(This essay was published in Hong Kong Economic Journal on 20 May 2015.)
In 1969, I visited a classmate whose family had recently moved into Man Cheong Building in the Jordan area. This was one of eight buildings completed in the late 1960s bounded by Man Cheong Street on the north and west, Man Wui Street on the south, and Ferry Street on the east. All eight were named “Man-something.”
Some thirty years later, and every time I came out of the Western Harbor Tunnel and drove down the flyover to Jordan Road, the “saw-tooth” skyline of the four buildings facing the western reclamation site came unmistakably into sight (see Photo). By then I had read Professor Steven Cheung’s 1979 study on rent control and housing reconstruction in Hong Kong and appreciated the fascinating economic story behind these buildings. My essay here draws heavily on his work.
These buildings are the product of the practice to “set-back” the top stories of buildings, which was adopted during the most infamous boom-bust periods of property markets and banking cycles in postwar Hong Kong. They also reflect the disastrous historical effects of rent control legislation and building codes on development.
Legal Origins of Building Codes
In 19th century London, one of the controlling factors for regulating the height of buildings was the light-angle. This was motivated by a concern about sanitary conditions. The frequent epidemics at that time were seen as a result of a lack of sunlight filtering through from between buildings onto damp streets littered with horse manure.
The English Public Health Act of 1875 regulated building heights to allow the sunlight to reach the streets by aiming for a maximum diagonal of 45 degrees between the building line (at ground level) on one side of a new street and the skyline formed by edge of the roof on the other side. The angle is not explicitly mentioned but implied in a set of by-laws stating:
“If the height of such building be 15 feet, he shall cause such distance (width of open space) to be 15 feet at the least.
“If the height of such building be 25 feet, he shall cause such distance to be 20 feet at the least.
“If the height of such building be 35 feet, or exceed 35 feet, he shall cause such distance to be 25 feet at the least.”
In these cases, the implied angle varied from 45 degrees to 54.5 degrees.
The light-angle terminology in terms of degrees was employed in the English Housing Act of 1890 and London Building Act of 1894. They mention the use of a 63.5-degree angle for back yards, and the calculation to be decided from the center line of the open space between two rows of buildings. So a building with a height of 35 feet should have a distance of 17.5 feet from its ground line to the center of the road (or 35 feet of open space across the street, which is the same as a diagonal of 45 degrees from the ground line of one building to the edge of the roof of the building on the opposite side of the street).
Building heights in Hong Kong were also regulated in the same way. After a series of epidemic outbreaks in the city, the Building Ordinance of 1903 was enacted with its contents transplanted from London. It specified the same 63.5-degree rule for regulating building heights.
Interestingly, E. P. Richards published a report in 1914 on town planning issues in the city of Calcutta. The Richards Report was commissioned by the Calcutta Improvement Trust (an official body of the British ruling government responsible for housing development) to improve slum-housing conditions in Calcutta.
The Report blamed the horrible living conditions in Calcutta on the 1911 Calcutta Improvement Act, which simply copied unthinkingly the English Housing Act of 1890 and the London Building Act of 1894, and adopted its light-angle rules – rules that were developed for London, located on a latitude totally different from that of Calcutta and also of Hong Kong. Ideally a more vertical angle could be set in sub-tropical and tropical latitudes for the rays of the sun to come over the buildings. Building heights could then be higher and more population could be accommodated.
The transplantation of many legal rules from Britain was often civilizing, but in this instance they became the cause of slum living conditions when the cities became flooded with rural migrants. A similar condition existed in Singapore and created the political conditions for Lee Kuan Yew’s rise to power in 1959.
Rent Control and Development in Hong Kong
The population in Hong Kong rose from 600,000 in 1945 to 2.3 million in 1951. The demand for housing exploded and rents shot through the roof. The British Military Administration immediately clamped controls on the rents of all prewar private premises through a 1945 proclamation. The Landlord and Tenant Ordinance was enacted subsequently in 1947.
Landlords could only repossess a building for reconstruction either by eviction or by exemption (with special permission of the Governor). But with many tenancies and sub-tenancies in a building, it was very difficult for landlords to evict sitting tenants and sub-tenants under rent control, where every eviction order would have to be contested in the Tenancy Tribunal. Redevelopment was almost impossible.
The prevailing Building Ordinance, which had been enacted in 1935, severely restricted building heights, and reduced landlords’ incentive to reconstruct. As a by-product, there was less potential for conflict between landlords and tenants. Land leased from the Crown after 1903 continued to be regulated at a light angle of 63.5 degrees, and those before at 68 degrees. So for land leased either before or after 1903, the respective height of the building could not exceed 1.25 or 1.0 times the width of the street. There was an additional requirement disallowing any building from exceeding five stories, except by special consent of the Governor. Buildings constructed under these limitations reached an average height of 3.6 stories with a low standard deviation of 0.8 stories.
In 1955 the situation was altered radically with a new ordinance permitting considerably higher structures. The height of the main wall facing the street was not to exceed 76 degrees from the horizontal, with greater heights permitted for corner and “island” lots. The average height of buildings constructed in the period 1960-62 rose to 9.39 stories.
The changes in the Building Ordinance of 1955 were in direct conflict with the objectives of rent control, which sought to protect the tenant by making eviction difficult and reconstruction impossible. It appears the building authorities failed to recognize the incompatibility of their new bill with the rent control legislation. The stage could have been set for an intense escalation of conflict between landlords and tenants.
This was fortunately avoided by a landmark court case on possession and reconstruction in 1954. Mr. John Way, who was the Chairman of the Tenancy Tribunal, was well aware of the enormous social cost of the delays in redevelopment and was leaning towards granting permission to make it easier for possession to take place and reconstruction to move forward. He invented the most ingenious argument, exploited a poor drafting in the rent control legislation, and convinced the court to permit redevelopment to occur.
Prompted by Mr. Way’s ruling, the Legislative Council met to discuss the setting of compensation for tenants to surrender their tenancies. The Tenancy Tribunal was given the authority to set compensation, giving it eminent domain in reconstruction proposals. This greatly lowered the transaction costs for evicting tenants. The vague criterion of “public interest” was now reduced to the simple measure that the new building must be superior to the old one, which was obviously true since the 1955 Building Ordinance permitted taller structures.
With the new rules in place, eviction cases declined drastically as landlord and tenant came to quick agreement. Without Mr. Way’s ruling, the easing of the building code would have largely been futile, since prewar premises covered under the rent control legislation were situated on the most desirable properties. Had it not been for his ruling, Hong Kong’s postwar reconstruction history would have stalled and the city would have ended up like Calcutta.
Singapore avoided a similar fate only through the high-handed rule of Lee Kuan-Yew that forced successful redevelopment. If anyone wonders why life in Hong Kong is so much more lively and dynamic than in Singapore, I think Mr. Way deserves most of the credit. Because of him, the spirit and vitality of common law is also much better formed in our city where development and redevelopment are more driven by private market initiatives.
Compensation and the 1962 Disaster
Unfortunately, the Tenancy Tribunal at the recommendation of member Mr. M. W. Lo fixed a low rate of compensation. The efficient rate of compensation for an old building should have been set as the discounted present value of the difference between market rents and controlled rents, which would be fair for both landlord and tenant. But this was not to be the case.
Over time the compensation rate bore little resemblance to the economically efficient rate. As a consequence, redevelopment in Hong Kong took place at a breakneck pace. Over-congestion became a problem as essential infrastructure lagged behind. An ad hoc plot-ratio amendment was enacted in 1962 to reduce the amount of redeveloped land space. But it had an odd loophole.
An explanatory note attached to the amendment stated that the new regulation would come into operation on 19 October 1962, but the Building Authority would be able to approve submissions for building works according to the old regulations if these were submitted at any time prior to 1 January 1966. This loophole triggered a disastrous building rush that swept through Hong Kong between 1962 and 1965.
Landlords used all means to submit building plans ahead of the deadline. The plans submitted during this period also introduced the practice of “set-back” profusely – which was the best proof of the rush to build. Under the ruling of a 76-degree angle from the horizontal, a landlord was able to increase his floor space if he chose to set back the top stories in steps, while still observing that angle for the hypotenuse (see Figure). The number of “extra” stories could be as many as 3 to 7 stories depending on the building site.
For the “set-back,” the cost of construction is exceptionally high because of the irregular structural framing and the decreasing area for each of the “set-back” floors. But it was worth doing for the landlord because this was a now or never decision. Had all the ambitious building plans submitted in this window period carried to fruition, over one-third of the city’s buildings would have been replaced. This, of course, did not happen because an economic recession soon emerged.
A minor run on the banks in 1964 was followed by a surge of heavier bank runs in 1965, until even the largest Chinese bank was forced into a change of ownership. The housing boom collapsed from mid-1965 until late 1969. I remember this period vividly. Half-built structures stood everywhere. The 1967 riots occurred in the middle of this period. I suspect the rush of construction might have triggered the bank runs and the economic recession, and perhaps even contributed to the riots as the living conditions of the people evicted from their homes worsened.
Such has been the disastrous unintended consequences of legislation and regulation. It has left a permanent mark on many buildings, some of which are still standing today. The Jordan area development described at the beginning of this essay will most likely stand for some time. If you look carefully at the photo, you will see the “set-back” appears on the top of both sides of every building, except the side facing south on Man Cheong Street. It was at the corner of a major road junction with more open space so there was no need to “set-back” on this side. As a student, I wondered why there was this asymmetric treatment of the buildings and even imagined that there must have been some profound fung-shui explanation.
Steven N S. Cheung, “Rent Control and Housing Reconstruction: The Postwar Experience of Prewar Premises in Hong Kong,” Journal of Law and Economics, April 1979
E. P. Richards, The Condition, Improvement and Town Planning of the City of Calcutta and Contiguous Areas – The Richards Report, Calcutta Improvement Trust, Jennings & Bewley, 1914