Memorandum for the Subsidised Housing Committee of the Hong Kong Housing Authority. Green Form Subsidised Home Ownership Pilot Scheme

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1 PAPER NO. SHC 26/2015 Memorandum for the Subsidised Housing Committee of the Hong Kong Housing Authority Green Form Subsidised Home Ownership Pilot Scheme PURPOSE This paper seeks Members views and endorsement of the proposed implementation details of the Green Form Subsidised Home Ownership Pilot Scheme (GSH). BACKGROUND 2. There have been suggestions from the community as well as individual Housing Authority (HA) Members for provision of subsidised sale flats to Green Form (GF) applicants at prices lower than that of Home Ownership Scheme (HOS) flats to help them achieve home ownership and at the same time release public rental housing (PRH) flats for applicants awaiting PRH allocation. The Long Term Housing Strategy (LTHS) promulgated by the Government on 16 December 2014 also reaffirms the role of subsidised home ownership as an essential element of the housing ladder. It also states that the Government will consider how to expand the forms of subsidised home ownership and, where appropriate, introduce supplementary schemes of subsidised sale flats. 3. In line with the LTHS framework, the Chief Executive, in his 2015 Policy Address, proposed to HA that suitable flats among its PRH developments under construction be identified for sale to GF applicants in the form of a pilot scheme, with prices set at a level lower than those of HOS flats. GUIDING PRINCIPLES AGREED BY THE STRATEGIC PLANNING COMMITTEE 4. At its meeting on 19 January 2015, HA agreed that the Strategic Planning Committee (SPC) should first consider the case of GSH and the guiding principles, based on which the Housing Department (HD) can work

2 - 2 - out implementation details for consideration of the Subsidised Housing Committee (SHC). 5. At the meeting on 22 January 2015, SPC unanimously supported the GSH proposal. It also agreed on the following guiding principles (c) (d) (e) (f) the implementation details of GSH should as far as possible follow those of HOS since they are effective, widely accepted, and easy to understand. Using the same sets of rules, where appropriate, can also maintain policy consistency across different types of subsidised sale flats under HA; it would be appropriate to adopt the same definition of GF applicants as that under HOS; past experience in HOS sale exercises indicates that remote sites are less attractive to GF applicants. Also, sites with public facilities which will incur high management and/or maintenance fees are also not preferred; the entire building should consist of flats for sale only. This is to avoid the complicated management problems found in the Tenants Purchase Scheme (TPS) under which tenants and flat owners co-exist. Fittings should be at PRH standard without upgrading; while the price setting mechanism should basically follow that of HOS, consideration should be given to the means of GF applicants; financial position of HA; and equity across various subsidised home ownership schemes. In general a higher discount rate as compared to that applicable to HOS flats should be offered in the case of GSH, but the selling price should also be able to cover HA s cost; and as for resale restrictions, some SPC Members consider that the restrictions should be more stringent than those applicable to HOS, while other Members are concerned that more stringent restrictions may undermine the attractiveness of GSH to GF applicants. 6. Based on SPC s guiding principles above, we propose implementation details as set out in the ensuing paragraphs.

3 - 3 - PROPOSED IMPLEMENTATION DETAILS A. Principles for site selection 7. Based on SPC s view, we propose the following site selection principles for GSH (c) (d) while a site may include certain public facilities (which may be unavoidable if the site is originally intended for PRH development), it should not contain public facilities that will incur very high management and/or maintenance fees; the conversion of a PRH site to GSH development should not result in substantive changes to the original planning (e.g. should not result in substantial reduction in the number of flats; should not entail significant changes to the provision of facilities originally planned for the site, etc.); the site should preferably be a standalone one, or can be easily carved out from a PRH development; and PRH development that will be completed shortly is not suitable, because (i) flat allocation may have already started; and (ii) converting rental units that will be completed shortly to sale flats involves planning and land procedures which take time Note 1 and the flats may be left idle in the interim period which is undesirable. 8. To launch the pilot GSH as soon as possible, we may select flats from PRH projects under development. In the long run, if GSH becomes a permanent feature, there can be other sources of sites for GSH. For instance, Note 1 Converting PRH flats into flats for sale involves the following steps revision of the approved planning brief; resolution of issues arising from site demarcation, shared facilities and cost sharing arrangements; and approval of general building plans; and preparation of land lease and the Deed of Mutual Covenant.

4 - 4 - flats from HOS projects under development can be converted into PRH standards for sale as GSH; new projects can also be planned, designed and built to PRH standard for sale as GSH. B. Eligibility Criteria 9. By definition, only GF applicants are eligible for GSH. Currently, the majority of GF applicants who are eligible for purchasing HOS flats are PRH tenants. However, all along there are a small number of other categories of persons who are also eligible for GF status in buying HOS flats, such as PRH applicants who have passed the detailed eligibility vetting and are due for flat allocation in about a year s time Note 2. To maintain consistency across different subsidised housing schemes under HA, we propose that GSH adopts the same definition of GF applicants as currently applicable to HOS. Express Flat Allocation Scheme 10. Currently, tenants who are allocated PRH via the Express Flat Allocation Scheme (EFAS) may apply for HOS flats using GF. However, if they apply within three years from the commencement of their PRH tenancies, they are treated as White Form (WF) applicants in the flat selection order. HOS flats thus purchased are also counted against the WF quota. This measure aims to prevent the use of EFAS as a back-door, fast track route to obtain GF status in order to purchase HOS flats. As GSH will not have WF Note 2 The following categories of persons are eligible for GF status in buying HOS flats- PRH tenants; PRH applicants who have passed the detailed eligibility vetting and are due for flat allocation in about a year s time; (c) clearees affected in clearance exercises initiated by the Government with PRH eligibility and victims of natural disasters with PRH eligibility; (d) PRH tenant s splitting / divorce cases with PRH eligibility; (e) Urban Renewal Authority clearees (displaced tenants with PRH eligibility); (f) former PRH tenants holding a Letter of Assurance issued by the Housing Department whose eligibility for allocation of PRH flat has been established; (g) junior civil servants opting for HOS flats under Civil Service Public Housing Quota, whose eligibility has been established; (h) recipients of the Rent Allowance for the Elderly Scheme; and (i) staff of Estate Assistant grade of the Housing Department holding a valid Letter of Assurance issued by the Housing Department.

5 - 5 - applicants or WF quota, to ensure fairness and to maintain consistency across subsidised housing schemes under HA, we propose that tenants allocated PRH via the EFAS should not be eligible for GSH within three years from the commencement of their PRH tenancies. C. Mortgage guarantee 11. Under HOS, HA offers mortgage default guarantee to participating financial institutions for up to 30 years Note 3 counting from the date of the first assignment of the flats. Under such arrangement, purchasers will be able to borrow up to 95% (for GF applicants) or 90% (for WF applicants) of the sale price for a maximum loan repayment period of 25 years. 12. For GSH, we propose to follow the practice of HOS to provide mortgage guarantee for up to 30 years from the date of the first assignment to allow GSH buyers to borrow up to 95% of the sale price, with a maximum repayment period of 25 years. As with HOS, after the GSH owner pays the premium and sells the flat in the open market, HA s mortgage guarantee will not be applicable to the new owner. D. Price setting mechanism 13. According to the established HOS pricing formula, selling prices of flats are determined by applying a discount to the market value. The discount is related to affordability, which is determined based on the principle that for at least 50% of the flats for sale, a mortgage-to-income ratio of not more than 40% can be achieved for eligible households with income at the level of the income limit for WF families. In calculating the mortgage-to-income-ratio, a loan repayment period of 20 years and mortgage Note 3 As a measure to revitalize the HOS Secondary Market, SHC approved in October 2010 an extension of the mortgage default guarantee period from 25 years to 30 years, counted from the date of first assignment, so that purchasers in the HOS Secondary Market may benefit from a longer remainder period of mortgage default guarantee when negotiating with the participating financial institutions for mortgage. The extension is applicable to both the HOS Secondary Market and the primary market (i.e. HOS flats put up for sale by HA). The mortgage default guarantee period is to be distinguished from the loan repayment period of a mortgage, which is a matter to be agreed between the purchasers of HOS and the financial institutions concerned. Nevertheless, as one of the conditions of the HA s mortgage default guarantee, the mortgage s repayment period should not exceed 25 years.

6 - 6 - loan to price ratio of 90% is assumed. HOS flats will be sold at 30% discount from the market value under normal circumstances, but a higher discount could be offered if the affordability criteria could not be met. 14. Taking into account views of SPC Members, we consider it appropriate to adopt the established HOS pricing formula for GSH with the following two changes in light of the circumstances of GF applicants a mortgage loan-to-price ratio of 95%; and the affordability will be benchmarked at the PRH income limit for a four-person household Note In other words, we propose the following price setting mechanism for GSH GSH flats will be sold at a discount to the market price, which will be higher than that applicable to HOS flats. The higher discount rate for GSH is justified by the fact that GSH flats will be sold with the fittings of typical PRH standard without any upgrading, which is lower when compared to HOS; the discount will be set at a level such that at least 50% of the flats will be affordable to target applicants based on the following assumptions (i) a mortgage-to-income ratio of 40%; (ii) a loan repayment period of 20 years; (iii) a mortgage loan-to-price ratio of 95%; and Note 4 In the case of HOS, the benchmark used to assess affordability is the income limit for WF families. One of the parameters used in calculating the income limit for WF families is the average household expenditure of the middle one-third expenditure group of four-person households amongst tenant households in the private sector. Since the HOS income limit is not applicable in the case of GSH, we consider it appropriate to use the PRH income limit for a four-person household as the parameter in the price-setting mechanism for GSH. The PRH income limit for a four-person household in is $25,250.

7 - 7 - (iv) a household income at the eligibility limit for applying PRH for a four-persons household; and (c) the selling price should in general not be lower than the cost, which includes the development costs (consisting of construction costs, direct staff costs and overhead), land costs, and administration and sales-related expenses. 16. Since we do not have the selected site yet, we cannot work out the exact cost of a GSH development and hence the discount which we can offer at this juncture. Along the practice of the HOS, the exact selling price of individual GSH projects will be determined about two months before the pre-sale to better reflect the prevailing market situation. We will submit proposed selling price for GSH flats prior to pre-sale for Members consideration based on the price setting mechanism endorsed by Members. E. Resale restrictions Existing resale restrictions for HOS and TPS flats 17. The agreements for sale and purchase as well as deeds of assignment of HOS and TPS flats are subject to the terms, covenants and conditions mentioned in the Schedule to the Housing Ordinance (Cap. 283), which sets out the resale restrictions for HOS and TPS flats, as follows during the first five years of the first assignment from HA, if the flat owner wants to sell his flat, he is required to offer to sell it to HA. HA, or its nominee, may buy the flat at the following price (i) within two years of the first assignment original price of the flat sold by HA; (ii) between the third and fifth year from the first assignment market price of the flat assessed by the Director of Housing less the original discount. If HA, or its nominee, declines to buy the flat, the owner can sell the flat in the open market after payment of premium; after five years counting from the first assignment have passed,

8 - 8 - the owner may sell the flat in the open market upon payment of premium; and (c) in addition to and above, from the third year onwards counting from the date of the first assignment, the owner may also sell the flat in the HOS Secondary Market to a person nominated by HA without payment of premium and at his own negotiated price. Traditionally, the HOS Secondary Market is restricted to GF buyers. Currently, such nominee also includes WF buyers under the Interim Scheme to Extend the HOS Secondary Market to WF Buyers. The above resale restrictions are widely known. There are also legal sanctions for unauthorized alienation. The transactions will be void and there would be criminal liability Note However, HA has since 2007 ceased to buy back HOS flats. Also, HA has never nominated a person to buy HOS/TPS flats offered to HA by flat owners. Therefore, in practice, currently a HOS flat owner can sell his flat in the open market at any time upon payment of premium. For TPS flats, HA will buy back within five years of the first assignment when offered Note 6. HA also allows TPS flat owners to sell in the open market after payment of premium from the third year onwards. Note 5 Note 6 Section 17B(1)(c)(i) of the Housing Ordinance provides that [w]here that person acts in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to the land... the purported mortgage, other charge, assignment or other alienation, together with any agreement so to mortgage, charge, assign or otherwise alienate, shall be void. Section 27A of the Housing Ordinance provides that [w]here a person whether as lender, borrower or otherwise purports to create a mortgage of or otherwise charge land or to assign or otherwise alienate land or to enter into an agreement which relates to land; and the purported mortgage or other charge or the purported assignment or other alienation or the purported agreement is void by virtue of section 17B, the person commits an offence and is liable to a fine of $500,000 and to imprisonment for 1 year. The nature of buying back HOS flats and TPS flats is different. TPS flats bought back by HA are reallocated as public rental housing, while HOS flats will always remain as subsidised sale flats.

9 - 9 - Possible resale restrictions for GSH 19. Both GSH and HOS flats are subsidised sale flats. It can therefore be argued that GSH should adopt the same resale restrictions currently applicable to HOS. On the other hand, there are views from many members of the public that more stringent resale restrictions should be imposed for GSH, such as a longer resale restriction period or restricting resale only to the HOS Secondary Market. Some SPC Members also have similar views. In light of the above, we have explored the following options for GSH s resale restrictions Option 1: Option 2: Option 3: Adopting the same resale restrictions applicable to HOS (i.e. status quo) Amending the Schedule to the Housing Ordinance to impose stricter resale restrictions HA to exercise its power to nominate buyers in the first five years from the first assignment Detailed considerations of the three options are set out below. Option 1: Adopting the same resale restrictions applicable to HOS 20. Justifications of Option 1 are the resale restrictions can be easily applied to a GSH project by way of a notice in the Gazette stating that the terms and conditions in the Schedule to the Housing Ordinance are applicable; if we wish to at least recover the cost for developing GSH flats (paragraph 15(c) above refers), we may not be able to offer too large a discount in the selling price. If we at the same time impose very stringent resale restrictions, we may run the risk of undermining the attractiveness of GSH to GF applicants and hence not able to meet the objectives of the scheme. Adopting the same resale restrictions applicable to HOS could eliminate such risk;

10 (c) regarding the concern of some members of the public on speculative activities involving GSH flats, there are already the following disincentives for the owners to resell their GSH flats within a short period of time since (i) GSH owners have to give up their PRH flats when they purchase the GSH flat. If they sell their GSH flats, they will have to either rent or buy a private accommodation, which is at a relatively high price at the moment; (ii) due to the larger discount (likely to be larger than the normal 30% discount in the case of HOS flats), the premium payment in the case of a GSH flat will be a considerable amount as compared to the price of the flat; and (iii) in addition to the premium, the Special Stamp Duty (if it is still in force) Note 7 will further reduce the profit margin. (d) as a matter of fact, since HA ceased to buyback HOS flats in 2007 (i.e. owners are allowed to sell the flats in the open market at any time with payment of premium), as at end-december 2014, out of some flats HOS flats sold by HA since 2007 (among which about 920 flats are still within the five-year resale restriction period), only 1% (about 170 flats) were resold in the open market after payment of premium within the first five years of first assignment. 21. The downside of this option is that it cannot address demand from some members of the public that GSH should have more stringent resale restrictions than HOS. Note 7 The Special Stamp Duty rates are as follows Special Stamp Duty rates for Holding period properties acquired on or after 27 October months or less 20% More than 6 months but for 12 months or less 15% More than 12 months but for 36 months or less 10%

11 Option 2: Amending the Schedule to the Housing Ordinance to impose stricter resale restrictions 22. The merit of this option is that we can introduce resale restrictions for GSH that are different from those currently provided in the Schedule to the Housing Ordinance, while keeping the legal sanctions currently provided for in the Housing Ordinance. This in turn will better ensure the effectiveness of the resale restrictions. 23. The downside of this option is that it may not be appropriate to amend the law for a pilot scheme. Instead, the appropriate approach would be to evaluate the outcome of the pilot scheme and consider whether GSH would be a permanent feature in the first place and if so, whether legislative amendment is necessary for the scheme in the long term. Besides, we want to introduce GSH as soon as possible, but legislative amendment could take a long time. Option 3: HA to exercise its power to nominate buyers in the first five years from the first assignment 24. HA may exercise its power as stipulated in the Schedule to the Housing Ordinance to buy back or to nominate a buyer in respect of GSH. We strongly recommend against buy-back, given the risk of moral hazard as all the liability and consequences of a falling market would then be borne by HA. This will also impact on HA s financial position which is already under serious stress Note A more feasible option would be for HA to nominate GF applicants to purchase GSH flats when GSH flat owners offer their flats to HA for sale. The price will be set at the original price of the GSH flat sold by HA within two years of the first assignment; and the prevailing market price of the GSH flat assessed by the Director of Housing less the original discount between the third and fifth year from the first assignment. The nomination process will have to be completed in a reasonable time period, say a period of Note 8 Under the LTHS announced in December 2014, the Government adopts a public housing supply target of units for the ten-year period from to based on the latest projection of housing demand. HA, being the main provider of public housing, will come under increasing fiscal pressure to meet the building target and is likely to require financial support from the Government to deliver its public housing programme.

12 six months subject to details of the procedure to be set. One way to operationalize this is to follow the current practice of the HOS Secondary Market in that we allow the GSH flat owner to identify eligible GF buyers through his own means for nomination by HA, including through estate agents. Proposed operational details under this option are set out at Annex. 26. The merits of this option are (c) the restrictions can be imposed within the current legal framework as set out in the Schedule to the Housing Ordinance without the need to amend the Ordinance; for sale to the nominee, whatever subsidy provided by the Government to GSH flat owners can be retained for circulation within the target group, i.e. GF applicants; and for speculators, they would not want to sell GSH flats to HA s nominees, as the selling price is fixed by the Schedule to the Housing Ordinance and there is no room for negotiation. On the other hand, they would need to wait for at least six months before they can pay premium and sell in the open market. This additional time will make it difficult for them to capture the prevailing market situation, while not so strict as to discourage purchase of GSH flats by GF applicants. It also provides a way for non-speculators to liquidate their asset in case of financial difficulties. 27. The downsides of this option are some people may consider this option not stringent enough or ineffective. With a rising property market, there is a risk that some flat owners may not actively facilitate HA s nomination, so that they can pay premium and sell in the open market after six months. In fact, there is a risk that there will be no transaction at all under this mechanism. GF applicants who wish to purchase GSH through this channel may criticize the measure as their effort and possibly costs involved may be wasted; according to paragraph 2 of the Schedule to the Housing Ordinance, between the third to the fifth year, the price will be the prevailing market price of the flat assessed by the Director of

13 Housing less the original discount at the time of the purchaser s offer to assign. Therefore, the assessed price will not be updated even though the market price may change during the six-month nomination period. This may lead to complaints in a rising market situation; (c) (d) we have explored the feasibility for HA to find a nominee by itself to purchase the flat when such is offered, but considered this a non-option given the practical difficulties involved and the unnecessary administrative cost thus generated for HA to undertake duties which are similar to those required of an estate agent. Whether the GSH flat owner will face difficulties finding a potential buyer on his own or whether estate agents are interested in serving this niche market remains to be tested. Therefore, we cannot rule out the possibility of complaints from GSH owners in asking them to find eligible GF buyers themselves for HA to nominate, but this may be a desirable disincentive arising from the more stringent resale restrictions; and in accordance with paragraph 1 of the Schedule to the Housing Ordinance, HA should allow the flat owner to pay the premium to sell in the open market when the nominated buyer declines to accept the assignment. Following HA s nomination, for various reasons, it is possible that the parties may not proceed with the transaction and/or complete the assignment. In case of disputes over whether it is the nominated buyer or the GSH flat owner who is in default, it would be difficult for HA to judge and to decide whether to allow the GSH flat owner to pay the premium and sell in the open market. To avoid HA engaging in such dispute and the risk of challenge and claim, one way is for HA to stipulate and require the nominated buyer to agree to allow the GSH flat owner to pay premium and sell in the open market if the transaction cannot be completed within a stipulated period of time, regardless of who declines to proceed with the transaction. Nevertheless, the protection for the nominated buyer will be weak. 28. If the decision is to impose more stringent resale restrictions for GSH, Option 3 would be a more practical option given the circumstances and considerations as set out above. We can revisit the need to amend the Housing Ordinance in future should GSH become a permanent feature and if the result of the pilot scheme suggests that legislative amendments in respect

14 of resale restriction are indeed necessary. F. Premium arrangements 29. The existing methodology for calculating the premium payable for lifting the resale and other alienation restrictions of subsidised sale flats sold by HA is set out in the Schedule to the Housing Ordinance, as follows Premium = Prevailing market value Discount rate where, Discount rate = Initial market value Purchase price Initial market value 100% 30. Any change to the above formula will require legislative amendments and is not recommended for a pilot scheme in the case of GSH. Hence, we propose adopting the established formula for subsidised sale flats as set out in the Schedule to the Housing Ordinance to calculate the premium payable for GSH flats. G. Timing for pre-sale of GSH flats 31. The timing for pre-sale of GSH flats depends on the time needed to resolve site specific issues of the selected site(s); to conduct district consultation; and to prepare the land lease, the Deed of Mutual Covenant and other sale-related documents. We also need to take into account the timing for other sale exercises under HA in view of staffing resources and more importantly, to offer reasonable choices to target applicants under different sale programmes of subsidised sale flats. Therefore, it may take a bit of time before the sale of GSH flats can be launched upon selection of the site(s). NEXT STEPS 32. Upon Members endorsement of the proposed implementation details including the site selection criteria, we will proceed to identify suitable site(s) for the GSH pilot project. As SPC approves the use of sites for public housing development, we will seek SPC s endorsement of the proposed site for GSH development. Thereafter, we will consult the relevant District Council(s) as appropriate. In response to its earlier request, we will also brief

15 the Panel on Housing of the Legislative Council on the implementation details for the GSH pilot project and the selected site(s). 33. Looking ahead, we will invite Member to consider and endorse the pricing and the sales arrangements for GSH about two months prior to the pre-sale exercise. We will also review the effectiveness and the merit of the pilot scheme in due course. FINANCIAL AND STAFFING IMPLICATIONS 34. If the sale prices for GSH are set at a level which is at least sufficient to recover the costs of providing the flats by HA, HA will not suffer any loss financially. The staffing requirement in the planning stage of GSH pilot project will be absorbed by HA s current budget, while that in the future will be reflected in the relevant budgets of HA. DECLASSIFICATION 35. We suggest that this paper be declassified if Members approve the recommendations as set out in paragraph 36 below. The paper will be made available to the public at the HA homepage, HD s library and through the Departmental Access to Information Officer if it is declassified. RECOMMENDATION 36. Members are invited to endorse the following implementation details of GSH principles for site selection as proposed in paragraph 7; eligibility criteria as proposed in paragraphs 9 and 10; (c) mortgage guarantee as proposed in paragraph 12; (d) price setting mechanism as proposed in paragraph 15; (e) resale restrictions Members to decide on which option (as detailed in paragraphs 19 to 28) to adopt for GSH;

16 (f) (g) premium arrangements as proposed in paragraph 30; and declassification of this paper. Miss Michelle LAU for Secretary, Subsidised Housing Committee Tel. No.: Fax No.: File Ref. : HD CR 4-4/SP/10-25/0-1 (Strategy Division) Date of Issue : 29 April 2015

17 Annex Proposed operational details of Option 3 HA to nominate buyers in the first five years from the first assignment The following are the proposed procedures in respect of an offer of buyback from a GSH flat owner under Option 3 (c) (d) (e) (f) if a GSH flat owner offers to sell his GSH flat to HA, HA will inform the owner to identify through his own means a buyer who is a GF applicant; within the first two years from the first assignment, the selling price will be the original price of the flat sold by HA. Between the third to the fifth year, the price will be the prevailing market price of the flat assessed by the Director of Housing less the original discount. The owner will have to pay a fee to HD for the assessment of the prevailing market price for this purpose; upon the GSH flat owner identifying a buyer who is interested to purchase the GSH flat, the interested buyer shall apply to HA for nomination. HA will verify the GF status of the buyer. HD will explore the feasibility of requiring a declaration to be signed by the GSH flat owner and a declaration to be signed by the buyer that there is no consideration involved other than the price stipulated by HA. Under section 26(2) of the Housing Ordinance, it is an offence for any person who makes any false statement to HA in respect of any matter relating to purchase of land in respect of which HA is authorized to nominate purchasers; upon verification by HA of the GF status of the buyer, a notice of nomination will be given to the GSH flat owner and the GF buyer. The GSH flat owner and the GF buyer are required to enter into assignment within a stipulated period of time; if no application for nomination is received by HA within a specified period, say six months after the date of offer from the GSH flat owner, or if after nomination is made no assignment is executed within the stipulated period for whatever reasons, the GSH flat owner can sell the flat in the open market upon payment of premium; and appropriate information on the resale arrangement will be provided in the sales documents.