(Reprinted from HKCER Letters, Vol. 5, November 1990)
On the Privatization of Public Housing
Alan K.F. Siu
An Ad Hoc Committee of the Housing Authority issued a consultative pamphlet on October 18, 1990 detailing its views on how to implement the Authority's proposal of selling some rental units to sitting tenants. Rather than taking a courageous stand in recommending the privatization of all public rental units, which will create an enormous amount of wealth, the Committee adopts a timid approach.
Three thousand to 4000 housing units from a couple of housing estates of around five years old will be selected as a pilot plan. Each tenant in these estates will be offered a choice to buy his flat at a discount off of the imputed market rate. However, the sale offer is conditional on more than 50 percent of the tenants of a block opting to buy; otherwise there will be no sale.
The 50 percent cutoff point is not chosen arbitrarily. It enables the Authority to withdraw from the management of sale blocks. The Committee envisages management problems in the mixed tenure situation arising from the divergence of interests between owner-occupiers and tenants. With the 50 percent cutoff point, the Authority can assume the role of a passive minority owner, and just follow the dictate of the majority owners.
To protect their investment, owner-occupiers will want their buildings properly maintained. They will want to spend more money on improvement and repairs. The Authority plans to pass the extra costs onto its tenants. Those who do not want to pay will be booted out and moved to other units with no such improvement. Eviction of tenants will destroy overnight the public image of the Authority as the guardian angel of the right to decent housing that has been carefully nurtured over years. The Authority would not want to squander such a precious asset. Very likely, it will be forced to shoulder the greater part of any improvement cost. Furthermore, will the Authority resist carrying out the same improvement for other public housing units? We can look forward to bigger budgets for the Authority in the years to come.
After buying his flat, the tenant-turned-owner does not have exclusive right over his property. During the first five years of ownership, an owner can only sell his flat back to the Authority at the price he paid for it. Within five to ten years, the Authority commits to buy back the flat at the current price of flats under the sale scheme. After ten years, the owner can sell his property on the open market, but he has to pay the updated value of his original discount to the Authority.
The resale restrictions make the sale offer less attractive from an investment point of view. There cannot be any capital gains in the first five years. After that, the amount of gains depends on the Authority's uncertain pricing policy, and then after ten years, on the amount of tax collected in the guise of updated value of the original discount. More importantly, given these restrictions, a buyer receives no compensation for giving up his tenancy right.
Consider this hypothetical example. Mr. Chan now lives in a 35.4 square meter public housing flat with his family and pays a monthly rent of $800. On the open market, the rent would be, say $4,000. At an annual rate of 10 percent, the rental subsidy has a capitalized value of $384,000 while the market value of the flat would be $480,000. The Authority now offers him to buy out his flat at $240,000, which is 50 percent off the market price. When accepting the offer, Mr. Chan has to forego his tenancy right, which has a virtual value of $384,000, in return for a notional lump sum subsidy of $240,000. Even without the resale restrictions, this is not a good deal for Mr. Chan. The Authority buys out his tenancy right at a discount of 62.5 percent. Moreover, with the restrictions, Mr. Chan can never capture the notional subsidy of $240,000. He would have given up his tenancy right for nothing. During the first ten years of ownership, the Authority effectively writes off half of the value of his flat. The amount of wealth destruction is just mind-boggling.
Mr. Chan can realize the full value of his property if he rents his flat out at the market rate. The Committee has not ruled this option out. However, given that the stated goal of the sale scheme is to assist sitting tenants to own their flats, this choice will likely be prohibited.
The resale restrictions are patterned on the current home ownership scheme. In the past five years, the success rate of Green Form applications for HOS flats was between 5 and 10 percent. This evidence seems to indicate that the resale restrictions, though undesirable, are still acceptable by public housing tenants. Many tenants are ready to give up their tenancy rights without compensation in order to join the HOS.
The psychological benefit of home ownership and the bequest motive can go some way in explaining why some tenants are willing to give up subsidized housing to join the HOS. However, these factors cannot be the whole story, not if tenancy right is really worth tens of thousand of dollars. To make economic sense, the value of tenancy right cannot be worth that much.
The amount of rental subsidy is not carved in stone. Uncertainty over the Authority's future rental policy can substantially reduce the value of tenancy right. Furthermore, public housing estates are not known to be desirable home environments. Lift malfunctioning, blackouts, dirtiness and noise pollution are not unheard-of complaints. The keen competition for HOS by public housing tenants can be viewed as an indictment of the poor qualities of public housing estates.
The HOS scheme provides one further important benefit. In applying for the HOS, one has a choice of where to reside. This option is not available under the sale scheme. A public housing tenant has very limited choice in choosing his residential location. He can apply to transfer from one estate to another, but the wait is very long. The potential gains by allowing tenants to swap units are enormous. There is no reason why these gains should be left unexploited. Under the sale scheme, an owner is effectively locked in, particularly in the first five years of ownership. If he happens to have to change his job to one that requires more commuting, the extra cost cannot be avoided by relocation.
All public housing tenants should be given a standing chance to buy out their flats cheaply. Public housing is not really worth that much to its tenants. Research conducted at the Centre indicates that, on average, tenants value their units at only 70 percent of their market value. There should not be any resale restriction which obliterates gains from trade. If the latter is an important policy objective, then impose a tax on trading profits. Cutting off your nose to spite your face is pure stupidity. Public housing units should be given a chance to realize their full value on the open market.
Dr. Alan K.F. Siu is a lecturer in the Department of Economics at the University of Hong Kong.