Although the HDC is the State’s main implementing agency for its housing policy, there are other important elements to be considered. The main one I will examine here is the role of public subsidy in the housing program.
Given that we live in a relatively wealthy and very densely-populated small island state which operates a free market system, the prices charged for property sales or rentals have moved upwards historically. One of the objectives of the housing policy is to assist those who are unable to compete in the market, so it is justifiable to apply State resources to reduce the cost of housing to those needy persons.
That allocation of Public Money and land to the housing program is intended to create the new homes for the applicants. In addition to the direct construction of the new homes, Public Money is also used to reduce the cost of housing.
These additional applications of Public Money are called Housing Subsidy, the three main types are –
- The five-year tax allowance of $25,000 per annum is available to first-time home-buyers. That is about $6,250 more cash each year for first-time buyers of homes in the open market or from the HDC. I have been unable to locate any official estimates of how many people benefit from these provisions. All first-time buyers are entitled to this tax allowance, whatever the actual price of the home being purchased. This subsidy is therefore widely enjoyed and not at all targeted to the needy.
- Subsidised mortgages at a 2% interest rate are available from TTMF for persons earning less than $10,000 per month who are buying homes under $850,000. This is substantially below the market rate of interest, so TTMF is subsidised by the State to compensate for the difference.This program started in 2007 to provide a ready stream of affordable funding for the anticipated output of the HDC’s large-scale construction program. This table shows the Public Money spent on this subsidy in the eight years for which TTMF’s audited accounts are available –
State Subsidy of 2% Mortgages for low-cost housing
YEAR AMOUNT of SUBSIDY 2007 $199.1M 2008 $194.7M 2009 $183.5M 2010 $165.9M 2011 $147.3M 2012 $129.6M 2013 $112.6M 2014 $ 94.8M TOTAL $1,227.5M
With apologies to readers, this is to correct my figures in relation to the amount of Public Money which TTMF received in relation to the 2% subsidised mortgage programme. The figures disclosed in TTMF’s Summary Financial Statements are actually liabilities, being the reducing balance on the original allocation of $200M.
The recalculated figures for this subsidised 2% mortgage programme are –
TTMF recovery of 2% mortgage subsidy 2007 to 2014
YEAR AMOUNT of SUBSIDY (cumulative) 2007 $900,000 2008 $5,300,000 2009 $16,500,000 2010 $34,100,000 2011 $52,700,000 2012 $70,400,000 2013 $87,400,000 2014 $105,200,000
These figures are far less than those I cited in my article, since only $105.2M has been drawn from the original allocation of $200M, as against my erroneous claim that $1,227.5M of Public Money had been spent on this subsidy.
This revision will require that we pay even greater attention to the HDC’s Housing Subsidy, since it far outstrips the other subsidies. There is also a seminal interplay between the HDC and TTMF which needs to be discussed in terms of promoting homeownership.
- HDC Subsidy is applied to the actual sale price or rent of the new homes. It can be calculated as the difference between the market value of the new home and its selling price. The same approach can be applied to rental units. Although I have not been able to find any consistent assessment of these figures from my limited interactions with the HDC, it seems clear that most of this housing subsidy is distributed to buyers of new homes.The allocation of the HDC subsidy ought to be an area of interest, since that program is intended to target the needs of ‘low income and middle income’ applicants. There is scarce evidence across the HDC program, so one is driven to use the few examples which become visible from time to time.
The two examples I am citing are –
This is a 180-unit project at Gordon Street/Bates Trace in St Augustine, opposite the Sir Hugh Wooding Law School (UWI).Noel Garcia, the then-MD of the HDC, was reported to have said –
“…the Government had taken a decision not to subsidise this particular development. It is being sold at market rates in HDC’s thrust to expand and attract an open market clientele…”
The units were sold for a maximum of $825,000 and they were worth a minimum of $1.7M, so each new home there was sold with at least $800,000 in housing subsidy. The only way those statements could be correct is if one were using the misleading cost-based approach. This is really heavily subsidised housing for the middle-income groups.
In this example, the opportunity cost is $1,700,000 – $825,000 = $875,000. Over 50% Housing Subsidy!
This is a 264-unit complex at Four Roads, Diego Martin, on an island site opposite to the Starlite Shopping Plaza. Again, this project appears to have been intended for middle-class applicants as per the previous example.The substantial construction of these apartments was completed in 2010, but there have been extensive modifications/improvements of the units to a surprising degree, when one considers the HDC mandate. The project is only now nearing completion, so consider these disclosures from the Minister of Housing and Urban Development, Marlene McDonald, in her statement to Parliament on Friday 4th December 2015 (pgs 59-61 of Hansard) –
“Some three bedrooms were turned into two bedrooms, some two bedrooms were turned into one bedroom; when they were completed there were tiles on all the floors in the 264 units, all those tiles were dug up. No one lived in there you know; all the tiles were removed and replaced by hardwood floors. All the tiles in the bathroom are now porcelain tiles. All the kitchen cupboard—beautiful…it is one of the finest HDC sites in the country…I am talking about the inside of the building…264 units, every one air-conditioned…“to provide a quality living experience”, you had the installation of automatic sprinkler systems; you had the installation of garbage chutes in each apartment; the installation of centralized air-conditioned units for common areas of the buildings; you had two four-storey car parks built, and let me tell you, with elevators. There are two of them, one on the western side of the compound and one on the eastern side. There is a swimming pool and the swimming pool sits on the roof of the eastern side of the car park. So you have the four-storey car park and sitting at the top there is the swimming pool…There is also a clubhouse there. There is also a tennis court. There is also a gym. There is also a sauna-cum-spa…”
According to the Minister, the total costs were –
• Original Cost of Construction of the buildings: $299M • Cost of modifications of the buildings: $141M • Cost of External Works:$170M TOTAL $610M
The total cost of $610M, when divided by the 264 new homes at this project, equates to an average cost of $2.3M! Please note that these estimates given by the Minister do not seem to have included the cost of what would be very valuable land. That is how far adrift this housing program is from focusing on the urgent needs of our less fortunate citizens.
According to Dr. Rowley, speaking about the valuations of those units on 21 November 2015 –
“…The cheapest unit is $1.6 million and the top units are valued at $4.5 million,”
One can only hope that those units will be sold at market prices so that HDC can recover some of these exorbitant costs. Given the location and the high-quality finishes, there Is no rational case for any housing subsidy to be expended at Victoria Keys.
How is Housing Subsidy managed?
The standard HDC lease, under which its new homes are sold, contains provisions at clause 22 which prohibit the purchaser from selling the property for ten years. The owners of these new HDC units who wish to sell within the first ten years have to obtain the HDC’s written consent. In the event of such an application, the HDC has the option to repurchase the property at the original price. That option is open to the HDC for three months, after which the homeowner can sell.
The purpose of that clause is to give the HDC the option of recovering housing subsidy in those cases.
For example, an HDC home worth $1.2M in 2009 and purchased for $720,000, represents a $480,000 housing subsidy. If that owner wished to sell today for $2M, the HDC could exercise its option to repurchase the property for $720,000 and sell-on to the prospective purchaser for the agreed price of $2M. The proper exercise of that option would allow the HDC to receive a net sum of $1.28M, within which its original subsidy of $480,000 is recovered.
This property management clause is intended for the replenishment of the HDC’s funds and the discouragement of profiteering on public housing. The fundamental principle being that the State, having made the initial heavy investment, is entitled to recover its monies and any capital gain within a reasonable period. The ten-year period represents an intended embargo on profiteering, after which time the homeowner is free to sell without penalty.
I have seen at least six HDC consent letters in cases of persons selling those units within the ten year time-limit, but none of the persons I spoke with had any idea what I was speaking about in terms of the HDC having those rights. No penalty charges were made. This means that valuable public property rights are either subject to public officials who do not understand the provisions of the fundamental documents created by the HDC, subject to arbitrary decision-making processes in which some fortunate people are able to sell within ten years and without penalty and others are not. Which is worse, inept officials, or erratic, possibly corrupt, decision-making? I tell you.
I have been critical of the HDC’s cost-based approach to pricing its units, because it sets the prices by reference to the cost of construction. Apart from the land element being effectively omitted, that is an inappropriate approach, because it does not identify the housing subsidy allocated to successful applicants. The value-based approach better satisfies those basic requirements, since it is based on the market value of the completed homes. The housing subsidy being the difference between the value and the actual HDC selling price.
It is essential to establish the size of the overall housing subsidy and then, to determine how that subsidy is allocated. A clear analysis of housing subsidy is used in the advanced jurisdictions to monitor housing programs and review the policy as necessary. When one juxtaposes the sharp competition for public housing with the drastic reduction in available Public Money, it is now imperative that data-driven approaches are adopted to better inform the design, allocation, funding and partnership aspects of the housing program.