Reform the market for subsidised homes to give young people hope
Extend the mortgage guarantee on HOS resale flats to make loans more affordable, abolish limits on buyer eligibility certificates and give failed applicants of new flats a weighted chance
The recent launch of Hong Kong’s first hotel-to-youth-hostel conversion project has returned attention to the hot topic of young people’s housing needs. Today, fewer young people are able to own a home due to skyrocketing housing prices and stagnating income mobility.
With their hopes of home ownership fading as upward mobility deteriorates, many feel frustrated and defeated. The sense of powerlessness has led to a “let it be” lifestyle, with many taking to “lying flat” and rejecting the rat race.
Against this backdrop, Our Hong Kong Foundation launched its latest study on home ownership and youth social mobility, aiming to raise awareness of the difficulties faced by young people. It proposes to reform the Home Ownership Scheme (HOS) market, an underused resource that could be a game-changer.
Using population census data from the past two decades, we analysed changes in the median monthly incomes of young people aged 30-34. Without adjusting for inflation, the incomes of degree and non-degree graduates have increased by 20 per cent and 36 per cent respectively from 2001-2021. In the same period, housing prices have soared 399 per cent.
To measure changes in home-ownership affordability, we looked at a 30-year mortgage at 90 per cent of the property’s value, based on the median monthly income of young people. After obtaining the corresponding maximum loan amount based on the prevailing interest rate, the figure is divided by the average per square foot price of
residential units of different sizes, thus arriving at the maximum affordable flat size.
The results are telling. In 2001, university graduates could afford a large flat of 798-1,061 sq ft. But, by 2021, they could only afford an apartment measuring no more than 263 sq ft.
The trend is even more worrisome for non-degree holders. In 2001, they could afford a mid-sized flat ranging from 435-548 sq ft; by 2021, they could only afford nano flats of no more than 131 sq ft. In recent years, this has been epitomised by the scramble for cheaper units, irrespective of size. Nano flats swarmed the market and per capita living space shrunk.
HOS flats were meant to be a stepping stone for aspiring homebuyers who find the private market inaccessible. But, every year, sales of new HOS flats are hugely oversubscribed. In 2017, the success rate for applicants aged under 30 was below 1 per cent – and just 3 per cent for applicants aged 30 or above. There are barely enough HOS flats built and launched for sale each year.
Since these subsidised flats are highly sought after, the White Form Secondary Market Scheme, under which second-hand HOS flats can be bought and sold without a land premium, is particularly important. But we found that here, buyers are often deterred due to policy limitations.
The government guarantees mortgages on new HOS flats for 30 years, which means buyers can obtain a 90 per cent mortgage from banks without having to provide proof of income or undergo income stress tests. But the shorter the guarantee period left, the stricter banks become about mortgages. Where there are less than five years of guarantee left, banks would lend less and/or demand a shorter mortgage period.
For older HOS flats where the mortgage guarantee has run out, bank loans are capped at 60 per cent of the property’s value. This means a hefty down payment of at least 40 per cent, pricing out those on a limited budget, usually younger buyers.
Moreover, the number of second-hand HOS flats eligible for a 90 per cent mortgage is rapidly decreasing and a supply cliff is expected in five years. According to Housing Authority figures, 65 per cent of second-hand HOS flats are no longer eligible – that’s over 210,000 flats out of 320,000.
Out of the remaining 35 per cent or 110,000 flats still eligible, over 80,000 have a remaining guarantee period of just five to nine years – in other words, the eligible stock could drop sharply to around 30,000 flats in five years.
If nothing changes, newer second-hand HOS flats will become even more sought-after and expensive, while older second-hand HOS flats will be more unwanted and become illiquid assets.
To help more young people own homes, we propose a three-pronged solution to make better use of these overlooked second-hand HOS flats. First, we recommend extending the guarantee period so older second-hand HOS flats become eligible for a 90 per cent mortgage. Buyers would no longer be cornered into getting newer second-hand HOS flats, while speculation and overpriced transactions would be curbed.
Second, we propose gradually abolishing the annual quota and deadline on the Certificate of Eligibility to Purchase, eventually fully opening up the “white form” secondary market. Given the total stock of 410,000 flats, a sea of options could be unlocked for aspiring homeowners.
Notwithstanding concerns over the potential influx of demand that might drive up the second-hand market, it is important to note that “white form” buyers are still restricted by income and asset limits. The opening up of the secondary market would also ease the oversubscription in demand for new HOS flats.
Third, we recommend refining the ballot system for new HOS flats. The process should be weighted towards those with multiple failed applications, to compensate for their wait.
Through these measures, we hope a reformed HOS system would bring new hope of home ownership to young people.