One of the unique aspects of life in Hong Kong is that after 60 years of sustained economic growth that has dramatically increased the incomes of individuals and households, people still live predominantly in housing units whose sizes have not grown very much over the years. Many in Hong Kong may still have memories of life as depicted in the 1973 movie The House of 72 Tenants (七十二家房客). While standards of accommodation have certainly improved since then, most would agree progress has been limited and slow.
Small compact housing accommodation has long been a familiar sight to the people of Hong Kong. Apart from the 72 sub-tenanted housing units of the movie, there is rented bed space popularly known as caged homes, and more recently sub-divided rooms. I am sure Hong Kong sets the benchmark for high density living in terms of square feet occupied per person.
Asking why housing units are so small is but another way of asking why housing prices are so high. Housing prices per square foot have increased by leaps and bounds in Hong Kong. In contrast, in the US, house prices for single family homes, adjusted for inflation, size, quality and other attributes, have remained quite stable over 130 years. The Figure below shows that house prices in the US were largely unchanged from 1890 to 2008, except for the two periods associated with the Great Depression and the recent housing bubble before the Financial Tsunami. These figures are taken from Yale University Professor Robert Shiller’s study of house prices for single family homes, which measures price changes for the same unit over time and therefore the size, quality and other attributes of the units have to be the same.
Rent Control Deters Development
House prices in the US have not risen even though population and building costs increased steadily in the 20th century. According to the principles of economics, one would predict that as individual and household incomes rise, people would spend more money on housing. Since US home prices per unit have not changed for over a century, it can therefore be concluded that American households must be paying for bigger and better homes. The housing units Americans live in today are indeed bigger and better than before. By contrast, households in Hong Kong are living in units that may be better, but are not a lot bigger. Housing is getting more expensive in Hong Kong, unlike in the US.
Why is this? Simply put, for Americans housing is primarily a consumption commodity, for Hongkongers it has become primarily an investment commodity. On the surface many may find the US house price figures puzzling. Have not house prices in major cities in the US risen a lot over time? Casual observation can be misleading. US home prices did rise during periods of inflation in the 1970s and 1980s, and more relevant to our immediate experience there was a housing bubble in many cities beginning in the late 1990s that lasted for a decade. But home prices for over a century were kept in check by the move to suburbanization in the US, and single family homes grew in size.
In Hong Kong, the great attractiveness of housing has not been its size, quality and other attributes but its long-term appreciation potential. This is intertwined with the issue of why housing units are so small in Hong Kong. I believe that by focusing on size, we will be able to gain a deeper understanding of the reasons behind Hong Kong’s high housing prices. More importantly, it will then become more apparent to all that it is totally wrong-headed to anchor the aims of today’s public housing policy in the continued provision of housing as a consumption commodity.
In my essay published in the Hong Kong Economic Journal, 14 March 2012 entitled “Why is Housing so Expensive?” I explained that the new Town Planning (Amendment) Bill on 7 July 2004 had made rigid planning rules and regulations even more rigid. As a consequence, in the past decade the already considerable gap between housing prices and building costs in Hong Kong became even wider. Regulatory rigidities make it very difficult, costly and time consuming to make land available for housing development. This slows down the supply of housing in the face of rising demand. A natural market equilibrating outcome is to build smaller units so that the total number of units can be increased given the fixed permitted floor space.
The Town Planning Ordinance of 2004 is only one of many major regulatory interventions that have slowed down the supply of housing units in Hong Kong’s history. There were other major interventions in the past decades that also contributed to taking Hong Kong down the path of supplying small housing units. Each and every one of these interventions added new burdens to the development process, increasingly slowed down supply, compressed units sizes, and fuelled further property price increases.
Between 1945 and 1951 the population in Hong Kong increased from 600,000 to 2.1 million. But in 1947, the Hong Kong government imposed rent control on all pre-war housing. The original intention was for this to be a temporary measure for one year, but once enacted it was renewed again and again. The British government in Singapore also imposed rent control in the same year.
Rent control of course reduced the incentive for developers to build housing. It also encouraged landlords to evict tenants on expiry of the old lease in order to raise the rent on leases for new tenants. To protect existing tenants, rent control measures were further augmented to make it impossible for landlords to raise the rent even on new leases. It was then impossible for the landlord to evict tenants, making it very difficult for pre-war housing units to be redeveloped. Faced with one of the worst housing shortage in human history, the Hong Kong government chose a policy that made it impossible for the problem to be properly addressed.
The aim of the rent control ordinance was to protect the immediate interests of the local residents from new arrivals. What it ended up doing was to make property development more difficult, most landlords worse off, and all tenants to suffer, except for the main tenants who could often reap the benefits from subletting the unit, But they too had to reduce their living space.
Some tenants found the congested environment in the old private tenements intolerable and moved into squatter units constructed without authorization on illegally occupied Crown land. Their numbers were, however, quite limited compared with those crowded into the tenements. Between 1945 and 1948 the total number of people in Hong Kong increased from 600,000 to 1,800,000. Only 30,000 were squatters in 1948, representing less than 2% of the population. Even by 1953, when there were 300,000 squatters, they made up only 10% of the total population. The private pre-war tenements had managed to accommodate the vast majority of the new arrivals. The extremely cramped conditions in these tenements need no description. Rent control had set the stage for small compact housing accommodation and high density living in the private sector.
Despite its onerous effects, rent control was not enough on its own to permanently condemn Hong Kong to small housing units for over half a century. In fact, the rent control legislation was amended in the Landlord and Tenant Ordinance (1955) to facilitate redevelopment of the old private tenements. Unfortunately, another policy intervention was inaugurated that made withdrawing from the small housing units’ syndrome that much more difficult.
Resettlement Policy Is Not Aimed at the Poor
Squatter units had been built on Crown land without permission. These were illegal structures. The builders were often construction companies that also built houses legally in the private sector. Such behavior did not ingratiate them with the colonial administration, which often regarded them as opportunistic speculators engaging in illegal, unethical, and exploitative practices. Their contribution to meeting the housing shortage was discounted. At its peak there were an estimated 1,000 developers during this period. This meant the property development business has to be highly competitive making the allegation that this was a lucrative business rather unlikely.
The typical squatter unit provided housing accommodations that were much more spacious than the cramped conditions in the old private tenements. This is corroborated by movies made about life as a squatter at that time, featuring well-known child actor and actress Lai Siu-Tien and Fung Po-Po, that depicted living conditions much more pleasant than those seen in The House of 72 Tenants (七十二家房客). Squatter units were either sold or rented out to households that could afford to pay what government officials at the time described as “exorbitant prices” by a “racket”. This official view is seriously flawed and completely fails to acknowledge why builders had to resort to constructing illegal structures. If developers had not built these illegal structures then prices would have been even higher. That the squatters were able to afford the so-called “exorbitant prices” suggests these occupants were not the poorest in society.
Fires in the squatter areas were common and there were many investigations of them, but one fire, in Shek Kip Mei on Boxing Day in December 1953, triggered the inauguration of the resettlement policy. A popular urban myth has since developed around this policy claiming that its aim was to help the poor get decent housing.
The real purpose was to clear squatter areas for redevelopment since land in the urban area was scarce as a consequence of rent control. From 1945 to 1958 no more than 200 acres of land were made available in the urban area, and less than 30 acres were auctioned. The rest of the land on which building took place was granted by private treaty, primarily for non-profit projects. Since rent control prevented redevelopment, clearing squatter units that had invaded undeveloped land became in effect the only option for obtaining new land for housing (other than lifting rent control). Clearance was the easier option because it affected fewer households and recovered more land, given that squatter areas were less densely occupied than old private tenements.
Public Housing Tenants Pacified by Low Rents
Denis Bray, former Secretary of Home Affairs during 1973-1977 and 1980-1985, wrote, “The resettlement program of the fifties was not a housing program for the poor. It was a means to clear land for redevelopment. You could not apply for a resettlement flat. You were offered one if your hut was about to be pulled down” (Hong Kong Annual Review 1991, p. 9).
These considerations clearly meant that being poor was not a necessary criteria for resettlement. As suggested above, households that became squatters before the resettlement policy was introduced were unlikely to be the poorest in society. When their squatter units were torn down, they were provided with a very basic small unit at a low rent. The size of the new resettlement estate unit was in all likelihood even smaller than the squatter unit, but likely to be more spacious than the cramped conditions in the old private tenements.
Once the public sector program started to provide housing, the stage was set for Hong Kong to become permanently locked into the supply of small housing units. The poor and the not so poor were provided with a uniform standardized housing space, whose only redeeming feature was the low rent that made it somewhat tolerable.
A strange thing also happened. The number of squatters increased from 300,000 in 1953 to 600,000 in 1964. By 1964 squatters represented 20% of the population. The growth in squatters cannot be attributed to the arrival of new immigrants, because the inflow slowed down enormously after 1954.
Two factors contributed to the phenomenal growth of squatters.
First, the government resettlement policy provided strong incentives for tenants living in cramped old private tenements to move out into squatter areas expecting to be resettled in due course. There was widespread speculation on which squatter area would be cleared next. For tenants living in cramped old private tenements, becoming a squatter was an intermediate step to resettlement. It was an investment in getting cheaper and better housing. The more squatter areas the government cleared, the more there were to be cleared; such were the perverse incentives of the resettlement policy.
The injustice of the resettlement program was that it was not aimed at helping the poor. Instead it rewarded those “bold entrepreneurial” ones who were willing to risk becoming an illegal squatter. A means test was eventually introduced as another criterion for admission into the public housing program. For decades the authorities struggled to balance the competing claims of poor households against the need for redevelopment clearance in the political arena. This in turn spawned numerous well organized advocacy groups pursuing competing claims with divided loyalties.
“Mini” Units Become The Norm
Rent control introduced in 1947 made it difficult to repossess buildings because tenants could not be easily evicted. Redevelopment of the old private tenements became close to impossible. So in 1955 amendments to the Landlord and Tenant Ordinance were made to facilitate repossession, as many old buildings were falling apart and becoming dangerous. Landlords could henceforth make a monetary compensation to tenants for the loss of their tenancies. The compensation rate was to be determined by the Tenancy Tribunal. This was followed, in 1956, with an amendment to the Building Ordinance to allow for a more generous plot ratio. Taller buildings could now be built and the incentives to redevelop old buildings were significantly enhanced.
There was a rush to redevelop because rent control had delayed housing construction for over 10 years. Unfortunately, the Tenancy Tribunal had set a rate of compensation that was too low. The structure of compensation was essentially frozen from the late 1950s to the early 1970s, setting the stage for a rush towards excessive reconstruction. Huge numbers of tenants were evicted. The ranks of the squatters swelled. And housing conditions in the squatter areas became equally cramped as the old tenements.
The public housing program had to accommodate the growing numbers of different types of squatters – those who were evicted from buildings that were being demolished and those who voluntarily enrolled to become a squatter in search of resettlement. For our narrative in this essay, the most devastating long-term consequence of the rapid explosive growth of the resettlement program was that vast numbers of the population in Hong Kong were offered small housing units at a very low rent; and this would essentially become their permanent housing condition. Such a condition would of course spillover into living conditions in the private sector, but this will be considered in next week’s essay.
Robert J. Shiller, Irrational Exuberance, 2nd edition, Princeton University Press, 2005