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 So we finally get the confirmation that the government will restart the home ownership scheme. 

The government will resume the controversial HOS programme in a new form.  The monthly household income requirement for these flats will be HK$30,000 or below, and income level which would (in the current market anyway) have difficulties to own a property in the private sector.  The flats will mostly be small sized (100 to 200 sq. feet).  The pricing of these flats will be based on the affordability of these households at the market situation at that moment (which, supposedly, will be dependent on the mortgage interest rates and other factors).  The current estimate offered by the government would be rather HK$1.5 to 2 million.  The first batch of 2,500 flats will be available for presales in 2014 or 2015.  Over the 4 year period from 2016-17, the government will be providing a total of 17,000 or more, with the annual supply between 2,500 to 6,500 units.

Another new feature for the scheme is that the flats will be available for secondary transactions in 5 years time with a slightly different requirement for premium.  As in the past, the owners will have to pay premium as the flats are sold in the private market, and the premium is adjustable contingent on the prevailing market condition.  But in the new HOS, the premium will be regarded as a loan to the owner, thus the premium payment will be based on the subsidy the government made at the time of purchase.  Thus the premium will not be subjected to adjustment as in the old HOS. 

For those households who are earning HK$40,000 a month or more, the My Home Purchase Plan announced last year would be for them.  There will be 5,000 of such flats coming on stream, with 1,000 of them in Tsing Yi coming onto the market in 2014 or so, and the plan would be enhanced.  On top of that, the government continues to pledge to supply land available for 20,000 units for the private sector each year in the next decade, and an average of 15,000 new units per year in public rental housing.

To assess the impact, we start with paragraph 8 of the policy address (emphasis mine):

8.      Housing is an issue of great public concern.  The joint efforts of the Government and our people over the past decades have produced good results in this area.  There are currently 2.6 million residential units in Hong Kong, accommodating 2.35 million households.  Of those, 730 000 households live in public rental housing (PRH) and 380 000 in self-owned units acquired with government subsidies.  In other words, almost half of the households in Hong Kong are benefiting from some form of housing subsidy by the Government.  Of the 1.24 million households living in private properties, 870 000 are owner-occupants.  Taken together, nearly 85% of households live in PRH units, subsidised home ownership scheme flats or their own private properties.

As far as the total housing stock is concerned, there is no “shortage” what so ever, as I have previously discussed.  Based on my previous estimates, the private sector housing stock consists of about 1.4 million units, and this housing stock is accommodating 1.24 million households, of which 870,000 own the flats they are living in.  That means there is surplus supply available in the housing stock.

Based on the population growth and households formation estimates, with 15,000 annual supply of flats in the public rental housing, my previous estimates suggest that the private sector market would need roughlynet 13,000-15,000 units of annual supply to maintain the supply-and-demand balance, assuming that half of the new households will choose to live in private housing.  Without HOS, however, we would need more supply in the private sector, for sure.  The estimation is not wholly scientific, but 15,000 –20,000 units ofnet private sector supply for the next 5 years or so should be sufficient if HOS is not available.  And given the recent sub-10,000 gross units supply, it would also be desirable to have more supply in the near-term.  So 20,000 units of gross new supply per year in the years could be sufficient (consider the fact that there are demolitions of old buildings happening every year, with the exact figures not clear, the net supply would be slightly less than the gross).

The new HOS supply of 2,500 to 6,500 units per year, together with the My Home Purchase Plan, do not appear to be large enough to alter the balance of supply and demand, at least in the near-term, especially consider the fact that it will take at least 3 years for those supply to come onto the market.  Thusconsistent with my expectation of the Policy Address, the announcement today does not offer anything very dramatic in altering the supply-and-demand balance.  Of course, with population growth slowing and population ageing, the supply level of 20,000 flats in private sector, roughly 5,000 HOS and My Home Purchase Plan flats per year, and 15,000 public rental units per year would probably be more problematic in the a more distant future, in my view.  The key for the government in 5-10 years ahead would be flexibility.

I do welcome some of the feature of the new HOS, such as the fixed premium payment upon selling to improve the flexibility, but there could be unintended consequences.  If, for instance, the property market fell after the initial purchase and if the premium was fixed, that could make property owner even less likely to trade up and shift to the private sector, and that could be exactly the opposite thing the government wants to see.  So using such policy to encourage people trading up can only work under the assumption that property prices will continue to rise.

On the whole, the Policy Address is not offering anything dramatic.  I would be rather more concerned about the possible excess of supply in the 5-10 years time frame if the government is inflexible about the implementation.  The near-term impact, however, could be very limited as the property market is dictated by the global macro environment more than by what Donald Tsang has to say.  In the longer-term, however, the key is flexibility.

This article originally appeared here: Hong Kong Policy Address 2011-12: Resumption Of HOS
Also sprach Analyst - World & China Economy, Global Finance, Real Estate


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