One of the top concerns of Chief Executive Mr John Lee Ka-chiu is housing. Last week, I presented some ideas on what we should do. This week, I would like to discuss what we should not do.
Policy scientists are well aware of the possibility of “unintended consequences”, to the extent that this has become an important subject for policy analysts. Writer Rob Norton noted that “Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.”
In March 1998, in an article in the South China Morning Post titled Policy Blunder of the Century, I warned that the Tenants Purchase Scheme (TPS) would lead to a long spell of housing price declines, eroding the Hong Kong Special Administrative Region’s fiscal resources, and ultimately causing huge deficits. My forecasts at that time, unfortunately, were borne out. When many economists suggested that the SAR was facing serious structural deficits, in an article in Oriental Daily in 2002, I suggested that then-housing secretary Michael Suen Ming-yeung’s policies would end the housing market depression soon. Because of the SARS outbreak, the housing market did not recover until summer, and the fiscal situation improved, creating fiscal surpluses from 2005 through 2018! Compare this with the relentless fiscal deficit from 1998 to 2004 (1999 registered a small surplus)!
The housing privatization program had many serious intended consequences. By selling public housing cheaply, it led to a plunge in Home Ownership Scheme (HOS) housing. HOS owners had difficulty trading up, thus spreading declines to higher tiers in the housing market. Housing market turnover collapsed, indirectly hurting many sectors that depend on housing market turnover to make a living. What is even worse is that it made Public Rental Housing (PRH) much more attractive than before, because PRH tenants could get rich. Now that the TPS has ended, the fact that PRH tenants enjoy “Green Form” status when they apply for an HOS flat and that they can participate in the HOS and TPS secondary markets, it continues to add attraction to PRH. The long queues for PRH housing of course have much to do with the stunted supply of public rental housing, but no doubt are aggravated by the increased attraction of PRH.
The standard per capita space for PRH tenants is 75 square feet (7 square meters). But actual per capita space had risen steadily, and now stands at around 145 square feet. This is much better than many who live in private housing. This leaves very little incentive for those who can afford private housing to leave public housing, especially when it is built on highly desirable pricey land. In order to reserve public housing for those who otherwise would be in dire straits, families whose household sizes had shrunken should be relocated to smaller flats. Absentee tenants must not be allowed. University of Hong Kong academic Vera Yuen proposed that those who leave their units vacant for an extended period of time should be asked to repay the market rent for the period when the unit is left vacant, and should also be prohibited from applying for public housing again for five years. She also noted that one tenant found to hide his HK$15 million ($1.91 million) in assets was given a tiny fine of HK$2,000 and a suspended sentence for a prison term of only 10 days. This is clearly much too lenient and without the needed deterrent effect.
Hong Kong has implemented the Special Stamp Duty since November 2010. The SSD was supposed to be a temporary demand management policy. But the policy has continued without any serious official study of the effects and the unintended consequences. In the face of the SSD, indeed, short-term speculation has virtually vanished. While speculative demand was indeed curbed, the policy has also curbed the supply of existing homes from those who otherwise would have liked to trade up for better, roomier housing. Many owners would not run the risk of having to pay a punitive SSD in case for some reasons they had to resell the property. This led to a huge pickup in the prices of starter homes, and goaded developers to focus on the production of “nano flats”, the per-square-foot price of which could easily surpass that of bigger flats. The data shows clearly that the prices of the smallest flats (Class A flats in the parlance of the Rating and Valuation Department) surged ahead right after the introduction of the SSD. The data also showed that the turnover of existing flats plunged after the introduction of the SSD, which corroborates the hypothesis that the SSD had actually produced a perverse rise in housing prices because supply had fallen.
Instead of critically assessing the effects of the SSD, unfortunately, the SAR government simply dared not touch the subject. There is perhaps the “what if” fear: “What if housing prices zoomed after the SSD was abolished?” and “What if abolishing the SSD gives the market wrong signals?” Between the SSD and the Buyer’s Stamp Duty, I would retain the latter, on the condition that it applies only to buyers who live overseas and buy the property only for investment purposes.
I would say no to TPS, no to absentee tenants and absentee HOS owners, no to the SSD, and no to public housing projects on pricey prime land.
The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.
The views do not necessarily reflect those of China Daily.