Finance Committee (Papers) 17 Jul 98

FCR(98-99)19

For discussion
on 17 July 1998

ITEM FOR FINANCE COMMITTEE

LOAN FUND
HEAD 251 - HOUSING
Hong Kong Housing Society
Subhead 116 Home Starter Loan Scheme

PROBLEM

We need to modify the drawdown schedule of the Home Starter Loan Scheme (HSLS) in order to help more eligible families acquire their own residential properties this year.

PROPOSAL

2. We propose to increase the drawdown under the HSLS for the current financial year from $3.6 billion to $7.2 billion.

JUSTIFICATION

3. The prices of small and medium sized residential properties have fallen by about 40% between October 1997 and June 1998, and by about 25% since the HSLS was approved in January 1998. In addition to the lower prices, an estimated 25 000 new residential properties are due for completion in 1998, 36% higher than that in 1997, thus increasing the supply in the market. Many of these are small or medium sized flats in the New Territories.

4. Under the circumstances, more families in the low and middle income brackets will now be able to afford to purchase their first homes if they have the means to meet the initial down-payment. The Hong Kong Housing Society (HKHS), the administrator of the HSLS, has received over 12 000 applications for HSLS loans since the launch of the scheme in April 1998.

5. When Members approved the commitment for the HSLS in January this year, we informed Members that the HKHS would draw from the Loan Fund the money for operating the HSLS in five annual instalments of $3.6 billion each from 1998-99. This will benefit 6 000 households on the basis that each will be granted the maximum loan of $600,000. Under current arrangements, no more applications can be entertained in the first year once the annual drawdown of
$3.6 billion has been exhausted. Unsuccessful applicants will have to re-apply again in next year's exercise. In view of the overwhelming response from applicants and to allow potential first-time home-buyers to take advantage of the current market conditions, we propose to increase the annual drawdown for the first year from $3.6 billion to $7.2 billion. This will increase the maximum number of loans to eligible families in this financial year to 12 000. The eligibility criteria and administrative arrangements for the scheme will remain unchanged.

6. Subject to Members' approval of the proposal, we expect the total commitment of $18 billion approved by Members for the HSLS to be drawn down over four years instead of five. We will monitor the demand for, and the effectiveness of, the scheme in the light of actual applications received and approved each year.

FINANCIAL IMPLICATIONS

7. The proposal to increase the drawdown in the current financial year will only affect the cashflow of the Loan Fund. There is no additional funding requirement as the total commitment under the HSLS shall remain at $18 billion. Interest forgone for the whole scheme as a result of concessionary interest rates is estimated at $6.32 billion^Note. Government will reimburse HKHS any reasonable expenses it has incurred in implementing the scheme. There are no recurrent financial implications for the Government.

BACKGROUND INFORMATION

8. On 9 January 1998, this Committee approved a total commitment of $18 billion under the Loan Fund for the Hong Kong Housing Society to operate a Home Starter Loan Scheme to be drawndown by five annual instalments of $3.6 billion each from 1998-99. A copy of FCR(97-98)86 on setting up the scheme is at the Enclosure. The scheme provides low interest loans of up to $600,000 or 30% of the purchase price of property, whichever is lower, for households earning no more than $70,000 a month and which have not owned any residential property in the past ten years.

9. On 22 June 1998, the Chief Executive announced a package of special relief measures to address the current economic adjustment. One of the measures included in the package is to double the number of beneficiaries under the HSLS this year by increasing the first annual drawdown from $3.6 billion to $7.2 billion subject to Finance Committee's approval.

Housing Bureau
July 1998

Enclosure to FCR(98-99)19

For discussion
FCR(97-98)86
on 9 January 1998

ITEM FOR FINANCE COMMITTEE

LOAN FUND
HEAD 251 - HOUSING
Hong Kong Housing Society
New Subhead "Home Starter Loan Scheme"

PROBLEM

We need to provide the Hong Kong Housing Society (HKHS) with sufficient funds to enable it to administer a new loan scheme which aims to assist eligible families in acquiring their own residential properties in Hong Kong for the first time.

PROPOSAL

2. We propose to provide a sum of $18 billion over the next five years from the Loan Fund to the HKHS to establish and operate a "Home Starter Loan Scheme" (HSLS).

JUSTIFICATION

Home Starter Loan Scheme

3. As pledged by the Chief Executive in his Policy Address on 8 October 1997, we propose to introduce an HSLS to provide financial assistance targeted at first-time home buyers. The HKHS will act as the implementation agent for Government in providing beneficiaries with one-off, up-front loans towards meeting down-payments and related home purchase expenses. The HSLS will provide about 6 000 loans each year to eligible families. The key features of the scheme are as follows -

income of applicants - there will be no minimum income requirement. The maximum income limit for households will be set at $70,000 a month;
assets of applicants - a net aggregate assets limit of $1.2 million per household will be set to ensure that the scheme benefits those who have a genuine need for assistance;
property ownership restriction - as the scheme aims at providing assistance to first-time home buyers, we will impose a condition that applicants must not currently own any residential property in Hong Kong, nor have owned one during the last ten years. This should be a sufficiently tight criterion to ensure that the scheme will benefit first-time home buyers;
loan amount - the maximum loan amount will be $600,000, or up to 30% of the purchase price of the property, whichever is lower;
permitted value and age of property - to allow greater flexibility to applicants, there will be no limit on the value of property to be purchased. The maximum permitted age of the property will be 30 years;
interest rate - there will be two interest rates, depending on the incomes of beneficiaries at the time of application. This will take into account the better financial position of those with higher incomes. For households with incomes not exceeding $30,000 per month, the annual interest rate will be set at 2%. For households with incomes between $30,001 and $70,000 per month, the annual interest rate will be set at 3.5%. Interest will accrue from the day of drawdown;
loan repayment - repayment will start in the fourth year after drawdown of the loan, by 120 equal monthly instalments; and
resale restrictions - we will adopt the same resale conditions as those applying to the Sandwich Class Housing Loan Scheme (SCHLS). That is to say, in addition to repaying the loan and any interest accrued thereon in full on disposal of the property, applicants who sell their property within three years of purchase will have to pay the HKHS the gain in property value, while applicants who sell after this three-year period will only have to pay an administrative charge.

4. Government will have the right to revise from time to time the details of the scheme in the light of changing circumstances.

Accounting management

5. The HKHS will draw from the Loan Fund the money for operating the HSLS in five annual instalments of $3.6 billion each from 1998-99. This is calculated on the basis of 6 000 loans a year at $600,000 per loan.

6. The HKHS will repay Government within two months after the end of each financial year, all sums received through repayment or recovery of loans during that financial year, less any reasonable expenses which it has incurred in implementing the scheme. Expenses will be mainly staff costs for processing the applications, legal and professional fees and general overheads.

7. The HKHS will set up a fund separate from its other accounts to cater for the receipts and payments under the HSLS. The Society will use money from the fund for the HSLS only and may invest monies which are not required for use by the HSLS for the time being in bank deposits, commercial papers or other low-risk investment instruments according to guidelines approved by Government. All investment income will accrue to the HSLS.

8. The HKHS will furnish Government with quarterly reports on, inter alia, the financial position of the fund, the number of successful applicants, the amounts of loan drawn, principal and interest repaid, investment income, performance on investment of surplus and such other information as required by Government. An independent auditor will conduct an annual audit on the accounts of the fund. Government may also require the HKHS to return any unspent balance in the fund after giving a reasonable notice.

9. We will require the HKHS to enter into an agreement with Government which sets out the financial arrangements for and the implementation details of the HSLS. The HKHS will be responsible for inviting and processing applications according to the eligibility criteria set out in Enclosure 1, or as modified by Government from time to time.

Impact on the property market

10. The scheme will not have a significant impact on the property market. Assuming an annual production rate in the private sector of 35 000 flats, a maximum of 17% of these flats could in theory be taken up by successful applicants under the scheme. However, we expect that many beneficiaries will purchase in the secondary market, especially since the limit on the age of the flats which can be purchased under the scheme is relaxed to 30 years.

FINANCIAL IMPLICATIONS

11. We propose to create a new subhead "Home Starter Loan Scheme" under Head 251 Housing with a commitment of $18 billion. The proposed loan is a one-off commitment. There are no recurrent implications.

BACKGROUND INFORMATION

Home ownership

12. Home ownership is important to both the community and the individuals. It helps foster social stability and a sense of belonging to the community. It also helps families provide for their own future financial security. The policy of promoting home ownership as set out in the Long Term Housing Strategy Review consultative document released in January 1997 received strong support from the community.

13. The current home ownership rate is 52%. The Chief Executive pledged in his speech on 1 July 1997 that Hong Kong would aim to achieve a home ownership rate of 70% in ten years. In order to achieve this target, we intend to provide increased opportunities for low and middle-income families to fulfil their aspirations to home ownership. The measures we shall take include expanding existing subsidised home ownership schemes ¹, providing more loans for home purchase, implementing a scheme to sell public rental flats to tenants, and implementing a "buy or rent" scheme under which we offer public rental housing waiting list applicants the opportunity to buy flats when their turn comes for flat allocation. The latter measures will mainly benefit those in public sector housing, and most will originally be public housing tenants or prospective tenants. We must also take steps to meet the aspirations to home ownership of those who wish to buy in the private sector but lack the means to do so : these include not only low income families but also families in the middle-income group, and many of these families would be first-time home buyers.

14. At present, Government operates two loan schemes designed to help low and middle-income families buy flats in the private sector. The Home Purchase Loan Scheme (HPLS), operated by the Housing Authority, was set up in 1988 to help low-income families. The SCHLS operated by the HKHS, was introduced in 1993 to help middle-income households. These schemes have persistently been oversubscribed ², demonstrating the extent of pent-up demand. Simply expanding these schemes, however, will not provide an adequate solution. This is because -

the HPLS is targeted at low-income families with incomes below $30,000 a month, and mainly benefits public housing tenants (Green Form applicants). About 70% of loans approved over the last two years have gone to Green Form applicants, and the Hong Kong Housing Authority has not accepted new White Form (private sector) applicants since November 1996;
the SCHLS is targeted at families with monthly incomes in the $30,001 to $60,000 range ³. It was originally intended to be an interim scheme, pending the construction of an adequate number of flats under the Sandwich Class Housing Main Scheme; and
neither of these schemes is specifically targeted at first-time home buyers.

15. It is against this background that the Chief Executive announced in his Policy Address on 8 October 1997 that a new "Home Starter Loan Scheme" will be launched, targeted at first-time home buyers.

Hong Kong Housing Society

16. The HKHS was established in 1948 and incorporated under the Hong Kong Housing Society Ordinance in 1951. The Society plays a major role in supplementing the housing development programmes of the Hong Kong Housing Authority, particularly in providing adequate and affordable housing to selected target groups.

17. Government does not directly subsidise HKHS but provides both land on concessionary terms (subject to conditions on use) and low interest loans to help the Society meet specific housing objective.

18. A table listing key features of the HSLS, as compared to the two existing schemes, i.e. the HPLS and the SCHLS, is at Enclosure 2.

Housing Bureau

December 1997

Enclosure 1 to FCR(97-98)86

Eligibility Criteria for the Home Starter Loan Scheme (HSLS)

Households will qualify for a loan under the HSLS if -

the applicant has lived in Hong Kong for at least seven years and is a permanent resident of the Hong Kong Special Administrative Region;
there are at least two family members, including the applicant, in each application;
the aggregate net assets of all the persons included in an application do not exceed $1.2 million;
total monthly income of all the persons included in an application does not exceed $70,000;
none of the persons included in the application has owned any residential property in Hong Kong within the previous ten years; and
none of the persons included in the application are authorised tenants/occupants of public rental units, nor have they enjoyed other publicly funded housing loan or home ownership schemes (such as the HOS, HPLS, SCHS and FFSS ⁴ ).

Enclosure 2 to FCR(97-98)86

Comparison of the Key Features of Different Loan Schemes

Key features	Home Purchase Loan Scheme	Sandwich Class Housing Loan Scheme	Home Starter Loan Scheme

Eligibility	Green Form - no income limit imposed; no private property; lived in Hong Kong for at least seven years; White Form - income not exceeding $30,000 a month; no private property; Applicant and one family member have lived in Hong Kong for at least seven years.	Monthly household income between $30,001 and $60,000; Applicants must not be authorised tenants/occupants of public rental units, nor have enjoyed any Government funded home ownership assistance; Disposable assets not exceeding $1.2 million; Not owned domestic property in Hong Kong for the past five years; Applicant must have resided in Hong Kong for at least seven years.	Monthly household income not exceeding $70,000; Applicants must not be authorised tenants/occupants of public rental units, nor have enjoyed any Government funded home ownership assistance; Disposable assets not exceeding $1.2 million; Not owned domestic property in Hong Kong for the past ten years; Applicant must have resided in Hong Kong for at least seven years.

Key features	Home Purchase Loan Scheme	Sandwich Class Housing Loan Scheme	Home Starter Loan Scheme

Number of family members	Green Form - at least two directly related family members; White Form - at least two family members (one has to be spouse, child, or grand child).	At least two directly related members. Priorities are : a) applicant + spouse and/or child b) applicant + parent(s) c) applicant + sibling(s)	At least two directly related members, such as : a) applicant + spouse and/or child b) applicant + parent(s) c) applicant + sibling(s)

Amount of loans	Green Form - loan of $600,000 or monthly subsidy of $5,100 for four years; White Form - loan of $400,000 or monthly subsidy of $3,400 for four years.	Maximum loan of $550,000 or 25% of flat price, whichever is lower.	Maximum loan of $600,000 or 30% of flat price, whichever is lower.

Repayment	Repayable over the same period as the bank mortgage on the property, up to a maximum of 20 years.	Repayable in ten years starting from the fourth year after the loan is made.	Repayable in ten years starting from the fourth year after the loan is made.

Conditions of purchase	Age of flat less than 25 years.	Price of flat less than $3.3 million; Age of flat less than 20 years.	No restriction on price of flat; Age of flat less than 30 years.

Key features	Home Purchase Loan Scheme	Sandwich Class Housing Loan Scheme	Home Starter Loan Scheme

Interest	Nil.	2%.	2% for those with income not more than $30,000 per month, 3.5% for those with income between $30,001 and $70,000 per month.

Resale restrictions	Nil.	First three years, repay all outstanding loan + price appreciation of flat to Hong Kong Housing Society (HKHS); After three years, repay all outstanding loan + $15,000 fees.	First three years, repay all outstanding loan + price appreciation of flat to HKHS; After three years, repay all outstanding loan + an administrative fees.

Annual Quota	Depending on the Hong Kong Housing Authority's Development Fund, the current quota is - 1996-1997 1997-1998 Green 4 000 3 000 White 3 000 1 500 7 000 4 500	About 1 000 per year.	About 6 000 per year.
Latest subscription rate	Green 3.3:1 White 2.5:1	4:1	Not applicable.

Note Based on the assumption that the weighted average interest rate for all the loans is 3% and the no-gain-no-loss rate for Government remains at 6.262% throughout the loan period.

1.These are : the Home Ownership Scheme and Private Sector Participation Scheme operated by the Hong Kong Housing Authority; and the Flat-for-Sale Scheme and Sandwich Class Housing Loan Scheme operated by the HKHS.

2.Over-subscription by an average of three times in respect of the HPLS and four times in respect of the SCHLS in the last two years.

3.Currently about 65 600 families in this group do not own domestic private property.

4.HOS and HPLS: Home Ownership Scheme and Home Purchase Loan Scheme operated by the Hong Kong Housing Authority; SCHS and FFSS: Sandwich Class Housing Schemes and Flat-for-Sale Scheme operated by the Hong Kong Housing Society.