Governments Roles in the Housing Sector

Transcription

1 Housing Issues and Policy, Urban Studies Programme, CUHK URSP3100 Governments Roles in the Housing Sector by Dr Edward CY Yiu Associate Professor Dept of Geography and Resource Management, Chinese University of Hong Kong 1

2 Government s Roles in the Housing Sector The following are related government s roles in the housing sector Landlord (land supply): Land disposal (with premiums) Lease exchange and modifications (with premiums) Lease terms (such as public open space/facilities in private developments) Governor / Laws enforcers Urban planning control (Town Planning Ord. in HK) Building control (Buildings Ord. in HK) Related authorities (estate agents, first-hand sales, stamp duty, vacancy tax, ) Many other statutory authorities (Water supply, energy supply, transport, ) Users: Government/Institution/Community facilities Transportation / Roads Military land uses Countryparks / greenbelt / public open space Related policies enforcers Population policy (housing demand) PPP development policy for developers (See my ppt on PPP for details) Public housing policy Monetary policy (linked exchange rate, negative real interest rate, ) 2

3 Housing as a Welfare In the 19 th century, governments roles on housing were normally limited to: Governing the private markets; Setting the minimum housing standards; Ensure health and safety issues. In the early 20 th century, housing has become a way to boost economic growth and consumer confidence: After 1932 Great Depression, the New Deal of the US made home ownership a strategy of recovery. In the early 21 st century, housing has become a welfare: NO homeless promise; A rights to have a home; A minimum living standard. 3

4 How can a government deliver housing welfare? 6 main approaches: Demand-side subsidy: Built and provide a shelter to the needy (PRH); Provide rent subsidy or coupon (CSSA); Provide mortgage loan subsidy (Freddie/Fannie); Provide home buying subsidy (HOS/SIN HDB); Supply-side control/subsidy: Rent control and vacancy control (vacancy tax); Deregulation and securitization (MBS); and Housing Inclusion and tax reliefs (LIHTC). A novel proposal: A Public Chonsei Scheme (PCS) 1945: subsidized rental housing 1990: subsidized owner-occupied housing 1998/2008:? (Asian Financial Crisis / Global Financial Crisis housing welfare caused negative equity) 4

5 Asian v. Western Approach Asian approach direct, planned economy: (lower risk but costly and inefficient) Government builds and provides shelters to the needy Provide home buying subsidy; China Singapore Hong Kong Western approach indirect, financial engineering: (efficient but risky) Provide mortgage loan subsidy; Housing inclusion and tax relief; Deregulation and securitization. US Europe 5

6 Does Supply-Side Approach Work? It subsidizes suppliers and encourages them to reduce prices and increase supply: Low-Income Housing Tax Credits (LIHTC) provide tax credits to developers for building affordable housing in the US. Housing inclusion (mixed development) What are the differences in subsidizing households and suppliers? Which way is more efficient? Why? For leasehold interests, a lease condition specifying the minimum number and maximum size of housing units ( 限呎限量 ) to be built at a site, the bid price would be lower, but would it help build more affordable housing? 6

7 Why a government encourages home ownership? A sense of belongings; Stable economy (with consumer confidence and economic growth); Encourage savings; Security of tenure; Wealth accumulation; Better outcomes of children; Community engagement and voting behavior; Active and informed citizenry. (see Andrews and Sanchez, 2011) 7

8 Housing as a Growth Engine The post-war Keynesian model of economic growth: A demand management process supported by a welfare system facilitated by transfer payments. Social transfers protected households against economic upturns and downturns. The housing market played a particular role as the new dynamic of growth Expectations of continued house price inflation effectively became a basis for economic growth (Ronald and Elsinga, 2012: p.13) A huge sum of mortgage for financial market; A large sector of employment (developers, estate agents, building professionals, lawyers, construction contractors, maintenance contractors, ) 8

9 5 Reasons for the Growth of Homeownership Rate The relatively rapid growth in real incomes; The increasing availability of housing finance; The tax benefits available to owner-occupiers (exemption from capital gain tax, mortgage tax relief, etc.) Limited access to the rented sectors. Specific government policies to expand owner-occupation. (Whitehead, C., 2012 Owner-occupation in an increasingly uncertain world, in Ronald and Elsinga, eds. p.110) Another 5 Reasons of mine: Negative Real Interest Rate? (mortgage < rent) Expected price growth? (hedge rental growth, reap capital gain) Culture? (no-house, no-couple culture) No security of tenure? (forced to leave by 6-mon notice) Terms and conditions of tenancy? (no renovation rights) 9

10 Homeownership Makes Responsible Citizens the Thatcher governments utilised increasing levels of home ownership as a means of making citizens responsible consumers by exposing them to the outcomes of monetary policy. Perhaps now the credit crunch is another realisation of this policy. (Rowlands, 2010) Good, sustainable citizens are those who have made the active choice of acquiring their own property through the market and have therefore purchased a direct stake in the quality and character of their neighbourhoods. (Raco, 2007: 314, cited by Rowlands, 2010) Government s inflationary monetary policy would be embraced by home owners; and Citizens would support a more stable economic growth and bail-outs to avoid shocks to the housing markets. 10

11 Own versus Rent Building price: $225,000 Down payment: $50,000 Debt: $175,000 interest-only mortgage at a rate of 10%, due and payable at the end of year 5 Expect to sell the property at the end of year 5 for $280,000 Require 12% equity return Year Mortgage payment -$17,500 -$17,500 -$17,500 -$17,500 -$17,500 Down payment / reversion -$50,000 $105,000 Net cash flow -$50,000 -$17,500 -$17,500 -$17,500 -$17,500 $87,500 Present value (12%) -$50,000 -$15,625 -$13,951 -$12,456 -$11,122 $49,650 Net present value -$53,504 11

12 Own versus Rent Alternatively, lease the same building for 5 years at $20,000 per year Shall I own or lease? What is the acceptable rental level? NPV (rent = $20,000) = -$72,000 < -$53,000 (Own is a better choice) NPV (rent = $14,800) = -$53,000 = -$53,000 (Own and rent are indifferent) Year Lease rental expenses -20,000-20,000-20,000-20,000-20,000 Present value 0-17,857-15,944-14,236-12,710-11,349 Net present value -72,096 Lease rental expenses -14,800-14,800-14,800-14,800-14,800 Present value 0-13,214-11,798-10,534-9,406-8,398 Net present value -53,351 12

13 Own versus Rent (cont) Other costs of owning: Agent s fee Solicitor s fee Stamp duty Maintenance and repair Other owners liabilities Other benefits of owning: Tax relief Sublet income Other owners rights 13

14 What are the problems of home ownership? Has incentive to push housing price up; Measures to prevent housing price drops; Wealth concentration at one sector (risky); Labour immobility; Debt accumulation (intergenerational gains); Inequality; Low fertility; Early retirement and over-saving; and Housing issues become political. (see Andrews and Sanchez, 2011; and Ronald and Elsinga, 2012, Ch. 1) Bubbling! 14

15 Jackup home ownership rate causes housing bubbles? In order to generate a positive return on housing investment, the government needs to engineer price increases Then price rises mean ultimately that what the economy ends up with is a bubble that invariably blow: making property less for occupation and more for speculation. (Moyo Dambisa, 2011) See my ppt on the causes of the subprime crisis 15

16 A Family-unfriendly Policy? In Life Cycle Model terms, over saving at a young age, forced by the nature of housing systems, may facilitate dissaving to take place earlier than might otherwise have been the case. Promoting home ownership is both familyunfriendly and work-unfriendly, because: It contributes to the demographic trend of ageing by depressing fertility rates, It contributes to the fiscal consequences of falling dependency ratios by further reducing the proportion of the adult population in work. (see Andrews and Sanchez, 2011; and Ronald and Elsinga, 2012, Ch. 1) 16

17 Homeownership Ratio = 70% in Europe 2011 Spain 77.8% in 1990s -> 83.2% in 2004 Switzerland and Germany are the lowest, about 50% 17 _tenure_status,_2011_(%25_of_population).png&filetimestamp=

18 Homeownership Ratio = 70% in the UK 2011 HOR increased from 23% in 1918 to 69% in 2001; But a drop from 69% in 2001 to 64% in Why? The Housing Act of 1980 allowed local authorities to sell social housing to sitting tenants (Right-to-Buy Scheme) 1.8m new homeowners 18

19 Homeownership Ratio = 65% in the US 2013 Drops from the peak of 69% since 2004, why? 19

20 Homeownership Ratios in Asia 2013 Singapore: from 29% in 1970 to 92% in 2000; China (urban): from 17% in 1985 to 82% in 2010; HK: 51.3% in 2013, TPS after 1997 Ronald and Elsinga (2012), Census and Statistics Department, HKSAR 20

21 How to Increase HOR? Mortgage subsidy (US Fannie/Freddie) Purchase price subsidy (SIN HDB, HK HOS) Right-t0-Buy subsidy (UK RTB, HK TPS) Mortgage subsidy: lower taxpayers contributions but high risk (e.g. just act as a guarantor, provide lower mortgage rate, or top-up mortgage with insurance, see HKMC) Purchase price subsidy: medium taxpayers contributions and medium risk (e.g. land premium payable when resell to the market) Right-to-Buy subsidy: higher taxpayers contributions but lower risk (e.g. build and sell at a discount) 21

22 Mortgage-to-GDP Ratio HOR was largely driven by loan increase MTGR of PIIGS increased >100% in 13 years MTGR of the UK rose 80% MTGR of the US grew from 60% in 2003 to 90% in 2006, and dropped to 75% in MTGR of Germany drops slightly Europe and US United States Spain Greece Germany United Kingdom Markets/Banking-and-Insurance/Comparative- Statistics/mortage_gdp/fileBinary/mortage_gdp.xls 22

23 Mortgage-to-GDP Ratio Asia HOR was not driven by loan increase Except: MTGR of China is just 17% in MTGR of HK grew from 30% in 1996 to 50% in 2002; then dropped to 30% in 2007, back to 45% in MTGR of Singapore increase 100% in 13 years (20%->40%)

24 Home Ownership as a Palliator Dissaving housing assets: Sales-and-leaseback; Sell and rent; Sell and buy another cheaper; Reverse-mortgage; Re-mortgage. But there is no evidence of large-scale dissaving of housing assets in Europe (Ronald and Elsinga, 2012) Why don t people spend it in later life? Home ownership is not a saving? Uncertainty about life span, about health and health costs? Information asymmetry? High transaction costs? Psychic or emotional attachment? Social network? Bequest motive? Unable to sell because the building is too old? A situation to be changed in the future? For reverse mortgage HK can refer: 24

25 Shall MPF be used to pay for home ownership? Scenarios: A: If home ownership is a saving for ageing, then it shares the same roles of MPF, it shall be transferrable between the two. B: Home investment can be risky and if MPF is used up to own a flat, a property slump can cause financial hardship to the retirees. C: If people would not dis-save housing assets to spend in later life, it is of different role of MPF, it shall not be transferrable between the two. See Yiu, C.Y. and Hui, C.M. (2007) An Empirical Study of the Impact of Income Uncertainty on Private Residential Property Markets in Singapore and Hong Kong, Housing Studies, 20(5),

26 Housing Policy for Anti- Speculations As housing unit is a necessity, if it is speculated and resulted in unaffordable housing, it would cause homeless or public outcry; Normally, government would take one or more of the following approaches to tackle: Increase / encourage (with incentives) housing supply; Punish / tax speculators or suppliers (sellers/owners) Capital gain tax Property tax (ownership) Vacancy tax Manage housing derivatives Stop pre-sales (forward contracts) Tax confirmors (resell before occupancy) Manage housing demand (buyers) Stamp duty (SSD/BSD/DSD in HK) Progressive tax for buying the 2 nd, 3 rd, units Which way(s) are the best? And with the least side-effects? What is speculation? See Wong, Yiu, Tse and Chau (2004) Do the Forward Sales of Real Estate Stabilize Spot Prices? JREFE 32(3),

27 Housing Policy for Regulating Housing Sales Housing sales are normally NOT governed by the Sale of Goods Ordinance, why? There is recently a Residential Properties (First-hand Sales) Ordinance in HK, which governs first-hand housing sales only, why? Why not second-hand ones? There has been an Estate Agents Ordinance governing the estate agents, but not the sale of housing, why? Can a housing sale without agent? There has been a Conveyancing and Properties Ordinance governing the transfer of property interests, why it cannot protect the first-hand buyers? There is a Landlord and Tenant (Consolidated) Ordinance governing the rental market of housing, why it cannot protect the tenants? 27

28 Cases Study 1: Housing Policy in the UK The Right-to-Buy Privatisation Policy failed in the 1980s; The Deregulation of Financial Institutions Policy also failed in the 2000s; See Murie (2010) 28

29 Cases Study 2: Housing Policy in Germany No encouragement policy for homeownership (abandoned); The lowest homeownership rate in Europe; No social housing subsidy (no public rental housing nor public housing for sale), no subsidy for private housing purchase; Very strict mortgage loan system; Very stable housing price and rent one of the lowest volatilities; Only money subsidy for the poor; Why it works? 29

30 Cases Study 3: Singapore Public Housing Public housing for sale by HDB; Homeownership rate > 80%; A very small private housing market for the very rich and the foreigners; Provident funds are allowed to pay for mortgage; The single player of housing markets; But the citizens are very satisfied. Why? 30

31 Cases Study 4: Housing Policy in HK Govt sold land for building private housing before the 1950s; Public Rental Housing (rental subsidy, govt builds) since the 1950s; Home Ownership Scheme HOS (purchase subsidy, govt builds) since the 1970s, PRH and HOS now are accounting for more than 50% of housing stock; Private Sector Participation Scheme PSPS (purchase subsidy, private builds) since the 1980s; Home Loans Schemes (mortgage subsidy, govt pays) since the 1990s; Application system of land sale since the 2000s; Tenant Purchase Scheme (sell-to-sitting tenants) since the 2000s; Abandonment of almost all housing policies after 2003 (private-led market approach); Active government land supply, demand-managed approach since the 2010s. Govt proposes to change the Public : Private housing ratio from 4:6 to 6:4. Govt is the dominant player in the housing market: monopolised land supply (own 100% land); own 50% housing stock; continue to build more public housing (6:4); control monetary policy; control mortgage market via HKMC; control urban renewals via URA; control all kinds of development governance. 31

32 Cases Study 5: A Proposed Public Chonsei Housing Scheme Chonsei is a rental agreement where the tenant pays a lump sum deposit to the landlord in lieu of rent for two years. The entire deposit (excluding any interest earned) is returned when the household moves out at the end of the tenancy. The amount of the chonsei deposit ranges from 30% to 70% of the housing unit s market price, depending on market conditions. Technically, the chonsei contract combines two separate transactions. The first is a loan made by the tenant to the landlord, the second is a lease by which the landlord grants the tenant use of the residence for imputed interest payments on the chonsei deposit. Landlords are not restricted in their use of the deposit and frequently the chonsei money is used as leverage to invest in additional housing units. (Park, 2007: p.77) 32

33 Chonsei Rental Housing Merits: 1. It is virtually rental free. The tenant pays the opportunity costs of the deposit only (i.e. interest income) 2. The landlord would not and could not terminate the tenancy early, unless s/he can give you back all the deposit 3. The landlord would not worry about late or nil payment of rent, as the deposit sum is much more than the total rent payable 4. The tenant also would not worry about fraudulent or missing landlord, because the value of the housing unit is much more than the deposit. 5. The rental level has been fixed throughout the tenancy period, and there is no risk of asking any rental increases within the period, because the deposit sum is a fixed sum. 33

34 Housing Dilemma 1. public rental housing supply is too few and too slow (too expensive and too inefficient) to satisfy the long queue of demand; 2. the rent of the private housing sector is both unaffordable and without security of tenure; 3. the price of the private housing sector is beyond reach. Why? 34

35 Public Rental Housing Problems The current problems of public rental housing in HK: A long queue (waiting time > 3 years) Low eligibility threshold because it costs taxpayers a lot, both on land supply, construction costs and maintenance costs Inefficient quasi public organization to build and manage Little choice of location because locations of PRH are fixed PRH expenditure 2012/2013 Total Construction Expenditure Budget: $10,000m Total Operational Expenditure for PRH Budget: $13,744m Total Rental Income from PRH Budget: $12,306m Income < operational cost Never payback, not sustainable! Total Land Value:? 35

36 A Public Chonsei Rental Housing Public Chonsei can solve the problems immediately: Efficient - tap on the private housing market resources Ample choice of location anywhere private rental housing is available Ample supply a secure and safe tenant (HKG) Security of tenure no rental changes and no forced termination of tenancy No cost to taxpayers, except opportunity cost What are the shortcomings? 36

37 Public Chonsei Housing An example say a housing unit priced at $5m, with a yield rate of 2.5%, i.e. annual rental income of $125,000, or monthly rent of about $10,000. if the government would put a deposit of $2m to the landlord of a private housing unit, and rent it for 2 years to the family queuing the PRH. The rate of return is 6% (about the same as the loan rate). the government would get the deposit back after 2 years 37

38 Cases Study 4: A Sustainable Public Housing Scheme An expiry date is fixed for government housing subsidy: A 10-year PRH or a 10-year HOS; Public housing units can be reused (reallocatable) every decade; If still eligible after 10 years, one has to queue again at the back; It is fairer to all the people at the queue; It is sustainable in the long run. 38

39 References Required readings: Andrews, D. and Sanchez A.C. (2011) The Evolution of Homeownership Rates in Selected OECD Countries: Demographic and Public Policy Influences, OECD Journal: Economic Studies, 2011/1 Ronald, R. and Elsinga, M. (2011) Beyond Home Ownership, Routledge Recommended readings: Groves, R., Murie, A. and Watson, C. (2007) Housing and the New Welfare State: Perspectives from East Asia and Europe (Social Policy in Modern Asia), Ashgate Pub Co. Wong, Yiu, Tse and Chau (2004) Do the Forward Sales of Real Estate Stabilize Spot Prices? JREFE 32(3), Rowlands, R. (2010) Sustainable communities, in Ch. 11 of Malpass, P. and Rowlands, R. (eds) Housing, Markets and Policy, Lon.: Routledge. Raco, M. (2007) Securing sustainable communities: Citizenship, safety and sustainability in the new urban planning, in European Urban and Regional Studies 14(4),

40 The End comments are welcome. Enquiries to: 40