Small doesn’t come cheap - Hong Kong’s nano flats cost 9 per cent more in square footage

The city’s supply of tiny flats are now more expensive than larger homes on a per square foot basis, as investors snap up homes requiring lower lump sum down payments

PUBLISHED : Tuesday, 29 August, 2017, 8:03am
UPDATED : Tuesday, 29 August, 2017, 7:28pm

Hong Kong’s second-hand tiny flats are 9 per cent more expensive than larger ones on a per square foot basis, as record-high home prices and government cooling measures have created a mismatch between supply and demand.

The average per square foot price of second-hand flats smaller than 400 square feet (37 square metres) transacted this year hit HK$13,836 (US$1,768) in 50 major housing estates, 9.3 per cent higher than the HK$12,654 of larger homes, data from the Land Registry compiled by the South China Morning Post showed.

The per square foot price of tiny flats is 9.8 per cent higher than that of flats of 400 to 800 sq ft, and 4.1 per cent higher than that of flats larger than 800 sq ft.

Read: Hong Kong homes shrink as prices soar, and affordability goes out the window

This reflects an unintended effect of the government’s cooling measures to rein in the world’s least affordable housing market, which is the distorted demand and supply relation in the secondary market, analysts said.

Watch: Why is Hong Kong housing so expensive?

“The government did a good job in suppressing speculative demand,” said Midland Realty’s chief analyst Buggle Lau Ka-fai. “But on the other hand, supply also dropped in the secondary market.”

The government raised the stamp duty to 15 per cent for all residential purchases except for first-time buyers in November 2016. In a policy-related tightening, the Hong Kong Monetary Authority has rolled out eight rounds of mortgage restrictions since 2014.

The ability and motivation of middle-class families to sell their existing homes to buy larger ones declined because of these measures, said Wong Leung-sing, associate director of research at Centaline Property Agency. “The government policies only leave a way out for first-time buyers and buyers of smaller flats.”

The low interest rate environment also made homeowners less likely to sell their properties due to the lack of profitable investment alternatives, said Lau.

For example, an owner of a HK$4 million (US$511,251) flat in City One Sha Tin should be able to lease it for HK$12,000 to 15,000 a month, but the same HK$4 million will only generate around HK$8,000 annually, assuming 0.2 per cent interests on deposits held in local savings accounts.

Read: A peek into six of the smallest flats in Hong Kong

This has led to fewer home sales in the secondary market, which has always been the dominant market in Hong Kong. Second-hand property transactions slumped to 40,466 last year, the lowest level since modern record keeping begun in 1996, according to Midland.

Meanwhile, many homebuyers have been forced to look towards smaller homes with lower lump sum down payments, a catalyst that has helped to push up prices on a per square foot basis for tiny flats.

Centa-City Leading Index, which tracks 100 large housing estates across the city, shows home prices have risen 11 per cent to 160.8 as of August 20, a fresh record.

“The reality is pretty disheartening” for young people facing the burden of buying their first homes, said Denis Ma, JLL’s head of research in Hong Kong.

The supply of new homes in the primary market will pick up to a 13-year high of 98,000 units in the next three to four years, a Transport and Housing Bureau report showed in June.

“But it’s still going to be way below in the long-term kind of level,” especially with the secondary market “not working” at this moment, said Ma.