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Tuesday, January 19, 2021, 00:55
Nano flats: Explaining a tragic phenomenon unique to the city
By Ho Lok-sang
Tuesday, January 19, 2021, 00:55 By Ho Lok-sang

According to a study recently published by the Liber Research Community, the number of Hong Kong’s “nano flats”, defined as tiny flats smaller than 260 square feet, has grown 85 times from 2010 to 2019. They represented only 0.2 percent of newly developed flats in 2010, but 12.9 percent in 2019. Nano flats can be as small as 128 square feet (11.9 square meters) — smaller than a regular parking space for a car.

This phenomenon begs an answer. Although Hong Kong’s economic growth has slowed, there was still growth. Our per capita GDP rose from US$32,550 to US$48,756 from 2010 to 2019, or 49.8 percent, noticeably higher than the comprehensive consumer price index, which rose 37.5 percent. How can we explain the fact that our homes are getting smaller and smaller, amid positive real economic growth?

An explanation is that our housing prices have risen much faster than incomes or the price index. Our developers are simply following the directions of the market. Because bigger flats are so unaffordable, there is demand for smaller flats, and building smaller flats has become much more profitable than building larger flats. 

Data from Statista indicates that the average living space per person in Hong Kong’s public housing flats has grown. By 2020 it was 13.4 square meters, higher than 2007’s 12.2 square meters. This is as it should be. But many who live in private housing, who pay much more, and even those who buy their own flats, are living in poorer and poorer conditions. In particular, those living in rooms from subdivided flats pay exorbitant rents, often more than double the rent paid to the Housing Authority, and they have to put up with an average living space per person of 48 square feet.

The nano flat phenomenon is unique to Hong Kong. I do not know of any other city that builds such tiny flats. And this is also a new and quite recent phenomenon in Hong Kong. Consider the fact that Hong Kong’s population growth has fallen dramatically since the 1950s from 4.5 percent a year in the 1950s to 1.8 percent a year in the 1980s and finally to an average of 0.7 percent in the last decade. Consider that, prior to the 1997 handover, land supply from auctions was constrained by an annex to the Sino-British Joint Declaration to no more than 50 hectares a year. After the handover there is no more restriction. The “nano flat phenomenon” begs an answer. 

Prior to 2010, the per square foot prices of Hong Kong’s bigger flats were much more expensive than that of smaller flats, which corresponds with intuition as well-off people can afford premium prices for better quality housing. Indeed, prices of bigger flats used to outpace that of smaller flats. But this was reversed after October 2010, when the Special Stamp Duty was introduced. After the SSD was launched, owners of smaller flats were much less inclined to selling their flats and trading up. Selling their flats would have meant a greater supply of starter homes. Buying bigger flats would have meant greater demand for bigger flats. The rise in the prices of smaller flats per square foot relative to bigger flats is the main reason behind developers’ decisions to build more smaller flats.

To put it in perspective, the smallest size flat is “Class A” under the Rating and Valuation Department framework, while Class D and Class E are the biggest flats. By the last quarter of 2010, Class A home prices rose 61 percent since the first quarter of 1999, compared with 105 percent for Class D and Class E homes, which are combined because transactions in these classes are rather low. After the introduction of the SSD in the last quarter of 2010, Class A homes rose a hefty 167 percent up to the third quarter of 2020, much more than the 57 percent increase for the biggest homes.

One might think that the increased supply of new small flats from developers would offset the reduced supply of old small flats. But even though this did happen, there are also incentives for investors to buy the smaller flats for investment purposes. These investors were not deterred by the SSD because many of them were not speculators but were prepared to hold on to them beyond the two or three years after which the SSD would no longer be applicable. Moreover, normally the supply of existing homes from those who want to trade up to bigger flats is much bigger than the new supply from developers.

The SSD was portrayed as a demand management policy by the SAR government. The main effect, unfortunately, was to reduce the supply of existing flats rather than to curtail demand for starter homes. Even more unfortunate is that mortgage policies favored smaller flats, which attracted more buyers into the smaller flat market. 

The Liber Research Community proposed that the government should stipulate on the land lease to mandate that flats must be no smaller than 260 square feet. I am sympathetic with this proposal, as a tiny living space is mentally stressful and may be unfit for living. However, the root cause is really our various special stamp duties, the social cost of which is much bigger than is recognized by our policymakers. 

The author is a senior research fellow at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily. 

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