New HOS resale rule may waste valuable resources
Ho Lok-sang outlines his objections to the proposed extension of a moratorium on open market resale for the Green Form Subsidized Home Ownership Scheme
Iagree that resale of HOS (Home Ownership Scheme) housing should be subject to restrictions, but disagree with the proposed extension of the moratorium on open market resale for the Green Form Subsidized Home Ownership Scheme (GF-HOS) from five years to 10 years.
The latest batch of GF-HOS flats for sale will be priced at a much deeper discount from the market price. Buyers will need to pay only 42 percent of the market price. Most HOS housing have previously been priced at 70 percent of the market price. According to the proposed new rule, in the first two years after purchase, the buyer can only resell to eligible buyers approved by the Housing Authority at no higher than the original price. After the first two years, he can sell to eligible or Green Form applicants in the secondary market at a mutually agreed price. Only after 10 years can the buyer resell his unit on the open market after the owed land premium has been repaid.
The tightening of the rules for resale is presumably to ensure that those who buy intend the flat to be used as a home and not as a vehicle for investment and definitely not for short-term gain. While I agree with the motivation behind the proposal, I am afraid the new rule may lead to inefficient use of a valuable resource. If it is profitable to do so, the GF-HOS owner will wait out the 10 years in order to reap a huge capital gain. In the worst case scenario, an owner who does not need the flat any more could just leave the flat vacant, because he is not allowed to sell or rent it out. After the 10 years are over, the flat is resold in the open market. The original owner makes a fortune, and the flat becomes no longer available to those waiting for a chance to buy a subsidized flat.
In a paper published in Contemporary Economic Policy in 1995, I had called the moratorium “term resale restriction” and criticized it as inefficient. I recommended restriction of resale only to target groups. The HOS Secondary Market Scheme (HOSSMS) launched by the Housing Authority in June 1997 actually followed this model, and I applauded it — with qualifications which I shall explain below.
According to the Housing Authority, “the launch of the HOSSMS increases the turnover of HOS flats so as to satisfy society’s need of subsidized homeownership. Apart from providing more choices for public rental housing tenants and Green Form Certificate holders to own a home, more public rental housing can be recovered for allocation to families in need”. Selling in the secondary market does not require repayment of the owed land premium as a precondition. A buyer in the secondary market, however, is allowed to pay the owed land premium and sell it in the open market if he chooses.
The qualifications that I referred to above are that I prefer that resale be limited to those who qualify for purchase of new HOS housing. Green Form applicants typically have incomes and assets exceeding the “White Form” applicants. Green Form applicants have also typically lived in public housing for a number of years and have enjoyed upward mobility so they are financially better-off than the White Form applicants. The argument for allowing them to enjoy priority in buying HOS housing is that they will vacate their public rental housing units, so a Green Form purchase “hits two birds with one stone”. The buyer now becomes a homeowner; and a family in the queue can have the benefits of public rental housing.
Offsetting the benefits that seem so attractive, however, is that since Green Form purchasers are financially well-off, a resale of HOS home in the secondary market will still generate considerable capital gain for the HOS owner. That increases the attraction of HOS housing and draws applicants to join in the bid to buy HOS housing. Those who really need to buy a home will stand a lower chance of a successful bid. Similarly, the higher chances of buying HOS housing through the Green Form channel increase the attraction of public rental housing and draw applicants to join in the queue for PRH. As a result, those who really need PRH will have to wait longer in the queue.
One may think that allowing Green Form applicants a better chance to buy HOS flats can be justified because every purchase by a Green Form applicant translates to a PRH unit being freed up. But this benefit does not get us very far if the practice draws more applicants for HOS flats and for PRH flats.
Finally, I would ensure that those living in PRH or HOS units must not own any property. This will reduce the attraction of these schemes to those who actually can procure their housing without government assistance. Only then can PRH and HOS serve their original purpose of helping the needy escape the scourge of substandard housing.
One may think that allowing Green Form applicants a better chance to buy HOS flats can be justified because every purchase by a Green Form applicant translates to a PRH unit being freed up. But this benefit does not get us very far if the practice draws more applicants for HOS flats and for PRH flats.