The Carrie Lam administration has plans to put forward a “Starter Homes” scheme in Hong Kong, with details to be announced during her inaugural Policy Address in October. Although this scheme may help “legitimate” first-time homebuyers step on the housing ladder, as prices balloon “Up, up and away”, there are some issues that may need to be resolved first.

Issue 1: Definition of a “first-time homebuyer”

Data on residential stamp duties suggest that first-time homebuyers have recently accounted for about 90 per cent of all private home sales. In Hong Kong, the term “first-time homebuyer” encompasses any prospective buyer without a home registered under their name. This includes the city’s wealthiest individuals, who often own properties using special purpose vehicles.

For the “Starter Homes” scheme, we would like to think that it should benefit “first-time homebuyers” with a genuine need for housing—and therefore, a clear definition of the eligible target group is needed.

Issue 2: Balancing affordability against quality of living space

Let’s sketch out the profile of newlyweds, a group likely to be representative of a typical first-time buyer.

The average marrying age in Hong Kong is about 30 years. Using the median wage of individuals aged between 25-34, this translates into a combined monthly income of about HKD 33,600 (USD 4,310). Assuming seven-years of savings (post-tertiary education) and an LTV ratio of 80 per cent (60 per cent from a bank, and 20 per cent from the mortgage insurance programme), newlyweds can afford homes priced at about HKD 4 million (USD 0.5 million) – which, using our JLL average mass residential price, would equate to a unit no bigger than 300 sq ft of saleable area.

In view of this, the scheme should aim to balance the affordability of first-time buyers, including add-on financing incentives, against more spacious living environments.

Examples of flats priced around HKD 4 million (USD 0.5 million)
being sold in the primary market (August 2017)Source: EPRC

Issue 3: Setting income brackets and price mechanisms

The government is reportedly looking to set a household income cap as high as HKD 72,000 (USD 9,230) per month for the scheme. This would mean that over 80 per cent of all households would be eligible. Should this be true, the scheme could potentially crowd out eligible lower income families, including our newlyweds example.

The government also needs to find a mechanism to control the pricing of flats, both purchase and resale. The implementation of resale restrictions, though, could greatly reduce the appeal of such flats.

Issue 4: Who is going to build the flats?

The scheme will likely involve synergies of a public and private partnership. Yet, questions remain around how developers will be incentivised to participate in a price-controlled setting. Will the government need to provide sweeteners, such as additional development density, to boost the income potential of projects?

It’s still early days to judge whether the scheme could ease the housing dilemma. Depending on how requirements are set, cubicle-sized homes in the primary market could face new competition against the delivery of “Starter Homes”, assuming an affordability overlap. However, since any supply in the market takes time to realise, it looks like the average first-time homebuyer may still struggle in the meantime to find a home as the balloon rises higher and higher.

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