Policies Supporting First-time Home BuyersFull Report
Housing prices in Hong Kong have been escalating rapidly over the past decade, much faster than the household income. Owing to the high property price and limited supply of flats under the Home Ownership Scheme, it is very difficult even for the middle-income group to achieve home ownership. This report studied oversea policies and examined existing policies implemented by the HKSAR government. Focusing on the demand-side of homeownership, we propose three policy recommendations which would provide assistance and flexibility for first-time home buyers (FHB). We urge the government to provide new policies supporting FHB which could promote Hong Kong’s long term economic growth and social development.
Difficulties Encountering by First-time Home Buyers
(a) Soaring housing prices
Prices of small flats inflated more than 330% in the last decade, which outperformed the overall pricing index for homes. The annual average residential transaction volume from 2012 to 2016 was 61,000, which had declined by 44.7% when compared to the previous 5 years. Correspondingly, the total completion in private residential market in the same period was 60,000 units, which represented an increase of 21.8%. Although the amount of completed private residential units has increased in recent years, the vacancy rate continued to decrease to 3.8% in 2016, demonstrating the huge demand for housing.
(b) Transactions in secondary market collapsed
The HKSAR Government has introduced several rounds of demand-side management measures since 2010, including the Special Stamp Duty, Buyer’s Stamp Duty, Doubled Ad Valorem Stamp Duty and New Residential Stamp Duty. It drove out non-locals and non-FHB demand for housing effectively. In fact, statistics showed that the majority of residential property transactions involved local-FHB only. These measures have significantly reduced the transaction volume in the secondary market, which ultimately affected the homeownership of FHB.
(c) Unaffordable down payment
According to official statistics, households with income between $21,000 and $26,000 would require about 14 years to save $400,000 as down payment. Meanwhile, households with income between $39,000 to $48,000 would still require 3 years to accumulate the same amount. Shortening the time required for accumulating the necessary down payment is of paramount importance to assist FHB. Furthermore, the overall homeownership rate decreased by 2.7% to 50.4% during the last decade. As for household head aged between 25 and 44, the rate decreased most seriously.
(d) Mortgage policy becoming ineffective
The number of affordable flats for FHB became fewer as flat prices rose. Many FHB would consider flats costing $4 million or below as their target, owing to the 90% mortgage policy under the mortgage insurance programme (MIP). However, the percentage of secondary sales of these flats over the total secondary market transactions continued to drop sharply to 26.7% in early 2017, from 78.7% in 2010. This report would propose more choices for FHB’s homeownership decision.
Principles for Policy Recommendations
(i) Providing extra funding for down payment—offering more decision choices and promoting homeownership.
(ii) Reviving secondary housing market—increasing residential property transactions and releasing potential housing supply.
(iii) Balancing budgetary objectives—maintaining sound public finance and sustainability of new policies.
(iv) Enhancing a harmonious society—reshaping the dream of homeownership and narrowing the wealth gap.
Policy Recommendation 1: Relaxing the Mortgage Insurance
We recommend to relax the mortgage insurance programme (MIP) ratio and further extend the applicable property value under the MIP. Currently, the MIP allows a 90% mortgage loan for a property with value at $4M or below. It is suggested to relax the maximum LTV ratio to 95% for a property with value at $4.7M or below. The maximum applicable property value under MIP is also recommended to extend to $8M. These new measures only apply to FHB. The debt servicing ratio and stress test setting should follow the Hong Kong Monetary Authority’s rule. Therefore, the benefitted FHB will continue to be under stringent income requirement.
If MIP applicable property value can be extended while the discrepancy of down payment between marginally qualified MIP flat and marginally unqualified MIP flat can be narrowed, the price signal can serve better to channel different FHB to purchase different property according to their purchasing power. With such modifications, families with small flats could upgrade to medium-size flats more easily. This would eventually increase the supply of smaller flats in the market.
Policy Recommendation 2: Setting up the “MPF–Help to Buy Scheme”
The “MPF – Help to Buy Scheme” permits potential FHB to withdraw 50% of the MPF accrued benefits for the home purchase purpose. The Scheme only accepts a family size with 2 persons or above to file application. This proposal does not require applicants to repay the withdrawn MPF benefits. However, restrictions against sale and transfer, e.g., for a 10-year period, would be imposed to reduce possible speculative behaviour.
One possible alternative under this Scheme would be the requirement of applicants to repay the withdrawn MPF benefits to the MPF account. This can safeguard the retirement protection. If the withdrawn benefits are also covered by the MIP, the MPF account would remain intact.
In the long term, a rising housing market could provide additional retirement protection. The government should consider strengthening the connection between the “MPF-Help to Buy Scheme” with the reverse mortgage programme, and thus providing synergy for retirement protection.
Policy Recommendation 3: Providing a Grant to FHB
It is suggested that a $200,000 grant should be provided to FHB for homeownership purpose. The eligible families for the grant are those Green Form families and families that fulfilled the White Form income and asset limit. There would be no ratio restriction for the two different types of applicants. Successful applicants would only be allowed to purchase flats in the private secondary market.
As for the restriction on property ownership, all White Form family members must not own any property within the last 5 years, while the Green Form family is not subject to such a restriction. The annual quota of the grant is suggested to be 2,800, and this quota could be adjusted based on the future housing transaction volume. We recommend the Scheme to be financed by the Hong Kong Housing Authority’s reserve. Additional funding can be sought from the government, if necessary.
Convenor, Mr. Jasper Tsang Yok-sing (2nd right), Executive and Research Director, Mr. Andrew Fung Ho-kwung (1st right); Senior Research Fellow, Dr. Law Cheung-kwok (2nd left); and Assistant Researcher, Mr. Chan Aric Ebert (1st left) expressed their views and recommendations on the topic of “Policies Supporting First-time Home Buyers”.