THE UNIVERSITY OF HONG KONG

Housing Policy for the Sandwich Class - A study submitted to the University of Hong Kong in partial fulfillment of the requirements for the degree of MPA

The University of Hong Kong Hong Kong January 1998

LEUNG Man-kit

CONTENTS

Title Page .............................................................................................................. i Contents ............................................................................................................. ii

Chapter1

OVERVIEW .................................................................................1 Backgrounds..........................................................................1 Objectives of Study ...............................................................2 Arguments .............................................................................2 Methodology ..........................................................................2 Theoretical Framework .........................................................3

Chapter 2

HOUSING NEEDS OF SANDWICH CLASS ...............................9 Definition of the SC ...............................................................9 Characteristics of the SC......................................................9 Housing Needs of the SC....................................................12

Chapter 3

ANALYSIS OF HOUSING POLICY ON SANDWICH CLASS ......................................................................................16 Institutions adopted by the Government...........................16 Evaluation of the Institutions .............................................18

Chapter 4

CONCLUDING REMARKS ......................................................21

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Chapter 1 Overview

Backgrounds

For the past decades, the Hong Kong Government has introduced a series of housing policies to provide housing to the citizens. However, those policies were mainly directed towards the low and lower-middle income families. For example, the public housing programme aims at providing self-contained rental homes for people who are comparatively poorer; whilst the programmes promoting home ownership like Home Ownership Scheme, Private Sector Participation Scheme and Home Purchase Loan Scheme are targeted at the lower-middle income group.

There exists a group of people who has been neglected by the Government the middle income group, which is often known as Sandwich Class(the SC). Recently, the housing difficulties of the SC have become more obvious. With the improvement in their living standard, the SC wants to own their flats. However, with the escalating price and the speculation in the private market, such a dream is impossible, and at the same time, they fail to be included in the already existed housing policies. The Government has introduced many programs since 1993 to assist them in purchasing their own flats.

Objectives of Study

The present study aims at studying these programs using the Rational Choice approach of the Institutional Analysis. The content of the study is as follows: (a) define the meaning of Sandwich Class, and explore the housing needs of the SC, (b) (c) describe the institutions of the Government on the housing needs of the SC, analyse the impact of these institutions on the behaviours of the SC and hence their aggregated results using the Institutional Analysis.

Arguments

This study argues that the Government identified incorrectly the housing needs of the SC and hence resulted in inappropriate institutions not being targeted to those in needs. This study further argues that the institutions adopted by the Government generate further speculation in the private property market.

Methodology

The study is based on the official documents of the Government, the studies and statistics of scholars on housing problems, and the interviews of the colleagues of the author. In the interviews, the author emphasized that their answers were absolutely anonymity, and that confidentiality and rights of privacy were seriously

upheld in the study. Reference is also made to the data provided by the scholars and local newspapers.

Theoretical Framework

The study will use the Institutional Rational Choice (IRC) approach to study the impacts of the institutions on the housing needs of the SC. Kiser and Ostrom (1982) summarize the key features of the IRC approach.1 Figure 1 shows the key features with the attributes of the individuals combining with the attributes of the decision situation to yield individuals actions or strategies. Kiser and Ostrom define institutions as rules permitting, requiring or forbidding actions on the part of citizens and public officials.2 The conceptual unit that can be utilized to

analyse, predict and explain behaviour of an individual within institutional arrangements is an action arena. Inside the action arena, there are a model of an decision situation and a model of actors. The decision situation describes the array of choices confronting the individual and the pattern of consequences likely to flow from alternative choices. The attributes of the individual describe the capabilities and motives of the individual in the decision situation. The mix of the decision situations attributes and the individuals attributes causes the individual to select particular actions.

Kiser, L. and Ostrom, E. (1982) The Three Worlds of Action: A Metatheoretical Synthesis of Institutional Approaches, in E. Ostrom (ed.) Strategies of Political Inquiry (Sage: Beverly Hills, 1982), pp.179-22

A model of the attributes of the individual includes assumptions about: (a) (b) the individuals level of information about the decision situation, the individuals valuation of potential outcomes and of alternative action possible within the decision situation, and (c) the individuals calculation process for selecting among alternative actions or strategies.3 Political economists model the individual producer as possessing incomplete information about the decision situation, as valuing multiple outcomes rather than just profits, and as having difficulty in discriminating among the rankings of these outcomes.4

The model of decision situation can be characterized using eight clusters of variables: participants, positions, outcomes, action-outcome linkages, information, the control the participants exercise, the costs and benefits assigned to outcomes and actions, and the number of iterations of the situation itself.5

The values of the variables in an action arena depend on the following factors: (a) (b) (c)
2 3 4 5

institutional arrangements, events relevant to the issue concerned, the community which has a stake in the outcome.

Ibid., p.193 Ibid., p.184 Ibid., p. 185 Ibid., p.186

Institutional arrangements are the sets of rules governing the number of decision makers, allowable actions and strategies, authorized results, transformations internal to decision situations, and linkages among decision situations. Kiser and Ostroms classifies these rules into: (a) (b) (c) (d) (e) (f) boundary rules, scope rules, position and authority rules, aggregation rules, procedural rules, and information rules.6

The attributes of goods and events that shape individuals decision-making incentives include jointness of use, exclusion, degree of choice, and measurability.7 The community includes all individuals directly or indirectly affected by the decision situation. The attributes of the community relevant to the institutional analysis include the level of common understanding, similarity in individuals preferences, and the distribution of resources among those affected by a decision situation.8

To account for the policy change, Kiser and Ostrom argue that this is caused by action at different levels. According to them, there are 3 levels of action (see Figure 2):9
6 7 8 9

Ibid., p.194 Ibid., p.195 Ibid., p.201 Ibid., p.206-08

(a)

operational, having to do with the direct actions of individuals in relating to each other and the physical world,

(b)

collective-choice, the level at which individuals establish the rules that govern their operational-level actions,

(c)

constitutional, the level at which individuals establish the rules and procedures for taking authoritative collective decisions.

The same structures of decision situation make up all 3 levels of action. The same actor may move between levels of action. Much of the time, actors seek their best outcomes within a given set of rules. At other time, actors try to change the rules in ways that make their preferred outcomes more likely and dispreferred outcomes less likely. Policy change occurs because of actions at the collective-choice and constitutional levels to change institutional arrangements.

Attributes of Institutional Arrangements Attributes of Decision Situation

Attributes of Events

Actions, Activities, and Strategies

Aggregated Results

Attributes of the Individual Attributes of the Community

The Working Parts of Theoretical Explanations

The Phenomena to be Explained

a direct relationship in time period one a feedback relationship in time period two and subsequently interrelationships that have occurred over prior history

Interdependent Relationships

Figure 1 The Working Parts of Institutional Analysis

Adapted from Kiser, L. and Ostrom, E. (1982) The Three Worlds of Action: A Metatheoretical Synthesis of Institutional Approaches, in E. Ostrom (ed.) Strategies of Political Inquiry (Sage: Beverly Hills, 1982), p.207

ConstitutionalChoice Level

CollectiveChoice Level

Operational Level

Physical Action Situation Constitutions Rulesin-Use Laws Rulesin-Use Monitoring and Sanctioning Action Situation Community Action Situation

Outcomes

Monitoring and Sanctioning

Figure 2 Levels of Action in Institutional Analysis

Adapted from Kiser, L. and Ostrom, E. (1982) The Three Worlds of Action: A Metatheoretical Synthesis of Institutional Approaches, in E. Ostrom (ed.) Strategies of Political Inquiry (Sage: Beverly Hills, 1982), pp.187

Chapter 2 Housing Needs of Sandwich Class

Definition of the SC

The SC is those people who cannot afford to buy a private sector flat but are barred from applying any of the governments subsidized housing programmes. The Government defines the SC in terms of their monthly household incomes. The lower limit denotes the level of income above which a family is not eligible to apply for subsidized public housing units of the Home Ownership Scheme (HOS), and the upper limit denotes the level of income necessary to support mortgage payments for a 45m2 unit in the private sector. In 1992, a committee set up by the Hosing Authority defines families with income between $ 11,501 and $ 22,000 are classified as SC.10 These levels have been changing with time. Currently, they are set at $ 20,001 and $ 60,000 per month respectively.11

Characteristics of the SC

In 1991, there were about 258,000 such families in Hong Kong, constituting 16.3% of the whole population. The relation of the types of households with the

10

Hong Kong Housing Authority (1992) A Further Study of the Housing Needs of the Sandwich Class (Hong Kong: Hong Kong: Housing Authority, 1992) Ming Pao (2 December 1997)

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household monthly income is shown in Table 1.12 60% of the SC families had already owned their own properties. For the remaining 89,000 households, 58,000 lived in public housing, and the others lived in private rented accommodation or employment-related accommodation.

Table 1 Distribution of Households in 1991

Monthly Income Owner-occupier Tenant: Public Housing Private Housing Employer provided Rent free Total

Below $ 18,000 467,539

$ 180,00 - $ 40,000 156,345

Above $ 40,000 49,183

513,105 213,092 32,575 15,071 1,241,382

58,002 31,021 10,849 1,323 257,540

3,142 18,989 9,216 575 81,150

Source: Hong Kong 1991 Population Census

12

Census and Statistics Department (1992) Hong Kong 1991 Population Census (Hong Kong: Government Printer, 1992)

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Their other characteristics in 1991 were as follows: (a) The family size of the SC was relatively small, consisting of 2 - 4 members. Typically, such families were composed of only couples with a child or an elderly.13 (b) The heads of the SC families were largely in their 30s, and they usually had good education, and most of them are professionals, technicians, middle managers, or public sector employees.14 (c) They constituted the largest sector of the salary taxpayers, accounting for 58.3% of the total salary tax.15

From interviews conducted by the author, the author noted that the SC is generally very concerned with the housing policies of the Government, because these policies would seriously affect the price of the private domestic premises. However, they are satisfied with the performance of the Government on housing policies, and most of them do not want to have a drastic change in the housing policies of the Government. This concurs with the finding of a study conducted by social scientists of local tertiary institutions in 1990, in which 48.7% of the respondents said that they were satisfied with the housing conditions compared

13

Census and Statistics Department (1992) Government Printer, 1992)

General Household Survey (Oct - Dec 91) (Hong Kong:

14

Hong Kong Housing Authority (1992) A Further Study of the Housing Needs of the Sandwich Class (Hong Kong: Hong Kong: Housing Authority, 1992) Wenhui Po (22 June 1992)

15

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with 19.8% who were dissatisfied.16 This study further argues that the SC and the poor have little influences on the policy process of the Government.17

Housing Needs of the SC

The housing need of the SC is not simply a need in getting basic shelter. It is generally believed that the choice of housing tenure of the SC has moved from rental tenure to owner occupation over the past decades. The Government believes that home ownership of the SC will promote their social stability and their senses of belonging.18 However, there is actually no stability problems amongst the SC as revealed by the interviews of this study. Similarly, in a study by the social

scientists of local tertiary institutions in 1988, a total of 63.5% of the respondents declared that they had a very strong or strong sense of belonging to Hong Kong, compared with 8.9% who expressed very little sense of belonging.19

This study argues that the apparent need to change the mode of housing tenure is caused by the asymmetry of the information provided by the SC. Indeed, 75% of the SC have already owned their own properties or are living in the public
16

Wan, P.S. (1991) The Quality of Life in Y.W. Sung and M.K. Lee (eds) The Other Hong Kong Report 1991 (Hong Kong: The Chinese University Press, 1992) pp. 433-46 The business elites are traditionally co-opted in the Executive Council, and their interests are safeguarded in the decision-making process. See for examples the official views expressed in Long Term Housing Strategy - A Policy Statement (1987) and the Long Term Housing Strategy Review - Consultative Review (1997) published by the Hong Kong Government

17

18

19

Lau, S.K., Kuan, H.S. and Wan, P.S. (1988) Political Attitudes in S.K. Lau, M.K. Lee, P.S. Wan and S.L. Wong (eds) Indicators of Social Development (Hong Kong: HK Institute of Asia-Pacific Studies, The Chinese University of HK: 1991) pp.23 -28

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housing. For those living in the private rented accommodation, the author argues that they have no such urgent needs to change their mode of housing tenure. The need is generated by the differential patterns of the rises in the rent and prices of private domestic premises in the past decade. Figure 3 plots the patterns of these rises between 1989 and 1995.

The rent level of private domestic premises has been rising at an average rate of 9.2% p.a. between 1989 and 1995, which is approximately in line with the inflation rates. The rent for a 45m2 unit in Quarry Bay was $12,000 in 1995, i.e. 25% - 50% of the monthly household income of the SC in 1995. On the other hand, the price of such premises has been rising at an average of 18.86% p.a. between 1989 and 1995. In 1995, the average price of a 45m2 unit in Quarry Bay was $2,210,000.20 With the maximum mortgage-to-income (MIR) of 40%21, this unit needed a monthly household income of $50,000, exceeding the upper limit of the monthly household income of the SC in 1995.

20

These figures are computed using the data given in the Hong Kong Annual Digest of Statistics 1996 published by the Census and Statistics Department, Hong Kong. This figure is suggested by the Housing Authority in A Further Study of the Housing Needs of the Sandwich Class.

21

13

350

300

250

Indices of Prices of Domestic Premises 40-69.9 m Indices of Rent s of Domestic Premises 40-69.9 m

200

150

100

50

0 1989 1990 1991 1992 1993 1994 1995

Figure 3 Indices of Rents and Prices of Domestic Premises 1989-95 (1989 = 100)
Source: Census and Statistics Department (1996) Hong Kong Annual Digest of Statistics 1995 (Hong Kong: Government Printer, 1996)

With such attributes of the community and events, the strategies of the SC are to buy units in the private sector as their investments, and the aggregated result generates further demands on the private market, and further escalates the prices, and more members of the SC join the speculation. These cycles repeat, and hence generate a huge demand on the private market over the last few years.

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The above paragraphs describe the action arena facing the SC together with the institutional arrangements, events and community affecting the action arena. In order to affect the decisions of the SC, and hence to help them to meet their housing needs, this study argues that the institutions of the Government should keep the price and rent in the private domestic premises stable, and should provide financial assistance for those who have to pay most of their household incomes for their mortgage loans.

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Chapter 3 Analysis of the Housing Policy on Sandwich Class

Institutions adopted by the Government

The needs of the SC became an agenda of the Government in 1991, with the Government setting up a working committee to investigate the means to ease the strains upon the SC. Throughout this year, different suggestions were made, e.g. increase the mortgage rate for the SC, broaden the existing home ownership schemes, increase land supply, etc.. The working committees findings were to encourage home ownership amongst the SC, and to help those who lived in private rented accommodation to acquire their own units. Nothing was recommended to help those under the hardship of mortgages, nor to keep the rent and price to be stable.

In 1992 Policy Address, the former Governor Mr. C. Patten introduced a long-term scheme, called the Sandwich Class Housing Scheme (SCHS).22 Under the SCHS, land was granted to the Housing Society at a privileged price for development. The Housing Society is responsible to build and sell the flats to the SC at about 35-45% less than the market price. In 1997 Policy Address, the Chief

22

Our Next Five Years - The Agenda for Hong Hong, Address by the Governor, The Honourable Christopher Patten at the opening of the 1992/93 Session of the Legislative Council on 7 October 1992 (Hong Kong: Government Printer, 1992) pp.18-19.

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Executive Mr C.W. Tung announced that the Government plans to build 30,000 such flats by 2003.23 Between 1995-97, 2500 SCHS flats were sold to the SC.

In 1997 Policy Address, the Chief Executive Mr. C.W. Tung also announced that the Government plans to introduce the Home Starter Loan Scheme (HSLS).24 Under the HSLS, the SC can get a loan of $600,000 to buy their homes in the private market. The Government plans to grant the loan to 6000 SC families by 2002. The interest rate for the loan will be at 3.5%, and the loan is to be repaid in 120 equal instalments after the forth year of the loan. The eligible criteria for the SCHS are: (a) The applicant must be the major income earner of the family, having resided in HK for at least 7 years, and he must have the right of abode in Hong Kong. (b) The total household income must be between $30,001 and $60,000 per month. (c) (d) The family should comprise at least 2 members. All the family members must not have owned any residential properties in Hong Kong within a period of 24 months before the closing day of application and during the process of application. (e) All the family members must live in private rented accommodation, or accommodation provided by their employers.25

23

Address by the Chief Executive, The Honourable Tung Chee Hwa at the Provisional Legislative Council meeting on 8 October 1997 (Hong Kong: Government Printer, 1997) p.23-24 Ibid. Ming Pao (2 December 1997)

24 25

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For the HSLS, the detailed criteria have not yet been finalized by the Government. Up till now, the main criteria include: (a) (b) The total household income must not exceed $70,000 per month. All the family members must not have owned any domestic premises in Hong Kong within 5 years of the application.26

Evaluation of the Institutions

The policies introduced or to be introduced change the institutional arrangements affecting the decision arena. In the following paragraphs, the author will examine the impact of these institutions on the actions taken by the SC, and hence their aggregated results. The loan under the HSLS is of comparatively low interest rate. It will probably provide the incentives for the SC to participate in speculation, and hence generate more demands on the private market, which accelerate the cycle of escalating the prices. The loan will then require frequent adjustment to keep pace with the escalating prices; otherwise the SC will not be interested in joining the HSLS. On the other hand, if the price of the private domestic premises falls down, the SC will also lack the incentives to join the HSLS, as there is indeed no urgent need to change their mode of housing tenure.

The SCHS satisfies the needs of those in urgent needs of buying homes for their families. The re-sale restriction of the SCHS flats prevents the speculation on such flats. However, in 1994-95, only 1000 SCHS flats had been sold out, which

18

was terribly too low as compared with the official estimate of about 38,500 eligible Sandwich Class households.27 Moreover, the interviews of the author revealed that one of his colleagues had used such opportunity to save his cost of owning his first home, and then used the remaining money to speculate on the private property market. If such strategy is adopted by the SC, their aggregated result will lead to another cycle of escalating the prices. The Government will then be denounced as providing means for the SC to participate in speculation.

Moreover, both schemes were based on the assumption that the number of SC families will remain static with time. Is it really that the number of SC families remains static?

Regarding the equity of these institutions, this study also doubts whether it can fulfill the equity evaluation. Equity means that resources should be allocated to the correct people. Le Grand (1991) divides equity into 2 parts: horizontal equity and vertical equity. Horizontal equity means that all people subjected to the same conditions should have equal opportunities in resources allocation. Vertical equity means that assistance is progressive in nature, i.e. people subjected to the same problem should be helped according to difficult conditions that they have.28 Applying these concepts to the HSLS and SCHS, it is noted that only part of the SC can benefit from them. Those who have to bear the heavy mortgage repayment
26

Ibid. Lau, K.Y. (1994) Public Housing in Mcmillen, D.H. and Man, S.W. (eds) The Other Hong Kong Report 1994 (Hong Kong: The Chinese University Press, 1994) pp.265-296

27

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burden or those who live in public housing are not benefited from these Schemes. Are they under horizontal and vertical inequitable treatments by the Government?

28

Le Grand, J. (1991) Equity and Choice (London: Harper Collins Academic) p.71

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Chapter 4 Concluding Remarks

This study concludes that the Government wrongly identifies the housing need of the Sandwich Class, and hence devises a wrong policy for them. The SC wants to change their mode of housing tenure from rental tenure to owner occupation because of the differential pattern of the rise in the rent and price of the private domestic premises over the last five years. Indeed, only those who are under the heavy burden of mortgage repayment should be helped. The policies adopted by the Government, i.e. to grant loan or to build domestic premises for the Sandwich Class, according the Institutional Rational Choice analysis, will generate unnecessary demand on the property market, and generate further speculation. The proper role of the Government should be to keep the pattern of price increase in the domestic premises in line with the increase in their rent. With such information to the Sandwich Class, they will not favour a change in their housing tenure from rental tenure to owner occupation, and hence any need for help from the Government.

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