Hong Kong’s HOS flats a dilemma for market, government

HONG KONG: A family of seven spanning three generations lives like sardines, crammed into a 700 sq ft Home Ownership Scheme (HOS) flat in Shau Kei Wan. But despite the crowded living conditions, the Huang family has no plans to look for a bigger flat. The reason is simple: they cannot afford to.

Numerous cases such as this have helped spark an outcry over soaring housing prices in Hong Kong and calls on the government to resume the building of subsidised flats under the HOS.

The debate gained momentum when Financial Secretary John Tsang Chun-wah announced, in his budget speech on Feb 24, that the Housing Authority would "actively explore means to revitalise the HOS secondary market".

Two rival property developers then crossed swords on the issue.

New World Development managing director Henry Cheng Kar-shun supported calls for a resumption of the HOS programme to build affordable housing, only to have the suggestion slammed by Thomas Kwok Ping-kwong, a vice-chairman of Sun Hung Kai Properties, who said the scheme had helped trigger the big slump in the property market from 1997 to 2003.

Under the scheme, which has been suspended since 2003, households that cannot afford private homes can buy flats developed by the government at subsidised prices.

The cautious proposal by Tsang was seen as one of several government measures to increase the supply of affordable flats to those in need. Others include offering a site designated for mass residential development in Yuen Long, and having the MTR Corp and the Urban Renewal Authority increase their supply of small- to medium-sized flats.

The Huang family is typical of the 300,000 households targeted by the finance chief, who is studying how to encourage long-standing owners of HOS flats to move on and buy properties from the private sector. The study, to be undertaken by the Housing Authority, will take several months.

Victoria Huang's parents bought one of the last batches of HOS flats at Aldrich Garden before the construction of flats under the scheme was suspended and the Housing Authority stopped selling its surplus HOS units.

Huang now shares the flat, which commands a sea view, with her brother and sister-in-law and their two children.

Eight years ago, the family bought the unit for HK$1.6 million (RM685,638), a 44% discount to the HK$2.85 million market rate at that time. After obtaining a 90% mortgage loan from the bank, the monthly mortgage instalment cost the family about HK$6,000.

"Although it is very crowded, we are unlikely to find a similar-sized flat in the area in the private market. Prices are too high and beyond the reach of average buyers like us," Huang said.

Last month, an 829 sq ft HOS flat in Tung Yuk Court, a project next to Aldrich Garden, sold for HK$4.89 million or a record HK$5,900 per sq ft, fuelling fears that speculative fever had spread to the subsidised housing sector.

Huang said if she received a similar purchase offer, the family's 700 sq ft unit would be worth HK$4 million in the open market.

But any inducement to sell is immediately dampened by the requirement for owners to pay a premium to the Housing Authority calculated to reimburse it for the discount at which the unit was originally sold.

In Huang's case, the estimated premium is HK$1.75 million, according to the authority's calculation formula, which takes into account the flat's prevailing market value, the initial market value and the purchase price.

For Huang, the biggest hurdle will be to secure bank financing for the HK$1.75 million to pay the authority before she sells the flat. Then, her family will be free to sell the unit in the open market.

"Additional interest expenses will increase our burden even before we find a buyer. Why do we have to do it?" she asked.

After paying the premium, her family will end up with about HK$2.5 million in proceeds from the sale of their flat, assuming it fetches HK$4 million.

In the private market, current transaction prices in Shau Kei Wan are HK$8,000 to HK$9,000 per sq ft, and that means a slightly bigger 800 sq ft flat will then cost them HK$6.4 million.

A 30% initial downpayment for the HK$6.4 million private flat will be HK$1.92 million, and the monthly mortgage instalment, based on a 70% 20-year mortgage at 2.5% interest a year, will jump to more than HK$16,600 -- almost three times more than her family's current home loan costs.

"The larger home loan repayment [on a private sector property] will kill us," Huang said.

Eric Wong, a co-head of Asia properties at UBS, said the government should grasp the nettle and revitalise the HOS secondary market.

He said the government should shift the land premium burden from the sellers of HOS flats to the buyers, who will find it easier to secure financing through applying for bank mortgages.

"The change will enhance the liquidity of the HOS secondary market overnight," he said.

Other analysts said this might also deter the speculative investors that had begun entering the HOS market and were driving prices higher.

Last year, 8,631 HOS flats changed hands on the secondary market at a total value of HK$12.3 billion, compared with 133,962 secondary market deals worth HK$515.6 billion in the private sector.

Transactions of HOS flats in the secondary market hit a 12-year high last month, with 960 flats sold at a total value of HK$1.52 billion.

By shifting the premium burden to buyers, the HOS financing mechanism would be similar to the free market and a high turnover of flats would follow, Wong said.

"The change is an amicable solution. The government will receive land premiums faster, sellers' dreams of upgrading to bigger homes will be fulfilled, buyers can afford homes, and banks will get more home-loan business," he said.

"It will also bring more business to decoration firms and property agencies."

However, Wong Leung-sing, an associate director of research at Centaline Property Agency, was not persuaded that a change in the payment burden of the premium would help matters.

"It will only benefit rich HOS owners who can afford to upgrade to private flats anyway. The incomes of most HOS owners are barely enough to pay their monthly mortgage instalments," he said.

"Selling a flat in the New Territories does not mean you can trade up to one in an urban area."

Wong said only a minority of HOS owners could afford private sector flats and he opposed any measures to waive or cut the land premium as an incentive to encourage HOS owners to sell.

"It is unfair for taxpayers to dig deeper into their pocket to subsidise HOS owners," he said.

The Housing Authority is a statutory body that funds its public rental building programme with HOS profits, which are derived from building on land that the government provides free of charge.

Wong from Centaline said sky-high home prices were mainly driven by historically low interest rates and hot money.

An influx of capital into the property market was an effective way to hedge against rising inflation, he said.

"In an environment in which interest rates are lower than inflation, prices are bound to soar. If that is not the case, the sun will start to rise in the West," he said dryly, disagreeing with suggestions that the government should resume building HOS flats to increase overall supply.

He said Hong Kong had 2.4 million residential units, including both private and public housing flats, but the city only had 2.35 million families.

"We have no severe shortage problem. Don't prescribe strong medicine to rein in property prices. It is like giving radiation therapy to a patient who does not have cancer. He will die," he said.

Investment demand would begin to fall once interest rates returned to normal, added Wong, and the speculators who paid top dollar for flats would then dump them to cash out or to cut their losses.

Home prices would then fall without the need for intervention, as the market corrects.

"We should not repeat the painful lesson we had when former chief executive Tung Chee-hwa adopted a sharp rise in flat supply during his administration. At that time we saw a landslide in property prices but still no buying demand," he said.

Critics of the HOS scheme say that an increase in the supply of subsidised flats in the late 1990s aggravated the impact of the Asian financial crisis on the property sector, with many owners feeling the pinch after the price of their properties slumped.

The number of households in negative equity at one point swelled to more than 100,000 households after prices dropped as much as 70% from the peak level of 1997.

In his first policy speech in October 1997, Tung announced plans to raise the flat-building target to 85,000 per year to restrain property prices. However, the plan was scrapped in 2000 after property prices collapsed under the impact of the Asian financial crisis.

Amid strong pressure from property developers feeling the impact of a depressed housing market, the government abandoned its flats production and stopped selling its 16,600 surplus HOS flats in 2002.

Five years later, the Housing Authority started selling these empty flats and now still has 4,000 units to sell.

"Keeping those HOS flats empty for a long time is a big waste of public resources," said Eddie Hui Chi-man, a professor in Hong Kong Polytechnic University's department of building and real estate.

He supported the idea that the government should restart building HOS flats to satisfy demand for housing from low- to medium-income families. – South China Morning Post