For the past three years, Lily Kuang has preferred hanging out at cafes with friends, spending time at the library or even working longer in the office to returning home to her tiny flat too early. The 35-year-old from Chongqing has been living in a studio flat of about 200 sq ft in Wan Chai after the multinational company she works for sent her from Beijing to Hong Kong, the world's costliest city to buy property. "I used to live alone in an 80 sq metre (860 sq ft) unit in Beijing," Kuang said. "I was shocked when my budget was only enough to rent such a tiny flat when I moved to Hong Kong. I was even more shocked to see a family of four live in a flat the same size as mine next door! "I really sympathise with Hong Kong people over their rapidly shrinking living space." Kuang's flat may be small but it does not come cheap. Every month, she pays HK$9,800 in rent, equivalent to a third of her monthly income in her company's human resources department. "Rents are too expensive in Hong Kong," she said. "In Beijing, rental expenses were just about 10 per cent of my salary." Hong Kong rents and home prices rose to fresh highs for the fifth consecutive month in August, forcing foreign and local residents with limited budgets to abandon their hopes for a decent-sized home. In the five months to August, the average cost of flats smaller than 430 sq ft rose 6 per cent to HK$5.2 million from HK$4.9 million, according to data from the Rating and Valuation Department. Developers quickly spotted small flats as a lucrative, untapped market in the wake of a sharp fall in big-ticket transactions as a result of the government's cooling measures - credit tightening and an increase in supply - to curb investment demand, particularly from cashed-up mainland buyers. Early this month, Cheung Kong (Holdings) unveiled the city's tiniest new flat, just 165 sq ft, at its Mont Vert II development in Tai Po, two months after selling a 177 sq ft unit for HK$1.77 million at Mont Vert I. The 165 sq ft offering was one square foot smaller than one that sold for HK$3.6 million - or HK$20,395 per square foot - at High Place in Kowloon City, built by Henderson Land Development, in October last year. Sun Hung Kai Properties is also jostling for the lion's share of the mini-flats market with units starting from 160 sq ft in usable floor area - excluding kitchen and washroom - in its proposed 3,400-unit project at the MTR's Nam Cheong Station in Sham Shui Po. "With housing prices in Hong Kong being the highest in the world, people are forced to turn to smaller but affordable flats," said Charles Chan, Savills' managing director for valuation and professional services. But the trend - also encouraged by the government putting up more land designated for small flats - has further aggravated the lack of living space in Hong Kong, which has been the world's least affordable housing market for four years in a row, according to United States consulting firm Demographia. In survey results released in January, it said average home prices had risen to 14.9 times gross annual median income from 13.5 times previously, the highest in the survey's 10-year history. "Theoretically, tiny flats can achieve higher prices per square foot because of the smaller lump-sum amount [required to buy them]," Chan said. "From developers' point of view, strong demand for these flats will also reduce their investment risk, so why not build more small flats." A South China Morning Post survey found major developers are now increasingly moving towards building smaller flats. In the first eight months of this year, 1,554 units smaller than 215 sq ft in usable area secured permits to get off the ground, up 128 per cent from 680 units in the same period last year. The phenomenon is a complete reversal of the trend three years ago, when flats of more than 1,000 sq ft were built to cater to cash-rich mainlanders who accounted for nearly 40 per cent of new home purchases and were particularly keen on luxury residential projects. Victor Lui Ting, a deputy managing director at SHKP, said the developer would increase the supply of small flats in view of the strong demand. SHKP applied to the Town Planning Board last month for permission to convert four luxury residential projects in northeast New Territories that were providing large flats of up to 2,000 sq ft into 4,000 smaller units, including studios as small as 200 sq ft. "The marketability of small flats is certainly better than large-sized units," Lui said. Victor Tin, an associate director at Sino Land, said a tightening of mortgage lending would also help to boost demand for small flats costing between HK$4 million and HK$5 million. Under the Hong Kong Mortgage Corp's mortgage insurance scheme, buyers of flats costing less than HK$4.5 million can secure mortgage loans of up to 90 per cent of the flat's value. For SHKP's Nam Cheong Station project, Lui said the plans submitted to the Building Department excluded kitchens, toilets, balconies and petition walls. "The size of our studio units at Nam Cheong Station is nearly 300 sq ft, while those with one bedroom is 400 sq ft," he said. "They are absolutely liveable and comfortable. "It is definitely a development trend in accordance with the increase in smaller-sized households. We have seen a growing number of flats being sold to buyers who live alone." One-person households will account for up to 18 per cent of the population in the next 10 years, compared with 15.2 per cent in 1981, and two-person families will rise to 29 per cent in 2021 from 25 per cent in 2011, according to data released last year by the Census and Statistics Department. Lui said Hongkongers' living space was not shrinking. "A 300 sq ft unit for one person is not considered small," he said.