Full report (English only) | Executive summary
The Consumer Council is critical of the new regulatory regime on the sales of first-hand residential properties, and has proposed a package of progressive measures to bring remedy to the endemic problems confronting home buyers in Hong Kong.
In an in-depth study, one and a half years after the implementation of the Residential Properties (First-hand Sales) Ordinance, the Council has found the legislation to be of insufficient deterrence to forestall the problematic issues and practices detrimental to the consumer interests.
Said the Chairman of the Council, Prof. Wong Yuk-shan: "Much to our disappointment, such deep-rooted practices as aggressive tactics to make quick on-site sales, units released in small batches for possible market speculation, confusing exaggerated claims and information that plagued the market in the past, have somehow persisted."
The Council's package of a total of 8 recommendations was contained in a 160+ page report released today (November 11, 2014) for consideration of the Government, the regulators and the trade. The study was undertaken, between April and September, through a combination of survey, focus group meetings, field visits and research to gather consumer opinions and assessment on trade compliance.
As evidenced in consumer opinions in the study, it is apparent that despite improvement in some areas, the Ordinance has not lived up fully to the expectation of its avowed aim - by ensuring information transparency and a fair marketplace while still ensuring no undue overregulation of trade practices for fear of stifling legitimate business.
The Council has identified a number of trade practices of concern that could potentially give rise to the wrongful proliferation and dissemination of market information on supply and demand, seriously undermining the consumers' right to be informed and to choose.
First and Foremost, while the Ordinance stipulates the minimum requirement on the number of units to be included in the price list, it stops short of requiring all the units covered in the price list to be made available for sale concurrently.
The Council's compliance check has uncovered many instances of property developments - 7 out of the 17 developments under study - withholding from sales a proportion of the units covered in the price list as is required under the law; but since not all units listed were available for selection of the buyers, such practice could create confusion and uncertainty.
Indirectly, this loophole in the Ordinance may also have given legitimacy to this undesirable trade practice of releasing property units in small batches, and the potential to influence the supply situation and to encourage market speculation.
Second, a fair share of consumers were dissatisfied with the short "Cooling-off Period" of 5 working days, between signing of the Preliminary Agreement for Sale and Purchase (PASP) and the execution of the Agreement for Sale and Purchase (ASP), and a high forfeiture amount of 5% of the purchase price should a purchaser fail to comply.
The forfeiture of 5% of the purchase price represents a considerable sum in Hong Kong's high and rising property prices; in the case of a $10 million property the forfeiture could amount to as much as $500,000 - in a matter of 5 days if, for whatever reasons, the purchaser could not execute the ASP.
In the questionnaire survey, some 45% and 33% of the respondents considered the "Cooling-off Period" insufficient and the forfeiture amount unreasonable respectively. The majority of the respondents opted for a longer "Cooling-off Period" from 7 to 14 days and some opted for a smaller forfeiture amount of 1% to 3% of the purchase price.
Further, as revealed in the study a growing trend in the method of sales is by computer ballot drawing. Under this method, each prospective purchaser is entitled, in most cases, two ballot rights. To maximize the chance of buying a property, estate agents would typically try and persuade them to submit at least two Registrations of Intent with a deposit each.
Estate agency companies would readily offer cashier orders prepared in advance for lending to the potential ballot participants who would undertake to pay the company by credit card or cheque, with the assurance that the card would not be debited or the cheque cashed unless and until confirmation of the deal.
Sales by ballot drawing in such a way can have the possible effect of excessively boosting the demand. For example, a couple taking part in a ballot draw can submit as many as 6 Registrations of Intent - 2 under the name of the husband, 2 under that of the wife, and 2 under their joint account.
It is obvious that such lending practice is of disadvantage to consumers: first, to entice indecisive prospective purchasers into the ballot drawing, and second, to present grossly inflated market response to the public in the sales of the property - one case by as much as 20 times. Such lending practice is in fact in breach of the Estate Agents Authority's guidelines.
Furthermore, prospective purchasers were under great pressure to make quick purchase decision after they were informed of the ballot results. About 18.6% of the respondents said they had to make decision instantly - while other reportedly in a matter of minutes, in one compliance check case, within 3 minutes during their turn of selection.
Third, in the interest of information transparency, the Ordinance also sets out the required information in sales brochures, price lists and registers of transactions, etc. While consumers have the benefit of access to adequate and accurate information, this however has created confusing voluminous information that is not always user-friendly or convenient to prospective purchasers.
To get around, estate agents produce and distribute their own unofficial abbreviated versions of promotional materials, such as mini-catalogs and self-prepared price lists, to prospective purchasers, defeating the purpose of the legislative requirements on market information. The Council is of concern that these unofficial handouts may not be up-to-date or inaccurate.
Further, the Sales of First-hand Residential Properties Authority (SRPA) operates an electronic platform (SRPE), a database to provide online information on property developments on sales in the market.
But few seem to have made use of the SRPE. According to the survey, a high 92.5% of respondents had not used SRPE before, although improvement has since been made to its contents and accessibility.
Summing up, Prof. Angela NG, Chairperson of the Trade Practices and Consumer Complaints Review Committee, noted the sales tactics deployed by property developers and estate agents could easily give rise to confusing or misleading market information to the detriment of the consumer interest.
"This would seem to be a major underlying cause of the problem of the sales of first-hand residential properties," she added.
Overall, the perceived effectiveness of the Ordinance is considered to be "average" by 52.8% of the respondents in the survey which indicated also a high level of awareness (80.9%) of the Ordinance but a low level of understanding (10.1%) of the legislation.
A fair level of awareness (40.6%) was recorded of the Sales of First-hand Residential Properties Authority in the survey.
The 8 recommendations, put forward by the Consumer Council to the Government, the regulators and the trade are related to proposed change for improvement in these key areas: the Ordinance, sales practices, and the role of regulators and the consumer.
- Ensure all units in price lists available for sale concurrently
The Council is of the view that requiring developers to publish price list of a stipulated minimum number of units without concurrently requiring developers to put up for sale all the units on the price list should be addressed to curb confusion to prospective purchasers.
This is consistent with the legislative intent that a prescribed number of units with price information should be made available for sale to the public to ensure adequate supply of residential units in the market.
Further, the issue of price lists should be made available 7 days, instead of only 3 days, prior to the date of sale as suggested by the majority of respondents in the survey.
- Review 'Cooling-off Period' and forfeiture amount
The aggressive selling tactics of residential properties often compel purchasers to sign the PASP in great haste, in a very short period of time, without leaving sufficient time for home buyers to reconsider and to manage the mortgage loans.
At present, if a purchaser fails to execute an ASP within 5 working days after entering into a PASP, the PASP is terminated and the preliminary deposit will be forfeited. Clearly, an extension on the 'Cooling-off Period' and reduction in forfeiture amount would be of significant benefit to consumers.
A comparison of the 'Cooling-off Period' and amount of forfeiture of different jurisdictions indicates that, for instance, in Singapore, a purchaser has 3 weeks to consider to proceed with the transaction and the forfeiture amount is 1.25% of the purchase price. In British Columbia, Canada, it is 7 days and nil forfeiture; in Melbourne, Australia, 3 clear business days and AUD100 or 0.2% of the purchase price (whichever is the greater).
A review is called for to be carried out by the Government to make reference to overseas practices and to collect public views in setting the appropriate time period and amount.
- Extend defects liability period
Complaints by consumer about property defects are very common. The defects liability period is extremely short - in general within 6 months after the date of completion of the sale and purchase of the residential property.
This compared unfavourably with overseas practices: In Singapore, vendors are required to offer a 12-month defects liability period while in British Columbia, Canada, the minimum requirement of home warranty insurance covers 2 years on labour and materials, 5 years on the building envelope, including water penetration, and 10 years on the structure.
The Council sees no justification for a shorter warranty period for Hong Kong developers in the private sector, and suggests that the defects liability period be lengthened to any period between 12 and 24 months for labour and materials, and that warranty information on building ceiling and structure be also provided in sales brochures and ASP to enhance transparency.
The other recommendations are:
- Strengthen compliance checks and penalty
- Increase scrutiny of property advertisements
- Improve transparency of sales arrangements
- Promote informed purchasing decisions
- Enhance awareness and functions of SRPA
The Council's Chairman, Prof. WONG Yuk-shan, noted that the Residential Properties (First-hand Sales) Ordinance is a much hard-won piece of consumer protection legislation after many years of strenuous effort by the Council to address endemic and damaging sales practices that placed prospective purchasers at a distinct disadvantage in the market.
"From this study there are obviously many areas that need to be strengthened to ensure consumers are fairly treated in the market. It is hoped that all parties involved, the Government, the regulators and the trade, would give the Council's recommendations their most careful consideration, and to put into implementation the needed improvements on the way forward," the Chairman concluded.