24 August 2019
A group of HOS estates in Shau Kei Wan. Owners of subsidized flats enjoy the wealth effect created by surging home prices. Photo: HKEJ
A group of HOS estates in Shau Kei Wan. Owners of subsidized flats enjoy the wealth effect created by surging home prices. Photo: HKEJ

Why many subsidized home owners become subdivided flat tenants

A 212-square-foot flat in Tin Lai Court, a Home Ownership Scheme (HOS) estate in Tin Shui Wai, was recently sold for more than HK$10,000 per square foot, setting a new record for the area.

Property prices in Hong Kong have surged a lot in recent years. Even owners of subsidized flats are enjoying the wealth effect created by the asset appreciation.

Some of them are taking out new loans by pledging their flats even before they have fully repaid the mortgages. Not only is the practice illegal, many owners may find it impossible to pay back their debts and later become bankrupt.

There are mainly two kinds of subsidized flats in Hong Kong: public housing and HOS.

Only people whose income and assets are below a certain level are entitled to buy these houses. The idea is to help lower-income families acquire their homes. That is why subsidized flats are considered as one of the social benefits.

Since the flats are subsidized by the government, limitations are usually placed on the buyers.

For example, until HOS and public housing owners have settled the debt and paid the land premium, they remain as just borrowers, not owners, in the eyes of the government.

Under the current law, a borrower is prohibited to “sell, charge, mortgage, dispose of or otherwise deal with the property or any interest therein before the borrower has fully settled the debt”.

However, according to an investigative report done by Ming Pao Daily, more than 8,300 subsidized housing owners (around 85 percent or 7,000 of them are HOS flat owners) who have yet to pay back the land premium, have “further charged” their houses in the past six years.

This means that a subsidized housing owner whose property is already subject to a prior mortgage secures another loan on the same property, either from the same lender or a different one.

In 2014 alone, the number of such subsidized housing owners was 3,921 in total, double the figure in 2009.

Worse, over 1,000 of such flat owners have already received court orders against their property, forcing them to repay their debt within a certain period of time.

The borrowers have to shoulder annual interest rates of around 20 to 40 percent. The rates may seem usurious as they compare with uncollateralized debt such as as a credit card loan which charges around 30 percent.

However, a loan on a subsidized flat is not collateralized as the creditor does not have the right to take over the flat ownership if the borrower defaults. It is illegal to do so, but finance companies are willing to take the risk for the higher rates by venturing into a grey area.

National Resources Finance Ltd. has been involved in around 900 questionable loans of this kind in the past six years, according to the report. Its chief operating officer Chow Chi-fan told a Ming Pao reporter that the company has already sought legal advice.

The loan agreement only requires the owner to sell the house and pay back the debt in case of a non-performing loan or default. The contract does not involve house ownership, so the company isn’t breaking the law, according to Chow.

However, he admits that the practice is stepping into the grey area of the law.

On top of the high interest rates, borrowers also have to clear the debt within two to three years.

In most cases, debtors eventually have to sell their houses and other assets in order to settle the court orders.

Owners of subsidized flats usually have lower income, according to Edward Yiu Chung-yim, associate professor of geography resource management at the Chinese University of Hong Kong.

And these families are under tremendous pressure to sell their flats to service their debts in the short term.

“In fact, many owners who went broke have moved into subdivided flats in recent months,” Yiu said, citing his own findings on the issue.

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EJ Insight writer

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