February 15, 2024 · 《HKEJ》
Over the past decade, Hong Kong has been grappling with a surge in subdivided housing units (commonly known in Hong Kong as ‘subdivided flats’ or ‘SDUs’). Images of poor families cooped up in cramped, subhuman living conditions are heartbreaking and damage Hong Kong’s reputation.
To address this, the HKSAR Government has put forward solutions, but they take time to implement and are costly. The Light Public Housing programme will build short-term units for affected households, while the long-term solution lies in building new public housing estates to increase the supply of subsidised housing units; in the meantime, public rental housing waiting times will remain long.
Based on a comprehensive economic analysis of housing policy and trends, this article puts forward two policy reform proposals that will help shorten public rental housing waiting times and resolve the subdivided housing problem in one stroke. Economic analysis shows that the root of Hong Kong’s subdivided housing crisis does not lie in insufficient housing supply, but in mispricing within the public housing system.
To correct this problem, the government need only raise rents on well-off public rental housing tenants and reduce the land premium payable by owners of Home Ownership Scheme (HOS) and Tenant Purchase Scheme (TPS) flats. Once the system is set right, it will eliminate the mentality of high-income public rental housing tenants who prefer to enjoy cheap rent rather than move up to higher-quality private residential buildings (hereafter ‘private housing’); low-income families living in subdivided flats can then move into public rental housing. These measures will not add to the government’s fiscal deficit.
1. Public Rental Housing Rents Must Be Proportionate to Tenants’ Income
The ‘Well-off Tenant Policy’ for public rental housing was established in 1987, with the aim of encouraging well-off tenants to surrender their flats so as to maintain a fair distribution of public housing resources. Under this policy, tenants whose income exceeds the income limit must pay 1.5 to 2 times the rent. Currently, a non-elderly three-person public rental housing household with a monthly income of HK$20,000 pays a monthly rent of about HK$2,000, or roughly 10% of monthly income. If household income reaches HK$100,000, the monthly rent is about HK$4,000, or about 4% of monthly income. Households with monthly income above HK$122,000 must vacate the unit.
Times have changed, and the policy is no longer suited to the housing needs of low-income families; private housing units with conditions comparable to public rental housing now command monthly rents of HK$10,000 or more. As private housing rents have continued to soar over the past 20 years, well-off public rental housing tenants are even more reluctant to give up their current units.
Well-off public rental housing tenants whose real household income exceeds twice the 2021 public rental housing income limit jumped from 18,900 in 2006 to 51,580 in 2021. Over the same period, public rental housing tenants whose real household income exceeds the 2021 public rental housing income limit by 1 to 2 times rose from 137,080 to 244,860. Over this 15-year period, the average real income of public rental housing tenants rose by 25%.
Because public rental housing rents are so low, well-off tenants have no incentive to give up their current units and move to private housing, leaving poor families with little hope of getting into public rental housing and forced to live in subdivided flats that are cramped, expensive, and lack safety facilities. Private housing tenants whose real household income is below the 2021 public rental housing income limit rose from 104,860 in 2006 to 165,620 in 2021. From 2011 to the end of 2023, public rental housing waiting times extended from 2 years to 5.6 years.
The reform proposed in this article would raise the share of public rental housing rent in tenant income to 10%, while keeping rents for low-income tenants unchanged. For a non-elderly three-person public rental housing household with a monthly income of HK$100,000, for example, the monthly rent would rise to HK$10,000 — close to market rent — rather than being heavily subsidised by the government down to HK$4,000.
This will help induce well-off public rental housing tenants to surrender their units, feeding them into the private residential market and freeing up public rental housing for families on the waiting list. Not only will public rental housing waiting times be shortened, demand for subdivided flats will also fall, and the rents paid by low-income private housing tenants will likewise drop. Such a low-cost yet highly effective measure can yield immediate results and bring relief to the disadvantaged in Hong Kong society.
To help existing tenants adjust to the rent increase, the authorities could consider issuing cash subsidies in tapering form over a number of years. If a household decides to move out instead, the benefits it enjoys will not be significantly diminished.
As for well-off public rental housing tenants, no cash compensation is required. For such households, whether to stay in their current small but cheap public rental housing unit, or move to a private residential dwelling with a better environment and higher rent, is essentially a matter of indifference. A rent increase will only induce them to give up their public rental housing units; it will not cause them any loss, so no compensation needs to be paid.
Encouraging well-off public rental housing tenants to climb the housing ladder will inevitably push up rents and prices in the mid-range private residential market, which in turn will weaken the incentive of existing public rental housing tenants to move out. Fortunately, the second part of the author’s recommendations below will offset this issue, keeping private housing prices stable.
Even taking cash subsidies into account, the public rental housing rent adjustment will not impose significant fiscal pressure on the government. As well-off tenants leave, the rental income the government receives from those units will inevitably fall, because new tenants have lower incomes and pay correspondingly lower rents. On the other hand, the rent paid by the tenants who remain will rise. On balance, the net revenue impact on the authorities is expected to be limited, or may even be positive.
2. Lower the Premium for Subsidised Housing and Tenant Purchase Schemes
Regardless, recovering public rental housing units in this way is bound to be faster and cheaper than building new ones. Building new public rental housing not only costs as much as about HK$1 million per unit, but also takes years to complete. The reform advocated in this article can be implemented immediately, and phased in gradually by the government as appropriate; the costs involved are limited, and can be easily offset by the following measures proposed by the author.
The ‘Home Ownership Scheme’ (HOS) subsidises middle-income families in buying their own homes, namely new housing units built under the scheme. The ‘Tenant Purchase Scheme’ (TPS), meanwhile, allows some public rental housing tenants to purchase their current units at a substantial discount. Both schemes are designed to promote upward mobility of households along the housing ladder.
However, HOS owners must pay a land premium of 35% to 50% before they can rent out or sell their units. Because the premium amounts are substantial, only 22% of the total 351,000 HOS units have completed the premium payment.
Similarly, TPS units also require payment of the land premium before they can be rented or sold, with the premium rate as high as 82% to 86%. According to 28Hse.com, a TPS unit has a market price of about HK$2 million, meaning that after the owner completes the land premium payment and sells the unit on the open market, they receive only about HK$300,000. With returns so low, it is no wonder that, of the 152,000 TPS units sold, fewer than 2% have paid the premium.
High premium amounts are aggravating the subdivided housing crisis. Even if TPS and HOS owners see their incomes rise, the high premium rate discourages them from reselling or renting out their units, so they are unwilling to trade up to higher-quality units. This leaves an undersupply of small units available for low-income families to rent, and the imbalance between supply and demand in the lower-end residential market keeps worsening. The author here proposes the second part of the recommendations: halve the prescribed premium for subsidised home ownership schemes.
This reform will bring multiple benefits. First, it will make it easier for owners to transfer or rent out their units. Even if an owner has no intention of selling, the property can more readily be used as collateral for investment or entrepreneurial activity.
Second, as higher-income tenants are willing to trade up to higher-quality units, the supply of lower-end residential units on the market will increase, putting downward pressure on prices. As for mid-sized residences such as HOS units, this downward price pressure will offset the upward price pressure caused by the public rental housing rent adjustment in Part 1 above, thereby maintaining price stability. Lacking any offsetting upward price pressure, prices and rents of small residences comparable to public rental housing will inevitably fall, which also helps the SAR Government meet its goal of providing affordable housing for low-income citizens.
Third, as higher-income tenants trade up to higher-quality housing, the reform will generate upward price pressure in the high-end property market, which can offset the downward price pressure created by soaring interest rates. The SAR Government will therefore be better able to achieve price stability in the high-end property market.
Fourth, the reform will deliver a windfall to the government coffers. Although the government has rules on premium payments, it currently collects very little from them. Lowering the land premium ratio will instead encourage more owners to come forward to pay the premium, benefiting government revenue.
As for how the premium discount rate should be set, the guiding principle can be to maximise government receipts. For example, suppose the HOS premium rate is reduced from 35%-50% to 20%, and the share of HOS units that have paid the premium as a proportion of all HOS units rises by 20 percentage points; according to 28Hse.com, a typical HOS unit sells for about HK$4 million. On this basis, the government could receive an additional HK$56 billion, enough to build 56,000 new public rental housing units, easily offsetting the fiscal cost of the public rental housing rent adjustment — with a substantial public finance surplus still to spare.
Finally, in the current market downturn, activating property transactions can also give a much-needed shot in the arm to real estate practitioners. In sum, the reform proposals above bring every benefit and no harm.
3. Macroeconomic Policy Implications
This article advocates that the authorities adjust public rental housing rents and the premium rates of subsidised home purchase schemes, thereby encouraging high-income public housing tenants to trade up to higher-quality private residences. This will help low-income families escape the predicament of living in subdivided flats. The reform will both improve affordability in the lower-end property market and offset the downward price pressure in the high-end market caused by rising interest rates and an unfavourable macroeconomic environment — without adding to the government’s fiscal deficit.
Xia Baolong, Director of the Hong Kong and Macao Affairs Office, has pointed out that Hong Kong must bid farewell to subdivided flats before 2049; if the reforms proposed by the author are implemented, the problem can be resolved well ahead of that deadline. Improving the operation of the housing ladder will undoubtedly help retain talent, boost economic growth, and ease political grievances.
Given that the above reforms carry small risks and large gains, the SAR Government should seriously consider implementing them. If the authorities can provide the relevant administrative data, academic researchers can use it to calculate the benefits and costs involved.
(Translation supported by AI)
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