Concrete Analysis

Small flats cannot solve the long-term housing needs of Hong Kong

Sustainability of small flats remain doubtful if they are built to a size not functional for normal living

PUBLISHED : Tuesday, 28 February, 2017, 4:03pm
UPDATED : Friday, 03 March, 2017, 4:01pm

Developers in Hong Kong have always been very responsive to market changes. Building smaller residential flats is one of their recent reactions to market trend, but it is dubious that building too small flats is a sustainable way to satisfy the long-term housing needs.

The Census and Statistics Department projected that average household size would decrease from 2.9 to 2.7 persons in the 30 years following 2014. The projection was based on the demographic trends of increase in never marriage rates and divorce rates, as well as decrease in fertility rates and improvement in life expectancy. In tandem with the smaller household size, the proportion of smaller households (i.e. one to three persons) was expected to grow from about 68 per cent in 2014 to about 69.9 per cent in 2019 and about 71.4 per cent in 2024.

This trend in the demographic fundamentals logically leads to the expectation that the demand for smaller housing units will go up.

Apart from the fundamentals, the measures imposed by the government to cool down property prices have also indirectly pushed up the demand for the smaller units.

People in Hong Kong always aspire to own their flats, to climb up the ownership ladder and improve the quality of life by living larger and newer. These aspirations have been the key driving forces of the economic growth and high productivity of the local workforce. People still strive to buy flats despite affordability coming down alongside the surge in property prices in the past few years. Though the price to income ratio has increased from 15.27 to 15.60 in the last three years according to JLL, the aspirations to buy flats have become even stronger rather than lesser.

Meanwhile, the various cooling measures introduced by the government since 2011 have circuitously constrained the supply of flats in the second hand market. It is because not only of the 15 per cent ad valorem stamp duty incurred in the acquisition of a flat by an existing flat owner, but also the lowered loan-to-value ratios. It becomes difficult for flat owners to move up the ladder for changing to bigger or more expensive flats as great transaction costs are now added to the process. Acquisition of first hand flats would be the way out for many first home buyers or flat changers, as first instalments are more affordable and there are more flexible financing and payment arrangements offered by the developers.

Developers are matching the market needs by offering smaller flats in the first hand market. It is revealed from our analysis of data published in the Building Digest that the average flat size in the new residential projects commencing work is getting smaller. The average domestic gross floor area per unit decreased significantly from 867 square feet in 2014 and 806 square feet in 2015 to 607 square feet in 2016. Further, from the JLL study of the figures published by the Rating and Valuation Department, the proportion of private residential units of saleable area smaller than 430 square feet (i.e. 40 square metres) increased from 19 per cent in 2012 to 32 per cent in 2016 in total.

Developers do no wrong to match such demand by building smaller flats under the free market. But the sustainability of the small units are doubtful if they are built to a size not functional for normal living but merely for developers to get the highest unit rate out of an affordable lump sum. We have been seeing new flats of size smaller than 140 square feet coming into the market, while more than 30 per cent of the floor area would be taken up by the toilet, kitchen and external walls.

We do not have a guideline on the minimum space limit for a private residential unit, despite there being a minimum allocation standard of 75 square feet of internal floor area (IFA) for each individual in public rental housing in Hong Kong. And the actual IFA per person of public rental housing tenants was about 139 square feet in 2013.

It is time for something be done to ensure that new flats are built to minimum respectable sizes to cater to the spatial needs of ordinary living. If not there should be a minimum limit on flat sizes for new residential units. In addition, some measure to curb the investment demand from nano flat buyers in the first hand market should be considered.

Ultimately the government should think about ending the property price cooling measures to rewind the severe distortion to the market caused by them.

Dorothy Chow is regional director of valuation department at JLL