Long Term Housing Strategy Consultation Submission

Long Term Housing Strategy_Consultation Submission

(pdf version available for download)


I. Preamble

Hong Kong now stands on a precipice marked by widespread concerns – ranging in intensity from apprehension, anxiety to downright dread – about the future of housing. With the possible exception of the most affluent, all segments of society have their specific challenges, including access to safe and humane quarters, a seemingly never-reachable threshold of home ownership, and quality of life limitations for families out-growing their existing abode. Indeed, the very concept of a “housing ladder” has come to represent a fading sense of hope for many, especially among members of the younger generation, many of whom would apply for public rental housing as soon as they become eligible.

The issues involved are complex and the interests of various stakeholders are entrenched. To light a path forward, it would take different outside-the-box ideas, which will be outlined in the following pages. Given the centrality of the concept of “housing ladder” in the Consultation Document, this discussion is structured in terms of the three rungs of the ladder, concluding with fresh ideas about land management and creation required to meet the short, medium and long-term housing needs of the community.

II. Long Term Targets for Public vs. Private Housing

We generally concur with the Steering Committee in proposing that public housing should account for a greater share of the housing supply over the next decade. However, we believe the long term housing strategy should provide a framework that could enable a higher public/private ratio of the new housing supply, at 70:30 rather than 60:40. Globalization and the advent of the internet and other technological advances have resulted in wage stagnation in Hong Kong and other developed economies. According to the Real Wage Index compiled by the Census and Statistics Department, real wage in Hong Kong has grown by a meagre rate of 0.81% annually from 1996 to 2013.[1] Those in the lower end of the wage scale suffered more as the percentage of household income earned by the bottom half of household income earners decreased during roughly the same period[2] from 21.0% to 15.6%, a dramatic 25.7% drop.

Most wage-earners have also been squeezed by an unprecedented credit expansion that pushed up the prices of many non-renewable resources, including real property.[3] From 1996 to 2013, the Centa-City Index, which tracks Hong Kong’s property prices, rose by 116%, over seven times the rate of real wage increase. The index surged by 36% during the past 30 months alone, forcing the government to introduce a series of cooling measures over the past two years.

This “double whammy” of wage stagnation and asset inflation has exacerbated the wealth gap in Hong Kong, resulting in the highest Gini coefficient in Asia.[4] As a result, young wage-earners can afford to regularly upgrade their mobile phones but find it difficult to rent their living space, let alone save up enough money for a down payment. With this global, macroeconomic context unlikely to change dramatically over the next decade, notwithstanding boom-bust cycles produced by credit-driven speculation, private housing will continue to be unaffordable for the great majority of wage-earners.

III. Starting Rung of Housing Ladder – Affordable Rental Housing

The first rung of the housing ladder is affordable rental housing for low income individuals and families. Over the past several decades, this need has been served by Public Rental Housing (PRH) provided by the Housing Authority (HA) and the Hong Kong Housing Society (HS). However, the production of new PRH has not been able to keep up with demand, resulting in a failure to meet the three-year average waiting time (AWT) target.

1. Lowering Costs and Speeding Completion by Introducing Overseas Construction Firms for Specific Government-provided Affordable Housing (GAH)

Behind only the availability of land, the cost and availability of construction labour is the second most important factor affecting the production of the new PRH and the new Home Ownership Scheme (HOS) – collectively called the Government-provided Affordable Housing (GAH). The widely recognised shortage in construction workers not only pushed the cost of construction of PRH and HOS to a new high of about HK$600,000 per unit recently, it also severely limits the number of projects that can proceed concurrently. We propose that the government allow the introduction of overseas (including mainland China) construction firms outside the Supplementary Labour Scheme (SLS) specifically for the construction of GAH projects.

Given various restrictions under the existing SLS, construction companies are effectively discouraged from importing workers from outside markets to work on housing projects, whether private or public. In order to drive the “supply-led” approach outlined in the Consultation Document, the government needs to increase the overall construction capacity by removing existing barriers. A key restriction is cost. If construction workers imported for GAH projects need NOT “be paid at least median monthly wages of local workers in comparable positions”, as under SLS, the cost of constructing GAH could be reduced dramatically. This would also indirectly help contain costs for private housing projects, which in turn can enhance their long-term affordability for the public.

Labour accounts for about 25-30% of the overall cost of construction, which for PRH projects stands at about HK$1,100/sq. ft. Labour cost for construction projects in Shenzhen, for instance, is 35-50% less than that in Hong Kong. This means that opening the market to overseas construction firms can result in as much as a 15% reduction in construction cost, which will turn into an staggering amount of savings given the scale of the contemplated GAH projects over the long term.

In addition to cost reduction, the above suggestions can also dramatically speed up the GAH project completion. This also means that more projects can proceed at the same time, further boosting the rate of GAH production.

2. Increased Flexibility and Improved Competition

Reduced costs can also offer added flexibility in terms of the design of GAH units. The design of PRH and HOS units has always been constrained by cost as the Housing Department and contractors are forced to limit variations. Over the years, different standard designs of PRH, such as Single H, Harmony, and Cruciform, have been used to economize construction costs, without optimizing the use of space and ensuring reasonable comfort standards. With labour cost being reduced, the government can afford to create designs that make PRH units more liveable for occupants. At the same time, the introduction of competition from outside markets can also stimulate creativity, resulting in better designs for new HOS housing. Affordable housing would no longer have to mean “cheap” housing. Moreover, different designs can be developed to cater to the needs of different people, from seniors to young singletons.

Opening the construction of GAH to construction firms from markets in South East Asia and mainland China would result in increased competition, which could also help inject fresh ideas and approaches that ultimately benefit the occupants of GAH and the community at large.

3. No Negative Impact on Local Workers

Opening the market to firms from outside markets would inevitably draw concerns from local labour groups, which can be expected to lobby for increased training in lieu of measures that involve “importing” workers. This concern would be ill-placed given the extensive pipeline of large-scale public infrastructure projects over the coming years.[5] Therefore, labour groups need not worry about competition from outside markets taking their jobs or suppressing their wages.

It is important to highlight how the above idea differs from an apparently similar suggestion in connection to Hong Kong’s long-term demographics and population trends. Firstly, the proposed importation of workers from outside markets would only be allowed for the construction of GAH. It would be analogous to how foreign domestic helpers are “imported” to help meet a critical need of the community. Secondly, the measure proposed is a standing policy, rather than a short term measure. As long as there is a shortage of public housing and construction labour, regulatory barriers against the importation of construction workers would remained lowered.

IV. Middle Rung – Affordable Home Ownership

A. Segregating Home Ownership from Investment Needs

To properly determine the role subsidized sale flats plays as part of the LTHS, it is necessary to re-evaluate the government’s interest in promoting and enabling home ownership, which not only can satisfy a person’s housing need, but also can possess an investment value. We believe that subsidized sales flat, insofar as their development involves public resources, should only serve housing needs and should not have an investment value for individual owners.

The Home Ownership Scheme (HOS) was specifically conceived as the second rung of Hong Kong’s housing ladder when it was launched in the late 1970’s to entice better-off PRH tenants to vacate their flats for re-allocation to families in greater housing needs, and to provide an opportunity for home ownership to families unable to afford to buy in the private market.

It must be noted that the above two objectives are distinct, i.e., subsidized ownership need not be the only way to encourage well-off PRH tenants to vacate their units. This distinction highlights the presumption that home ownership is a desired situation for the vast majority in society. While home ownership, as opposed to humane housing, is not considered a universal civic right, it is generally agreed that a healthy level of home ownership is a critical stabilizing force in society.

One obvious benefit of home ownership is that it enables the owner to “age in place” as they would not have to pay rent once the mortgage has been paid off. In effect, home ownership represents an important part of retirement savings, which reduces the amount of resources the government would otherwise need to provide retirees. From this perspective, the use of public resources for the promotion of home ownerships could be justified.

On the other hand, home ownership was also often considered as an investment through which homeowners could increase their wealth through capital appreciation. While the government may have in interest in supporting home ownership, it should not structure the ownership of subsidized sale flats to include an investment value. This is because public resources should not be used to support the investments of individuals, and because such a practice can easily fuel property bubbles that eventually hurt individuals and the economy. The 1997 real estate crash in Hong Kong and the 2008 financial tsunami unleashed by the collapse of home prices in the United States highlighted just such a danger. While a key proximate cause in both cases is reckless lending and borrowing, the background of a government push for increased levels of home ownership was also culpable.

B. A New Model of Subsidized Sale Flats

Given the above discussion, we propose a new model of subsidized sale flats (SSF), being a new form of the old HOS, considered solely as a platform of affordable housing and retirement planning. A key innovation of the new model is its pricing, which would reference actual affordability for the intended buyers, rather than by discounting off current market prices. While there are different ways in which the price of SSF units can be derived from the actual ability of its intended buyers to pay, they should ultimately reference (1) the upper limit of well-off PRH tenants, and (2) some sort of representative figure for current income levels of the intended participants. In practice, the calculus would generate a range of sale prices for a given building, which would then be adjusted annually based on changes in the reference income levels. The actual price level of current private housing should NOT be a factor for determining the price of an SSF unit.

In order to remove their “investment” value, these new SSF units should not have a secondary market through which owners can expect to make a profit. Instead, owners who wish to dispose of their unit can sell them back to the government at the original sale price. Thus, this model of SSF represents a purer form of affordable housing through ownership. Furthermore, each eligible individual can make an SSF purchase only once in their lifetime.[6] This is different from current ownership rules for HOS, where a former HOS unit owner can apply to purchase an HOS unit for a second time, given a sufficient amount of time has lapsed after the first unit was sold.  The above mentioned limitations should lessen the potential perception that the initiative would involve grossly unfair use of public resources to subsidize a specific segment of the community.

C. Using Overseas Construction Firms to Lower Costs for Buyers of SSF

SSF, as priced according to affordability, can also benefit from the introduction of overseas (including mainland China) construction firms (OCFs). Due to cost constraints, contractors for previous HOS projects had to make design compromises that made the housing units less than ideal. With cost savings from the introduction of OCFs, better designed dwellings and more attractive prices can be achieved to appeal to well-off PRH tenants. Given current market conditions and income levels, we envision pricing SSF units at around $2,000/sq. ft., with half accounting for land premium and half for construction costs. This would enable SSF to properly function as the second rung of Hong Kong’s housing ladder.

In order to construct a more robust “housing ladder”, the transition between the first two rungs of the housing ladder would need to be properly calibrated so that people under a certain age (e.g. 40) and considered “well-off” under PRH would find SSF affordable within a reasonable amortization period (e.g. 15-25 years).

V. Final Rung: Private Housing

The current state of private housing in Hong Kong can easily be summarized thus: high prices due to supply shortage. Two ideas mentioned in connection to the first two rungs of the “housing ladder” should create long-term structural changes to the price dynamic of private housing. Firstly, the introduction of overseas construction firms to work on GAH should help contain construction costs for private housing. Secondly, once SSFs are priced according to affordability and promoted as part of retirement planning, demand for private housing would likely shift towards the luxurious end of the market, with the lower end of the market served by SSF.

As with the above discussion of SSF, a systematic analysis would need to be carried out to determine various factors (e.g. home ownership levels, amount of speculative activities, etc.) that would justify market intervention actions on the private housing market. Independent of such an analysis, in the short to medium term, the most direct remedy would be the release of more lands for private development [see Section VII below for practical ideas]. In the long term, a more dynamic system of land management would need to be developed so that the government can be more responsive to changing demands and market conditions [also see Section VII below for practical ideas].

VI. Other Strategic Types of Housing

With the completion of the High Speed Railway (HSR) and the Hong Kong-Zhuhai-Macau Bridge (HZMB) in the coming decade, Hong Kong will be at the centre of a one-hour living circle of over 70 million population. It is anticipated that more tourists will be coming to Hong Kong for short stays of less than 2 days for business or cultural activities. Yet, Hong Kong has long neglected the need to attract certain mainland talent to Hong Kong by providing affordable quarters for rental on a lease term of 2-3 years, coinciding with their period of employment. The West Kowloon Cultural District is a case in point where foreign talent in arts, performance and teaching could rent these quarters on a rotational basis. This type of GAH should therefore be a component of Hong Kong’ LTHS.

VII. Land Management and Creation

A. Land Management

1. Exchange of Development Rights

Before addressing the possible need to create more land for building public and private housing, it is important to explore ways to improve the management of land that is available or potentially available for development. A key stumbling block for effective and efficient land management is dispersed ownership. Where ownership is concentrated, even relatively young buildings are often redeveloped as the owners are lured by a significant increase in potential rental income. Recent examples include Sunning Plaza/Court in Causeway Bay, Ritz Carlton Hotel in Central, Somerset House in Quarry Bay, and others.

On the other hand, many buildings constructed in the 1960s in urban areas like Kowloon City, North Point, Quarry Bay and Sham Shui Po, have such a high “plot ratio” that they do not present viable candidates for redevelopment by the Urban Renewal Authority (URA) because the compensation needed to be paid out compares unfavourably to the expected sale value of the new development on the site. Nevertheless, these older buildings are quickly aging and have become dilapidated to the point of posing a hazard to residents and the public. Given that the ownership structure of these buildings is invariably dispersed, a strategy for decanting the inhabitants is urgently needed.

We believe a system of exchanging development rights could be the most effective and adaptable way of releasing land otherwise trapped. In order to effectively de-link the decanting process and the re-development value of a given site, existing owners would be compensated with development rights that could be sold to developers, who in turn can use collected rights to pay for the land price of a new site under the land sale programme. While the overall compensation cost of these older buildings might make them unviable for development into private housing, they could very well be used for PRH or SSF development. Alternatively, where there are “planning deficits” in the locality, the decanted site can be used for road widening or developing urban amenities, such as parking space, community centres, or even parks, to serve the community.

2. Applicability to Small House Policy

The rights exchange mechanism can also be applied to help manage the government’s “small house” commitments in the New Territories. To honour its commitment under the small house policy, the government has had to reserve land for eligible indigenous males to build small houses. Notwithstanding the generally agreed need to address the sustainability of the policy, the government could consider granting development rights to such eligible individuals, who could in turn sell them to developers to build high-density projects. This provides a relatively simple way for the government to handle the over 10,000 outstanding small house applications and help unlock land that would otherwise be used for low-density small house development.

Another source of land are the many pockets of privately-held non-agricultural sites in many parts of the New Territories currently not approved for development because they are not connected to the main road. We believe the government could consider investing in improving the necessary infrastructure to make these sites ready for development. The costs could easily be recouped through land premiums when the sites are re-zoned for residential or other developments.

B. Land Creation

The government should firstly look closely into the situation of idled public lands and properties. Private lands currently mis-used should also be examined if they could become developable after infrastructure improvements. For truly long term planning, the government would need to consider different ways of creating land in anticipation of population growth and expectations of improved quality of life. We believe the two most viable approaches are (1) land reclamation and (2) leasing land in the Mainland from the Central Government to function as an economic enclave.

1. Land Reclamation

Land reclamation has long been used by Hong Kong for residential, commercial and public infrastructure development. Despite increased awareness and concern about the ecological impact of such projects, land reclamation remains the most direct means of land creation and should be not ruled out of consideration. However, instead of choosing harbour front sites that might pose great ecological risks, we believe the government should explore strategic locations in open waters for the creation of artificial islands.

In particular, areas in between Hong Kong Island and Lantau Island should receive priority consideration and assessment as they would be ideal for helping connect the two islands, just like Tsing Yi connects the New Territories and Lantau. For instance, a bridge or underwater tunnel could be built to connect Route 4 stretching along the north side of Hong Kong to the proposed artificial islands, which in turn would be linked to the Eastern shore of Lantau Island, either directly connecting to Route 8, or via a high-speed roadway. A possible location of the artificial islands could be near the uninhabited Kau Yi Chau. This idea is essentially a revival of the proposal for Route 10 as envisioned in 1997, with modifications to take account of developments since. The new linkage between Hong Kong Island and Lantau Island would effectively create a “ring route” connecting all three major parts of Hong Kong. Flight passengers arriving at the airport would have the option of directly reaching the Central District via the newly created island without having to pass through the New Territories and Kowloon.

An artificial island, with a flat surface for building, offers the advantage of planning flexibility. Housing, transportation, community amenities and other urban infrastructures can be developed from scratch to maximize convenience and comfort. Moreover, different types of housing, including PRH, SSF and private estates, can be included to create a mixed, yet more diverse and dynamic community.

2. Lease-based Enclaves in the Mainland

Even though Hong Kong’s population has been growing at an annual rate well below one percent over the past decade, it would be imprudent not to explore a new source of land for development beyond the foreseeable horizon. In light of the city’s low birth rate and aging population, Hong Kong would need to look for ways to expand its labour force, which would in turn drive up the demand for housing. We believe the government should explore the possibility of leasing land in the mainland to create an enclave in much the same fashion as the arrangement between Macao and Hengqin.

The envisioned enclave would not be a “bedroom community” where workers commute to and from Hong Kong. Rather, it should be integrated with commercial and industrial zones that provide employment to existing Hong Kong residents and imported labour. One candidate in which such an enclave could be set up is the Nansha New Area (also known as Nansha District).

According to the “Guangzhou Nansha new zone urban general plan 2011-2030” consultation document, there are plans to build a multi-line high-speed rail system that links Nansha to airports in Shenzhen, Guangzhou and Hong Kong, and Guangzhou south railway station. When completed, Nansha will be less than 45 minutes of travel from Hong Kong, making it a legitimate “backyard community”.

As a State-level development zone, Nansha offers a wide range of preferential arrangements for companies in Hong Kong to invest there, including 60 square kilometres set aside for development under Closer Economic Partnership Arrangement (CEPA). As such, Hong Kong residents living in Nansha can work for a Hong Kong company with a business establishment in Nansha. Two industries are particular ripe for collaboration: finance and logistics – the former because Nansha plans to develop into a financial centre; the latter because Nansha is a deep water-port.

The University of Macau’s new campus in Hengqing provides a perfect precedence of how the Hong Kong SAR can extend its administration and jurisdiction to a location within the mainland. Indeed, Nansha has already set up an international arbitration centre in October 2012 whereby disputes are arbitrated according to Hong Kong law.

Last but not least, building public housing in Nansha would have the added advantage of easy access to the lower labour cost in the Mainland, without the need to transport workers to Hong Kong.

VIII. Closing Remarks

Doctoral Exchange has drawn from the collective expertise and experience from our diverse members to present the above recommendations and ideas, which we believe can work together synergistically or be implemented separately. We hope it is apparent that our thinking is driven by a strong passion for Hong Kong’s future and that it will spur further deliberations resulting in creative solutions for the benefit of the entire community.

About Doctoral Exchange

Doctoral Exchange is a public interest research collective founded in 2006 by a group of doctoral students and graduates with a shared respect for Hong Kong’s heritage of excellence and a common conviction in the city’s continuing role on the global stage. Regular meetings are held to discuss the latest hot topics and explore innovative solutions to entrenched challenges. The founding members, with expertise and professional training in disciplines ranging from architecture, urban planning, finance, business, logistics and education, are committed to conducting research without ideological or political biases in order to identify pragmatic, outside-the-box solutions for complex issues of concern to the community. Such an approach is desperately needed as the current space for public dialogue and deliberation has been dominated by special interest obstructionism, fanned by politicians and a media contingent bent on sensationalism rather than clarifying the issues for the public they serve.

[1] Data from Hong Kong Monthly Digest of Statistics, October 2013.

[2] The latest data was contained in Hong Kong 2011 Population Census – Thematic Report: Household Income Distribution in Hong Kong

[3] The credit expansion was driven by Hong Kong’s currency peg to the U.S. dollar.

[5] Key projects include: Guangzhou-Shenzhen-Hong Kong Express Rail Link, Hong Kong-Zhuhai-Macau Bridge; Shatin-Central MTR Link; Kwun Tong MTR Extension; South Island MTR Line; Central-Wanchai Bypass; Kai Tak Cruise Terminal.

[6] The government could consider giving SSF owners the opportunity to “upgrade” to a larger unit due to growth in their household. They would naturally have to make up for the difference in price through a lump-sum payment or increased mortgage.

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