Information paper for the
Provisional Legislative Council
Panel on Housing
Housing (Amendment) Ordinance 1997
Purpose
This paper elaborates on the basic assumptions and methodology used by the Housing Authority (HA) in calculating the financial implications arising from the Housing (Amendment) Ordinance 1997 (the Amendment Ordinance).
Background
2.At the meeting of the Provisional Legislative Council Panel on Housing on 29 September 1997, Members discussed the paper on " Housing (Amendment) Ordinance " which highlighted the operational and financial difficulties and legal ambiguities created by the Amendment Ordinance. A summary of these problems is at Annex A. Specifically, members noted that a change from the current twoyear rent review cycle to a threeyear rent review cycle would result in a loss of $5.2 billion in rental income during the period from 199798 to 200506. In this connection, Members requested information on the basis on which this estimated loss of $5.2 billion has been arrived at, and the difference envisaged if other sources of income such as rental receivable from commercial premises and the proposed scheme of the sale of public rental flats to existing tenants have been taken into account.
3.The information on the basis on which the estimated loss of $5.2 billion is calculated and the projected income generated from the commercial premises and the proposed scheme of the sale of public rental flats to existing tenants will be set out in paragraphs 5 to 9 below.
4.Apart from providing for a triennial rent review, the Amendment Ordinance also provides that rent increase by HA shall not cause the overall median rent to income ratio (MRIR) to exceed 10%. In order to give a full picture of the financial implications arising from the Amendment Ordinance, we will also give an account of the financial impact resulting from the imposition of the 10% MRIR ceiling.
Assumptions and methodology
5.Rents for public rental housing are normally reviewed every two years to keep in line with the general affordability of tenants while reflecting rising operating costs. The change to a triennial cycle will result in reduced income to HA caused by a lower frequency of rent increases : two instead of three times in every sixyear period.
6.In any forecasting model, it is inevitable that assumptions have to be used to simulate changing circumstances over time. The key parameters underlying the assessment of financial implications arising from the change to a triennial rent review cycle are drawn from those adopted all along by HA in its financial planning. They are set out below 
 rent increase to be effected every three years based on the last rent determination date;
 rent setting for new public housing estates will continue to be based on the general affordability of tenants and other relevant factors such as estate value, management and maintenance costs, inflation rate etc.; taking into account this principle, rent increase for each triennial cycle is estimated to be 28.2% based on an annual rate of 8.64% projected from the average historical rent adjustment;
 rate of rent increase is applicable to all public housing estates, except for Cottage Areas and Temporary Housing Areas; and
 expenditure of HA is in line with internal forecasts produced in the last annual budget exercise.
7.The financial impact on HA is affected by the mix of flats in each batch of estates as well as the timing of their last rent review exercise before the new threeyear cycle comes into effect. Three different scenarios together with supporting details are provided at
Annex B. For estates whose rents were adjusted two years ago, the aggregated reduction in income constitutes 60.9% of 199697 rental income during the period from 199798 to 200506. Over the same period, the aggregated reduction in incomes for estates whose rents were just adjusted and estates whose rents were adjusted one year ago represent 59.4% and 42.7% of 199697 rental income respectively. Taking into account these three scenarios, a change to a triennial rent review cycle will result in a loss of rental income of $5.2 billion (
Annex C) during the period from 199798 to 200506.
8.In addition, there will be an additional loss of rental income of $1.7 billion caused by the imposition of the 10% MRIR ceiling (Annex D) during the period from 199798 to 200506. Altogether, implementation of the Amendment Ordinance will result in a loss of $6.9 billion to HA. This will lead to a forecast deficit of $12.6 billion in the Domestic Operating Account over the same period. An annual financial projection and the cumulative impact are at Annexes E and F.
Commercial premises and the scheme of sale of public rental flats to existing tenants
9.The rental income generated from commercial premises is kept under a separate account from that of domestic properties given its nature as an independent stream of core business. Although there will be a forecast surplus of $16.4 billion in this account for the period from 199798 to 200506, after excluding operating expenditure and dividends payable to Government, this should be balanced against the need to sustain a massive housing construction programme. In this connection, the Chief Executive has pledged to produce not less than 85,000 flats, including about 50,000 public housing flats a year from 1999 onwards. As regards the scheme of sale of public rental flats to existing tenants, we have yet to finalise the operational details. Therefore, it is not possible to assess accurately the financial implications for HA at this stage.
Conclusion
10.Public housing subsidy should only be given to those in genuine need. Therefore rents for public housing are determined on the basis of tenants' ability to pay rather than the financial position of HA. At present, public housing rents are already set at reasonable and affordable levels. Further subsidy arising from the change to a triennial rent review cycle is not justified.
Housing Department
November 1997
Problems arising from the implementation of the Amendment Ordinance
Operational difficulties
1.It will prevent the HA from varying rents for a fixed period (three years) since the last rent review exercise, and so hamper flexibility to vary rents for individual public rental households according to their financial circumstances. This will make it impossible to implement effectively the rental policies applying to betteroff tenants1, and tenants in temporary financial difficulties paying reduced rents under the Rent Assistance Scheme2.
2.It will require the incomes of households residing in cottage areas and interim housing to be included in the calculation of the MRIR. This falls outside the original intention of the Amendment Ordinance, which is to ensure public housing rents are affordable to families living in normal public rental housing.
3.It may require a legally definitive determination of the overall MRIR to be made. The Amendment Ordinance could oblige the HA to conduct comprehensive surveys of incomes of all households living in public rental estates at least twice each year and oblige tenants to provide accurate details of their incomes, as opposed to the HA's present practice of determining MRIR by means of sample surveys. This will arouse resentment among tenants (and incur administrative costs as high as $32 million per survey).
Financial implications
1.The statutory 10% MRIR ceiling will lead to a loss of $1.7 billion by 200506.
2.A change from the current twoyear rent review cycle to a threeyear rent review cycle will result in a loss of revenue in the region of $5.2 billion by 200506.
Legal ambiguities
1.The financial impact of the Amendment Ordinance is inconsistent with the spirit of section 4(4) of the Housing Ordinance, which requires the HA to direct its policy to ensure that the revenue from its estates is sufficient to meet recurrent expenditure.
2.The failure of the Amendment Ordinance to specify clearly how the determination of MRIR is to be made could, in addition to the operational difficulties described above, expose the HA to legal challenges which will adversely affect its normal operations.
Annex B
(Pg. 2 of 6)
Scenario 1. Rent Just Adjusted
1997/1998 & 1998/1999
For estates with their rents just adjusted in 1996/97, their next rent review time will be two years (in 1999/2000) and three years (in 2000/2001) later for the old scheme (rent increases two years at 18%) and new scheme (rent increases three years at 28.2%) respectively. In other words, there will be no rent increment in 1997/1998 & 1998/1999 for both schemes ,and therefore there will be no difference in the rent level for these years.
1999/2000
The rent will increase at 18% this year under the old scheme but not for the new scheme. If the rent level in 1996/97 is 100%, the new rent level this year would be 118% of 1996/97 level for the old scheme but it would remain 100% of 1996/97 level for the new scheme. As a result, HA would lose 18% (i.e. 100% for new scheme  118% for old scheme) of 1996/97 rental income ( as shown by the area in yellow).
2000/2001
Under the old scheme, the rent level would be 118% of 1996/97 rent level since the rent has been reviewed in 1999/2000 and the next review year will be 2001/2002.Under the new scheme, the rent will be adjusted from 100% to 128.2% of 1996/97 rent level this year. Hence for this year, HA would gain 10.2% (i.e. 128.2%  118%) from the new scheme as compared with that of old scheme (as shown by the area in green).
2001/2002 & 2002/2003
Under the old scheme, the rent would be adjusted this year by 18% to 139.2% of 1996/97 rent level (i.e. by 18% increment of 118% in 1999/2000). However, the rent under the new scheme for these years would be the same as that in 2000/01 at 128.2% of 1996/97 rent level. Therefore, HA would lose 11% (i.e. 128.2%  139.2%) of 1996/97 rental income for each of these years.
2003/2004 & 2004/2005
There will be rent review for both schemes in 2003/2004. Under the old scheme, the rent in 2003/2004 will be 164.3% of 1996/97 rent level (i.e. by 18% increment of 139.2% in 2001/2002) whereas the rent under the new scheme will also be 164.3% of 1996/97 rent level (i.e. by 28.2% increment of 128.2% in 2000/01). The rent will not be adjusted under both schemes in 2004/2005. Therefore, there will be no difference in the rent level under both schemes for these years.
2005/2006
Since the rent will increase to 193.9% (i.e. by 18% increment of 164.3% in 2003/2004) of 1996/97 rent level under the old scheme but not for the new scheme (i.e. rent still at 164.3% of 1996/97 rent level this year for the new scheme). As a result, HA would lose 29.6% (i.e. 164.3%  193.9%) of 1996/97 rental income.
Summary
The loss of rental income in 9 years from 1997/1998 would be 59.4% of 1996/1997 rental income.
Scenario 2. Rent Adjusted One Year Ago
1997/1998
For estates with their rents adjusted in 1995/96, their next rent review time will be a year (in 1998/1999) and two years (in 1999/2000) later for the old scheme (rent increases two years at 18%) and new scheme (rent increases three years at 28.2%) respectively. In other words, there will be no rent increment in 1997/1998 for both schemes ,and therefore there will be no difference in the rent level this year.
1998/1999
The rent will increase at 18% this year under the old scheme but not for the new scheme. If the rent level in 1996/97 is 100%, the new rent level this year would be 118% of 1996/97 level for the old scheme but it would remain 100% of 1996/97 level for the new scheme. As a result, HA would lose 18% (i.e. 100% for the new scheme  118% for the old scheme) of 1996/97 rental income ( as shown by the area in yellow).
1999/2000
Under the old scheme, the rent level would still be 118% of 1996/97 rent level since the rent has been reviewed in 1998/1999 and the next review time will be 2000/2001. Under the new scheme, the rent will be adjusted from 100% to 128.2% of 1996/97 rent level this year. Hence for this year, HA would gain 10.2% (i.e. 128.2%  118%) from the new scheme as compared with that of old scheme (as shown by the area in green).
2000/2001 & 2001/2002
Under the old scheme, the rent would be adjusted this year by 18% to 139.2% of 1996/97 rent level (i.e. by 18% increment of 118% in 1998/1999). However, the rent under the new scheme for these years would be the same as that in 1999/2000 at 128.2% of 1996/97 rent level. Therefore, HA would lose 11% (i.e. 128.2%  139.2%) of 1996/97 rental income for each of these years.
2002/2003 & 2003/2004
There will be rent review for both schemes in 2002/2003. Under the old scheme, the rent in 2002/2003 will be 164.3% of 1996/97 rent level (i.e. by 18% increment of 139.2% in 2000/2001) whereas the rent under the new scheme will also be 164.3% of 1996/97 rent level (i.e. by 28.2% increment of 128.2% in 1999/2000). The rent will not be adjusted under both schemes in 2003/2004. Therefore, there will be no difference in the rent level under both schemes for these years.
2004/2005
Since the rent will increase to 193.9% (i.e. by 18% increment of 164.3% in 2002/2003) of 1996/97 rent level under the old scheme but not for the new scheme (i.e. rent still at 164.3% of 1996/97 rent level this year for the new scheme). As a result, HA would lose 29.6% (i.e. 164.3%  193.9%) of 1996/97 rental income.
2005/2006
The rent level for old scheme in 2005/2006 will still be 193.9% as rent has been reviewed in 2004/2005. However, the rent level for the new scheme will be 210.6% of 1996/97 rent level (i.e. by 28.2% increment of 164.3% in 2002/2003). Therefore, HA will gain 16.7% (210.6%  193.9%) of 1996/97 rental income.
Summary
The loss of rental income in 9 years from 1997/1998 would be 42.7% of 1996/1997 rental income.
Scenario 3. Rent Adjusted Two Years Ago
1997/1998
The rent will increase at 18% this year under the old scheme but not for the new scheme. If the rent level in 1996/97 is 100%, the new rent level this year would be 118% of 1996/97 level for the old scheme but it would remain 100% of 1996/97 level for the new scheme. As a result, HA would lose 18% (i.e. 100% for the new scheme  118% for the old scheme) of 1996/97 rental income ( as shown by the area in yellow).
1998/1999
Under the old scheme, the rent level would still be 118% of 1996/97 rent level since the rent has been reviewed in 1997/1998 and the next review time will be 1999/2000. Under the new scheme, the rent will be adjusted from 100% to 128.2% of 1996/97 rent level this year. Hence for this year, HA would gain 10.2% (i.e. 128.2%  118%) from the new scheme as compared with that of old scheme (as shown by the area in green).
1999/2000 & 2000/2001
Under the old scheme, the rent would be adjusted this year by 18% to 139.2% of 1996/97 rent level (i.e. by 18% increment of 118% in 1997/1998). However, the rent under the new scheme for these years would be the same as that in 1998/1999 at 128.2% of 1996/97 rent level. Therefore, HA would lose 11% (128.2%  139.2%) of 1996/97 rental income for each of these years.
2001/2002 & 2002/2003
There will be rent review for both schemes in 2001/2002. Under the old scheme, the rent in 2001/2002 will be 164.3% of 1996/97 rent level (i.e. by 18% increment of 139.2% in 1999/2000) whereas the rent under the new scheme will also be 164.3% of 1996/97 rent level (i.e. by 28.2% increment of 128.2% in 1998/1999). The rent will not be adjusted under both schemes in 2002/2003. Therefore, there will be no difference in the rent level under both schemes for these years.
2003/2004
Since the rent will increase to 193.9% (i.e. by 18% increment of 164.3% in 2001/2002) of 1996/97 rent level under the old scheme but not for the new scheme (i.e. rent still at 164.3% of 1996/97 rent level this year for the new scheme). As a result, HA would lose 29.6% (i.e. 164.3%  193.9%) of 1996/97 rental income.
2004/2005
The rent level for old scheme in 2004/2005 will still be 193.9% as rent has been reviewed in 2003/2004. However, the rent level for the new scheme will be 210.6% of 1996/97 rent level (i.e. by 28.2% increment of 164.3% in 2001/2002). Therefore, HA will gain 16.7% (210.6%  193.9%) of 1996/97 rental income.
2005/2006
The rent will increase to 228.8% under the old scheme (i.e. by 18% increment of 193.9% in 2003/2004) but there will be no rent increment for the new scheme (i.e. still at 210.6% of 1996/97 rent level), and therefore HA would lose 18.2% (210.6%  228.8%) of 1996/97 rental income.
Summary
The loss of rental income in 9 years from 1997/1998 would be 60.9% of 1996/1997 rental income.
Annex C
Financial Impact Due To A Change From Biennial
To Triennial Rent Review Cycle
 1997/1998  1998/1999  1999/2000  2000/2001  2001/2002  2002/2003
 2003/2004  2004/2005  2005/2006  Total 


Rental income of Group A & B estates in 1996/97 at $8.8 Bn

% Loss of rental income on average of 3 scenarios as compared to 1996/97^{Note}  6  2.6  6.3
 3.9  7.4  3.6  9.9  4.3  10.3  54.3

 $Bn  $Bn  $Bn  $Bn  $Bn
 $Bn  $Bn
 $Bn  $Bn  $Bn

Loss of rental income  0.5  0.2
 0.6  0.3  0.7  0.3  0.9  0.4  0.9  4.8

Adjustment mainly due to addition/demolition of housing stock (in Bn)
 (0.1)  0.3  (0.4)  0.3  0.1
   (0.1)  0.6  (0.3)  0.4

Adjusted loss of rental income
 0.4  0.5  0.2  0.6  0.8  0.3  0.8  1.0  0.6  5.2

Note : See Annex A
Annex D
(Pg. 2 of 2)
Explanation of decrease in rental income from 2001/02 to 2005/06 due to 10% MRIR capping at 2000/01
2001/02
Reduction in rental income is due to reduction in rate of rent increase (i.e. 1% as shown in Table A) as a result of the 10% MRIR capping at 2000/01. The reduction in rental income in 2001/02 can be estimated by multiplying this drop of 1% with the total income of $12.8Bn for 1999/00 and the ratio of no. of months that reduction effected during the review year. As the rent is reviewed biennially, the rental income at 2 years before is used to estimate the effect of reduction in 2001/02.
2002/03
Reduction in rental income is due to the cumulative reduction in rate of rent increase (i.e. 2% as shown in Table A) and can be estimated by multiplying this drop of 2% with the total income of $14.6Bn for 2000/01 and the ratio of no. of months that reduction effected during the review year.
2003/04
Reduction in rental income is due to the cumulative reduction in rate of rent increase (i.e. 3% as shown in Table A) and can be estimated by multiplying this drop of 3% with the total income of $16.5Bn for 2001/02 and the ratio of no. of months that reduction effected during the review year.
2004/05
Reduction in rental income is due to the cumulative reduction in rate of rent increase (i.e. 4.1% as shown in Table A) and can be estimated by multiplying this drop of 4.1% with the total income of $18.5Bn for 2002/03 and the ratio of no. of months that reduction effected during the review year.
2005/06
Reduction in rental income is due to the cumulative reduction in rate of rent increase (i.e. 5.1% as shown in Table A) and can be estimated by multiplying this drop of 5.1% with the total income of $20.9Bn for 2003/04 and the ratio of no. of months that reduction effected during the review year.