of Hong Kong's population were living in PRH. That was the peak and the pump measured a massive 670,000 units. Today there are 645,000 PRH units and the proportion of the population living in this type of subsidised housing has shrunk to 33%. As the numbers opting for ownership rise, so this proportion will shrink still further. That is healthy, but I do not wish to be misunderstood.

There will always be some families who for one reason or another will need rental assistance. Quite how many and what proportion of the population they represent, only time will decide. The HA is fully committed to continuing to provide assistance for them as in the past. What the HA will not be doing, however, is insisting that those who do not need rental assistance are given no other choice. Instead it will be giving all those eligible the option to buy or rent as their circumstances permit.

Restoring the Market

Some of you may say this shrinking of the size of the housing pump is just playing with the figures. After all, are not the families who buy HOS flats living in public housing? Let me explain why this is not so.

PRH is let at subsidized i.e. non-market rents. For as long as it is so rented it is outside the real market. Flats sold under the HOS and TPS are sold at a subsidized price. Ultimately, however, they are freely tradable. After the expiry of the so-called alienation period, which by the way has recently been reduced from 10 to 5 years, they attract a real market price or rent. In all respects they are private property, as freely tradable, whether by sale or rent, as privately built housing.

Currently some 53% of families in Hong Kong are home owners. This figure includes those who have purchased through the various publicly-assisted schemes. Another 10% or so rent in the private sector, half at the top end, half at the very bottom. A few are housed by their employers or live in some form of institution. A few live in informal housing e.g. squatter huts and other illegal but tolerated temporary structures. So far all of these groups are living in property which attracts, or potentially will attract, a real market price or rent. It is only those living in PRH, who are outside the real market.

The fact that, in free market Hong Kong, one third of families live outside the real market is a curious historical anomaly. It does not match with the economic progress that Hong Kong has achieved in the past two decades. But as that proportion shrinks, so the real market will be restored, to the health of the economy and the benefit of the community as a whole.

Conclusion

In conclusion, Mr President, the series of public housing policy reforms, which commenced with deliberations on the Rational Allocation of Public Housing Resources, have now come together as a coherent whole. A balance has been struck between the tightening of eligibility and the widening of choice. With all of the incentives now pointing in the same direction, we will be able to rely on the rational choice of our customers to ensure greater mobility and, as a result, that scarce resources are used in the most effective and efficient way.

In closing, allow me briefly to offer a couple of comments on the longer term consequences of this unclogging of the pump. I have said that the pump will become smaller and more efficient. This is important for at least three reasons, each of which touches on some aspect of the debate over Small Government versus Big Government.

First, experience has shown that the larger the public housing programme has become, the less it has been able to focus on those most in need. Far too large a proportion of resources have had to be devoted to keeping those already in public housing comfortable at the expense of those struggling to get in. If the butter does not have to be spread so thin, it should be possible to spend more on the really needy.

Secondly, the rise in ownership will result almost inevitably in a parallel rise in demand for private management and maintenance services and a decline in demand for those currently provided by the public service. In the long run, that is not something which we can control. Private firms will bid for contracts and the new owners will negotiate terms without Government interference. In the short term, the HA has a narrow window of opportunity to negotiate special arrangements for staff who are willing to transfer into private firms. You will be aware that many of my staff are not happy at the prospect, but I must emphasize that the window of opportunity is very narrow indeed. The ratio of tenants to owners among our customers is currently around 3:1. In only four years¡¦ time, it will be 1:1.

Thirdly, as the market is restored, the accumulated market distortions of 45 years of very direct government intervention will gradually disappear. The third of the market which has been virtually frozen for the last four decades will gradually de-frost. Transactions will begin to take place at the lower end of the market which have not existed for a long time, and these transactions will be normal market transactions. The middle to lower end of the rental market, which at the moment is a virtual public housing monopoly, will re-emerge as it is progressively restored to the private sector. So also in due course private sector investors will be attracted back into the lower end of the market, a market segment from which they have been scared away by the sheer scale of Government's intervention.

In sum, Mr. President, a more efficient housing pump will bring many benefits to the community:

• It will allow us to focus our resources on those who need them most.

• It will allow many families to become owners who previously could only dream of it.

• By giving these families more choice, it will give them more control over their lives, allowing more people to live where they want to.

• It will facilitate the restoration of the market.

And, finally, which may be of particular interest to members of your own profession, it will create a demand for more and better quality private real estate, management, maintenance and related specialist services.

End