14 September 2017 - Tackling soaring property prices has been a tough challenge for the government and with Hong Kong being ranked the world’s most expensive property market for seven years in a row, there is continued concern that existing policies are doing little to help the average person in Hong Kong. Before Carrie Lam assumed office, the city’s first female Chief Executive proposed a “Starter Home” project and a “public-private partnership” scheme during her election campaign to sway voters by offering affordable homes for the people of Hong Kong. While “Starter Homes” are a new concept to the local housing market, collaboration between the government and private developers has long existed.
Despite general doubt over its impact on helping local residents climb the property ladder, the “Hong Kong Property for Hong Kong People” policy introduced by the former Chief Executive Leung Chun Ying demonstrates government involvement in regulating non-citizen private housing ownership. Restricted by the measure, the apartments built under the scheme can only be purchased by Hong Kong permanent residents during its first 30 years. Last summer, the first batch of 110 units at One Kai Tak – a residential site sold to China Overseas Land under the programme – were sold for an average of HKD14,500 per square foot. Confronting public criticism on the high sale prices for first-time home buyers, China Overseas Land contended that they “did not recall any requirement [of the policy] on selling at reasonable prices.”
To combat the climbing rents of Hong Kong’s private property market, increasing the provision of subsidized homes is a direct and viable means to help a local home buyer fulfill their dream of home ownership. Theoretically, a public-private-partnership allows the sharing of financing risks and expertise of home construction between the public and private sectors, thus improving the quantity and quality of the social housing units. Thoughtful planning, however, is required to ensure that the co-development housing projects achieve the noble goal of helping local residents acquire their first flat. Below are two suggested proposals by local experts:
1. Incentivize private developers to contribute part of their land reserve to social housing.
There is a vast amount of agricultural land owned by the major private developers – spanning approximately 1,000 hectares. To put this into context, if fully converted into high-rise housing this could provide housing for almost 1 million households, or 3-4 million people1 – almost half of Hong Kong’s population.
For the sake of social and economic stability, such a conversion should not happen in its entirety (and certainly not simultaneously). However there is room for public-private collaboration on developing social housing on at least some of these sites. The land has been left undeveloped because of its remote geographical location and the lack of public amenities. To motivate private developers, the government could subsidize the cost of public infrastructure in these areas in exchange for private sector commitments to certain percentages of the land for subsidized flats. This partnership model is believed to be favorably received by developers since the government’s investments in infrastructure enables them to monetize hoarded land (illiquid assets) by converting them into profitable housing projects.
2. Invite private developers to construct social housing units and compensate them with a reasonable return on capital.
In this model, the government contributes most of the capital and invites private developers to take up the design and construction work of the subsidized homes. Upon completion, all units will be purchased by the government at an agreed upon price that generates moderate returns for the developers. While margins might not be as attractive as what a private housing project could bring, risks and capital requirements are significantly lower in these co-development residential projects. By partnering with the government, the developers are assured of a relatively stable return on investment.
Naturally, in a rising property market, developers are probably less focused on managing risk – this would be much more appealing when prices are declining. So there is a chicken-and-egg problem relating to incentives and timing. But proactively implementing such a scheme would help stabilize the market and prevent a large (risky) correction as well.
Hong Kong’s property challenges are complex, to say the least. Public-private partnership is certainly one possible approach to housing issues – so long as it is managed well and does not undermine stability. These are simply two of many possible models that have been considered, but whatever collaboration solution(s) are ultimately implemented, affordability should be the core consideration of the policy.
To truly help the average Hong Kong home buyer, the government might have to play a more active role in the pricing of subsidized flats – either directly (fixing prices to the public) or indirectly (more actively increasing supply).
Based on lessons learnt from the “Hong Kong Property for Hong Kong People” scheme, should the selling price of social housing units be determined by the government instead of the market in order to ensure they are within reach of the average home buyer? Economics 101 generally dictates that markets should determine prices, not governments. In any scenario, in order to solve Hong Kong’s housing challenges in a sustainable way, the market (i.e. Hong Kong’s people) must know what additional supply or price management policies are being adopted. Only then can market prices adjust rationally and without undermining Hong Kong’s long term health. It’s a formidable challenge for our government, to be sure, and ultimately any policy decisions should be made in conjunction with the major developers, since their organizations remain an important part of the fabric of a free economy that Hong Kong is built upon.
1 Assuming a plot ratio of 6.5 x 1000 hectares and an average flat GFA of 70sqm.