PAPER NO. HOC 8/2001 RHC 18/2001 THE HONG KONG HOUSING AUTHORITY Memorandum for the Home Ownership Committee and the Rental Housing Committee Review of Home Ownership Scheme Income and Asset Limits PURPOSE This paper seeks Members' endorsement to reduce the income and asset limits for Home Ownership Scheme (HOS) by 20% and 14% respectively for 2001/02. BACKGROUND 2. To facilitate wider home ownership, the Housing Authority (HA) has been operating three major subsidized home ownership schemes, namely the HOS, Private Sector Participation Scheme (PSPS) and Home Purchase Loan Scheme (HPLS). These schemes serve two main groups of clients, i.e. Green Form (GF) and White Form (WF) applicants. GF applicants are predominantly public rental housing (PRH) tenants who are exempted from the means test to facilitate their mobility. Other families may apply as WF applicants who will be subject to income and asset tests and other eligibility criteria. 3. As the HOS/PSPS and HPLS target at low-income families, the HOS income and asset limits are set to cover households who cannot afford to buy a reasonable flat in the private sector. These limits are reviewed annually to ensure that they reflect the latest market conditions and to cover those in need. From November 1999 onwards, singleton applicants are also allowed to join these three subsidized home ownership schemes. Their income and asset limits are pitched at 50% of the HOS income and asset limits for family applicants. The prevailing HOS income and asset limits for family applicants are $31,000 and $700,000 respectively.
- 2-4. In reviewing the HOS income limit (HOSIL), we adopt a household expenditure approach which comprises two elements- (a) Housing cost: The monthly expenditure for owning a 10-year-old private flat of 40 m 2 saleable floor area in the extended urban area and the New Territories. It covers mortgage payment, Government rent, rates and management fees. The mortgage payment will make reference to the latest mortgage interest rate and the projected flat price by the third quarter of the year; and (b) Non-housing cost: The average household expenditure of 4-person households in the middle one-third expenditure group amongst the non-owner-occupied households in the private sector. The current reference base is the 1994/95 Household Expenditure Survey (HES) which is adjusted annually by the Consumer Price Index (CPI)(A), projecting to the third quarter of the year. 5. The Home Ownership Scheme Asset Limit (HOSAL) was introduced in 1998. It is set at a level for a household to finance the downpayment and related transaction costs for acquiring a typical private flat as described in paragraph 4 (a) above. The asset limit for singleton applicants is again half of that for family applicants. PREVIOUS REVIEWS 6. After the Asian financial turmoil, property prices have dropped substantially while the deflationary trend has been in place. These unprecedented changes have impacted on the setting of the HOS income and asset limits significantly as they determine both housing and non-housing expenditure of eligible applicants under the established review mechanism. 7. Due to the property market slump, the HOSIL was projected to be reduced by 18% to $27,000 while the asset limits would remain static during the review for 1999/00. Having regard to the volatility of the property market and the likely public reaction at that time, Members decided vide Paper No. HOC 13/99 (RHC 16/99) to reduce the HOSIL by 6% to $31,000 while maintaining the HOSAL at $700,000. In the review for 2000/01, given emerging signs of economic recovery and the rise of property prices in early 2000, Members decided to freeze the two limits despite that they should have been reduced by 23% and 10% respectively vide Paper No. HOC 11/2000 (RHC 14/2000).
- 3 - THE CURRENT REVIEW 8. Despite initial signs of economic recovery, key indicators affecting the review of HOS income and asset limits dropped further in the third quarter of 2000 since our last review. A brief trend analysis since 1997 is provided below - 3Q 1997 3Q 1998 Position as at 3Q 1999 3Q 2000 (% change over 3Q 1999) 3Q 2001 (Projection) (a) Housing cost - price of a typical flat - Bank mortgage rate (b) Non-housing cost (movement of CPI(A)) $1.95 m $1.66 m $1.52 m $1.32 m ( 13%) 12% 10% 8% 7% ( 12.5%) 112.5 114.4 110.6 109.1 ( 1.4%) $1.32 m 7% 109.1 9. On the assumptions that property prices, mortgage rate and the CPI(A) will remain static up to the third quarter of 2001, the HOSIL should be reduced by 29% to $22,000 while the HOSAL will be reduced by 21% to $550,000 for 2001/02 under the established mechanism. The income and asset limits for singletons would therefore be $11,000 and $280,000 respectively. The projected HOS income and asset limits are at Annexes A and B. 10. While the Mandatory Provident Fund (MPF) Scheme has been in operation since December 2000, we have not reflected it into the assessment of the HOSIL as the contributions under the MPF are not counted as part of household income when applying for the three subsidized home ownership schemes. Our focus is on the "take-home" pay. ASSESSMENT 11. In undertaking this review, we would like to draw Members attention to three major policy considerations-
- 4 - (a) We have deviated from the established review mechanisms for two years. Any further departure will undermine the credibility of the system. (b) There have been concerns within the community that the prevailing HOS income and asset limits are too high to the extent that the HOS is not focusing at low-income families. The HA is hence urged to adjust the HOSIL downwards. Indeed, we should stick to the formula as it is the most equitable way of allocating public housing resources to those in genuine need. (c) Contrary to those who criticize the HOS, there are also voices from academics, commentators and public housing concern groups that the HA should continue to provide the HOS for low-income families who cannot afford to buy private housing. 12. Having regard to these policy considerations and given the relatively large scope for adjusting the HOS income and asset limits downwards, we recommend to reduce the two limits for 2000/01 so as to achieve our fundamental policy objective, i.e. to provide assisted home ownership opportunities to those who cannot afford purchasing a reasonable flat in the private sector. We have identified two broad options for Members consideration - Options Income Limit Asset Limit A : Full reduction B : Compromised reduction $22,000 ( 29%) $25,000 ( 20%) $550,000 ( 21%) $600,000 ( 14%) Our assessments on these two options are set out below. 13. Under normal circumstances, Option A should be chosen as it follows the established review mechanism strictly and ensures that public housing resources will only be allocated to those in need. The outcome is also clear and objective. The mechanism has also been practised smoothly for years. However, the rate of reduction, which has been accumulated for two years, might be perceived as too drastic.
- 5-14. Option B is a moderate reduction and has the following merits - (a) The established review mechanism will be given due respect to a large extent and the HOS eligibility net will be more focused. (b) Negative reaction from existing clients and the community may be reduced as the cumulative reduction is not reflected in one go. (c) It tallies with the more evident signs of economic recovery as deflation is less serious than before and the economy is picking up. (d) It provides room to cater for changes in market circumstances, e.g. re-emergence of inflation. This option however also has its demerits. First, the rate of reduction will be seemed as arbitrary and subjective. Second, it will still be a departure from the established mechanism and interest groups may take this as a precedent and expect for similar arrangements in future reviews. PROPOSAL 15. Under normal circumstances, we should stick to the established review mechanism which is the best way to ensure that public housing is allocated to those in need. However, given the fact that the adjustment is rather drastic and it has not been fully reflected for two years, we recommend that Option B be adopted as it strikes a balance between our policy objective and community aspirations. We propose to reduce the HOSIL by 20%, from $31,000 to $25,000 for families, and accordingly from $15,500 to $13,000 for singletons. Similarly, given a difference of 21%, we propose to reduce the HOSAL by 14%, from $700,000 to $600,000 for families and from $350,000 to $300,000 for singletons. The proposed rate of reduction represents about two-third of the full adjustment under the established mechanism. We will however make clear that this compromised reduction is an one-off exceptional arrangement given the very large rate of reduction anticipated and the fact that the reduction has not fully reflected for two years. It will still be the HA s policy and intention to adhere to the established review mechanism in further reviews.
- 6-16. Before coming to this recommendation, we have also considered the option of having a half-rate reduction instead of two-third, but would recommend to go for the above proposal as it can demonstrate the HA s willingness to adhere to the established review mechanism more firmly and clearly. Indeed, the smaller discrepancy after the proposed adjustment will also make future reviews less drastic should either housing and non-housing costs continue to drop next year. 17. The HOS income and asset limits under the above two options are set out at Annex C. Each option will affect the size of the eligibility net differently. A brief summary is set out below for Members' reference. Under Current Limits Option A HOSIL 29% and HOSAL 21% Option B HOSIL 20% and HOSAL 14% No. of households eligible for HOS - 1p - 2p+ 117,700 (28,700) (89,000) 69,500 (17,500) (52,000) 86,200 (21,200) (65,000) These eligible households cover those whose income are below the respective HOSILs but above the new Waiting List Income Limits (WLILs) as proposed in Paper No. RHC 19/2001 (HOC 9/2001), on the assumption that the WLILs will be reduced by 10% on average. 18. If the proposed adjustments of HOSIL and WLILs are taken together, the WLILs for 9-person and 10-person households will be higher than the HOS income limit, and the WLALs for households with 8 or more persons will be higher than the HOSAL. In order to preserve the home ownership opportunities of these large families, we further propose that the higher limits be applied when these large households apply for the three subsidized home ownership schemes. IMPLEMENTATION 19. The proposed HOS income and asset limits will be applied to the HOS WF applicants from Phase 23A onwards (or any sale exercises of HOS/PSPS resale flats on or after 1 April 2001). For HPLS WF applicants, the new limits will apply when a new phase is launched. We will also review whether and how the operation of the HPLS should be modified when the new phase is introduced.
- 7 - PUBLIC REACTION AND PUBLICITY 20. We believe that the public at large will find the proposed reduction of HOS income and asset limits understandable and acceptable, in view of the sustained deflationary trend and our efforts in not going for a full reduction under the established mechanism. Some critics may continue to argue that the HA should go for a more drastic reduction, while potential HOS applicants and concerned parties are likely to criticize the large extent reduction. 21. In any case, we would make clear that should the deflationary trend persist or property prices drop further, there is still the possibility of reducing the limits further next year. On the other hand, if private property and general price levels go up, we will examine whether the limits would be revised upwards having regard to the remaining gap as we do not go for a full reduction this year. For those applicants who have been taken out of the new HOS eligibility net, they will still be able to apply for the housing assistance offered by the Housing Society under the Home Starter Loan Scheme which bear higher income and asset limits. DECISION 22. At the joint meeting of the Home Ownership Committee and the Rental Housing Committee to be held on 8 February 2001, Members will be asked to endorse - (a) the reduction of the HOS income and asset limits by 20% and 14% as stated in paragraph 15 above; (b) the application of higher limits for large families as stated in paragraph 18; and (c) the implementation details as stated in paragraph 19. ---0---0---0--- File Ref : HD (CR) 23/1/177 Date : 3 February 2001
Annex A Projected HOS Income Limit for 2001/02 2000/2001 Actual 2001/2002 HOSIL Position as at HOSIL (Projection for 3Q 2000) 3Q 2000 (Projection for 3Q 2001) Assessed Average Flat Price 1,520,000 1,320,000 1,320,000 70% Mortgage Loan 1,064,000 924,000 924,000 (1) Mortgage Payment and Rates (a) Mortgage Payment 8,212 6,531 (1) 6,531 (b) Rates, Government Rent 1,200 1,200 1,200 and Management Fee 9,412 7,731 7,731 (2) Non-housing Expenditure 14,600 14,400 (2) 14,400 (3) Tax 0 0 (3) 0 Total Household Expenditure 2-person and above 24,012 Freezed at $31,000 22,131 Freezed at $ 31,000 Say 22,000 Singleton $ 12,006 Freezed at $15,500 Say 11,000 Freezed at $ 15,500 1. Assumptions used in arriving at the mortgage payment : a. private flat of around 10 years old in the extended urban area and the New Territories. b. flat size is 40m 2 saleable area or 50m 2 gross floor area. c. mortgage terms: 25 years at 7.0% p.a. 2. Non-housing cost is based on the average of the middle 1/3 expenditure group of 4-person private non-owner-occupied households of the 1994/95 Household Expenditure Survey and projected by reference to change of CPI(A). 3. From 1998/99, a household consisting a married couple with 2 dependent children with a monthly income of less than $28,300 and having incurred a mortgage interest of $64,000 per annum is not required to pay tax.
Annex B 2000/01 Actual 2001/02 HOSAL Position as at HOSAL (Projection for 3Q 2000) 3Q 2000 (Projection for 3Q 2001) Average price of a typical flat 1,520,000 1,320,000 1,320,000 1. Downpayment: 30% of flat price 456,000 396,000 396,000 2. Transaction Cost: 11.25% of flat pri 171,000 149,000 149,000 a. stamp duty: 0.75% b. conveyancing & mortgage deed fees: 1.5% c. estate agent's commission: 1.0% d. decoration cost & household fittings: 8.0% HOS Asset Limit Derivation of HOS Asset Limit for 2001/02 2-person and above 627,000 700,000 545,000 Say $630,000 Say $550,000 Singleton 320,000 350,000 280,000
Annex C Options for Adjusting HOS Income and Asset Limits Household Size HOSIL Under Current Limits HOSAL HOSIL Option A Full Reduction HOSAL HOSIL Option B Compromised Reduction HOSAL 1 15,500 350,000 11,000 280,000 13,000 300,000 2+ 31,000 700,000 22,000 550,000 25,000 600,000 Change (%) - - -29-21 -20-14 Eligible Net Total - 1p - 2p 117,700 (28,700) (89,000) 69,500 (17,500) (52,000) 86,200 (21,200) (65,000) The above eligible households cover those whose income is below the respective HOSILs but above the new WLILs as proposed in Paper No. RHC 19/2001 (HOC 9/2001).