The rise of Hong Kong’s public housing program can be ultimately traced to three factors. First was the arrival of new immigrants that increased the population from 600,000 in 1945 to 2.3 million in 1951. Second was the effects of the government’s disastrous imposition of rent control on pre-war housing in 1947. And third was the government’s hostility to development in the early years of the post-war period. The huge increase in the demand for housing was met with policies that made it extremely difficult for developers to redevelop the existing housing stock. An effective private sector supply response thus was prevented.


The rent control measure enacted in 1947 was conceived as a temporary response to the anticipated return of people to Hong Kong at the end of the Japanese Occupation. But it created a truly devastating set of consequences because this inflow turned into a massive influx of refugees escaping a raging civil war in China and the collapse of the Guomindang regime. Temporary rent control measures then became permanent ones with calamitous long-term consequences.


In 1947 the Un-official members of the Legislative Council representing property and business interests were very critical of government impediments to private development and called on the government to remove all unnecessary regulatory barriers. These voices were effectively brushed aside because Officials made up the majority in the Legco. All the Un-officials voted against the government to no avail.


Land Scarcity and Housing Shortages


The issue was important politically because any new development or redevelopment required extensive consultation with the government due to the Crown monopoly of land ownership, the imposition of numerous lease conditions and the use of the Building Ordinance to vet all development proposals. Because of these conditions, development could not take place easily or quickly. When housing was in high demand, the ensuing bottlenecks resulted in high land prices at auction and expensive housing prices and rents.


The Un-officials members realized that the situation had to be remedied. Unfortunately, according to Professor Alan Smart, “for a combination of technical reasons, bureaucratic interests, distrust of private developers as speculators, concern for government revenues, a commitment to town planning and building standards, and a concern of some officials that the workers not be exploited by high rents and low standards, the government resisted these pressures” (pp. 38-39).


When the government began to run out of land for development, a shortsighted resettlement policy was introduced to clear squatter areas. Squatter rights were largely ignored except for resettlement purposes. The program mushroomed into a massive permanent public housing policy where tenants in the old private tenements realized that the better way to get out of their cramped living conditions was to settle in squatter areas from which government would resettle them, rather than wait for private redevelopment.


In 1953, on the eve of the launching of the resettlement program, there were only 300,000 squatters who made up about 10% of the population at that time. By 1964 their numbers had doubled to 600,000 and constituted 20% of the population. It is ironic that the much acclaimed achievement of the grand public housing program was in effect a remedial measure necessitated by initial government folly.


It is worth noting that very little of the land that came available in this period was allocated to private development. From 1945 to 1958 no more than 200 acres of land were made available for development in the urban areas, of which less than 30 acres were auctioned. The rest was granted by private treaty, primarily to non-profit projects. An SCMP editorial urged “the government to form sites for sale to builders to resolve the housing shortage since many squatters can afford regular dwellings” (31 December 1958).


Private developers meanwhile were building squatter housing units to be sold or rented out to those who either could no longer tolerate the old private tenements or were prospecting for resettlement opportunities. The squatters could afford to pay what was described by government officials at that time as exorbitant prices and rents.


Given all the constraints, the market accommodated the influx of immigrants well, although the population paid for it in terms of high rents, overcrowding, and inadequate facilities. The supply of legal private housing units was constrained by the rent control on pre-war housing and also by the government attitude towards development. Private developers supplied illegal squatter housing by building on Crown Land without permission, especially agricultural land. Some of these illegal structures were even elaborate, multi-storey, reinforced concrete buildings. At one point there were over 1,000 developers operating in both the legal and squatter markets. The real difference between the two markets was whether permission had been granted by government to use the land and build on it.


The government naturally blamed private developers for exacerbating the squatter problem. It is amusing to read the appalling hypocrisy in an official justification for the housing resettlement program: “[B]y this resettlement program we are breaking a ‘racket’ ….If we can give these people living space at a fair rent, and if we can do this on a really large scale, we shall knock the bottom out of a ‘racket’ which helps keep the cost of living up” (Hong Kong Hansard, 2 March 1955, p.40).


Lima’s Other Path


Are their alternative solutions to an explosive growth in housing demand resulting from the arrival of immigrants into urban centers? Economist Hernando de Soto’s account of the efforts to understand and resolve the squatter settlements in Lima, Peru shows an alternative approach that Hong Kong should seriously consider adopting at this time to resolve its housing problem.


The population in Peru grew rapidly from 7 million in 1940 to almost 18 million 1981 at a rate of about 2.3% a year. The increase was substantially greater in the capital city of Lima, where the population multiplied by 7.6 times from about 600,000 in 1940 to 4.6 million in 1981. In 1940 the city housed 8.6% of Peru’s population; by 1981 it was housing 26.0%. A substantial part of the increase came from migrants whose numbers increased from 300,000 to 1.9 million between 1940 and 1981.


When the migrants arrived in Lima they encountered a hostile world. The urban dwellers did not want the peasants to descend on the cities. Assistance and development programs for rural areas were designed to ensure that the peasants improved their lot back home, well away from the cities. Civilization was expected to go to the countryside; the peasants were not expected to come looking for it.


The hostility was extreme. A ban was imposed on the construction of cheap apartments. Migrants found that it was tremendously difficult for them to access many legally established social and economic provisions, such as housing and education, and to enter business or get a job. Peru’s legal regulatory system had been developed to meet the needs and bolster the privileges of dominant groups in society. Before the peasants arrived the implicit discrimination in the legal regulatory system was not apparent. But it quickly was revealed when large numbers of migrants showed up.


In order to survive, the migrants had to live a life outside the formal economy and society, without the protection of the law. They lived, for example, in illegally built houses in shanty towns –– equivalent to Hong Kong’s squatter areas –– and they worked as illegal street vendors, again a common sight in post-war Hong Kong.


These individuals were not criminals as such, but they violated specific legal regulations that denied them their rights. As a result they became branded as the “informals” and in the late 1980s constitute 48.0% of the economically active population in Peru. They contribute 38.9% of Peru’s GDP and 61.2% of work hours are devoted to informal activities. Their neighborhoods are acquired and built outside of the law in exactly the reverse order to what happens in the formal world: they first occupy the land, then they build on it, next they install infrastructure. Subsequently they may gain title for their dwelling, and only at the end do they acquire ownership.


Hernando de Soto estimated that the replacement cost of the informal housing built in the period 1960-1984 amounted to US$8.3 billion, accounted for 42.6% of Lima’s dwellings and housed 47% of its population. In the same period, the total public investment in housing in the formal economy, including investment in middle-class housing, totaled US$862.2 million. This was a mere 10.4% of the informal investments.


Property Rights and Economic Prosperity


Hernando de Soto found that life in the informal settlements was neither anarchic nor disorganized as many erroneously imagined. The settlers had evolved a set of extralegal norms to regulate social relations in the settlements. These informal settlements had elaborate governance and management organizations to foster stability and security for the acquired dwellings and the inhabitants.


The order in these settlements can be better understood by looking at the process by which the migrants acquired property. Land was acquired in two ways: by illegal purchase of agricultural land or by invasion of government land. Invasions that were organized could be gradual or violent and involved a hundred or forty thousand settlers. The invaders drafted meticulous plans –– including an invasion contract –– with the help of professional invaders comprising unionists, lawyers, businessmen, politicians and others. The planning covered operational, organizational, political, legal, and publicity dimensions. The establishment, demarcation and distribution of the land to be acquired are first drawn up in an agreed invasion contract among the invaders beforehand.  And once the invasion was executed, informal governance and management organizations of the settlement were rolled out.


The invaders quickly set up various facilities within the settlement, like day care centers and communal kitchens, and negotiated with the nearest minibus operators to extend a route to the new settlement. Street vendors sold food and building materials and other provisions would appear. Law and order was maintained through organizing defense pickets. A common practice was to name the settlement after the President’s wife or some prominent political figure in an attempt to persuade that person to endorse the settlement.


The immediate effect was the establishment of a right to the land. But this right was merely an “expectative property right”, established by one’s own initiative outside the legal framework. It applied temporarily until such time as the government conferred definite ownership on the members of the informal settlement or, with the passage of time, popular organizations became able to defend it as effectively as the state.


The route to legalizing the settlements was difficult. As many as 159 bureaucratic steps had to be completed in order for residents to receive title to their lots and incorporate the neighborhood into the city –– a process Hernando de Soto estimated would take on average 20 years to complete. When this occurred the settler had enhanced security and stable rights to the dwelling he acquired through invasion. However, this did not signify complete integration into the formal legal system –– rather, it was exceptional recognition. Still the settlers regarded this recognition as decisive for increasing their investment in their dwelling and settlement. Thus, the greater the security of their property, the greater the investment they would make in it, and vice versa.


Hernando do Soto studied a sample of 37 informal settlements across Lima and found that the average value of buildings whose owners had received full legal title was 9 times that of buildings whose owners did not have title. These figures suggested that “expectative property rights” did not provide sufficient incentive to invest large sums of money in one’s house and in the settlement. People had to be able and willing to invest at least 9 times more to get some measure of protection from the formal legal system.


Without a definitive title, selling the land and renting out the buildings resulting from an invasion were prohibited by law. Residents therefore were always vulnerable, which forced them to take a number of costly precautionary measures. The situation was particularly difficult when it came to disposing of property.


When informals wanted to sell, they would claim they were transferring the buildings but not the land itself in order to disguise the sale. Moreover, as there were still no definitive rights and the system of extralegal norms only protected those who had devised it, the transfer had to be approved by the residents of the settlement. Buyers also had to demonstrate their adherence to the invasion contract and any supplementary agreements.


Renting was equally tricky. Because the tenant occupied the dwelling, informals feared the government would come to recognize the tenant as the owner of the land. Informals often preferred to disguise the tenancy as a lodging arrangement and the owner stayed or pretended to stay in the building with the actual tenant.


Hernando de Soto’s study became enormously influential throughout Latin America and the world. Many countries have established research centers devoted to the study of informality. In Peru, the government adopted his proposal to grant immediate legal land and building titles to all the settlers for free to bring them back into the formal legal economy. Half the population in Lima became empowered literally overnight. A massive makeover was initiated in the shabby looking informal settlements as settlers began to invest in their dwellings and the community. The Peruvian economy experienced a prolonged recovery and growth.


The work to bring the vast informal Peruvian economy back into the formal economy also had important political consequences. It undercut political support for the terrorist movement known as the Shining Path and restored political stability in Peruvian society.


Different Property Rights of Indigenous and Non-Indigenous Villagers 


Opposition is currently mounting to a government plan to reclaim land to build three new towns, known as the North East New Territories New Development Areas. The project has raised the troubling issue of differences in the treatment of indigenous villagers who lived in the New Territories before the British took control in 1898, and those who arrived more recently –– the non-indigenous villagers. The same kind of conflict came to the fore over Tsoi Yuen Village, which was demolished in 2011 to make way for the high-speed railway link to Guangzhou.


These conflicts stem from complications over land ownership. Indigenous villagers are owners of the village land they live on. They possess legal title to their land and dwellings. Non-indigenous villagers are more like squatters, whose presence on government land has been “tolerated” as long as they do not develop it. Unlike urban squatters, they have not occupied land that is keenly sought after for redevelopment, so for decades they have not been resettled into public housing. Some of them have bought land from the rural gentry but received no paper records of the transactions. The origins and status of non-indigenous villagers in relation to their occupied land and dwellings are essentially similar to the Peruvian “informals” in their settlements.


Indigenous residents occupying village land are protected under the law, including by the Basic Law. Since they own the land they are naturally entitled to at least fair market compensation from the government, including continuing their chosen lifestyle in another location. They therefore have good reason to support government initiatives to redevelop their property.


Most non-indigenous villagers, however, are not granted such protection because they do not have and cannot possess legal title to the property they occupy. They are either squatters on land without legal permission or purchasers of agricultural land without land title. Their status is essentially identical to the tolerated “informals” in Lima. At best they will be offered limited compensation (for example, $600,000 n the case of the Tsoi Yuen villagers) or a place in urban public housing when they are forced to move on. In essence, their options are identical to the ones available to squatters whose homes burned down in the Shek Kip Mei fire some 60 years ago.


Just as the Peruvian “informals” had the service of a team of professional invaders who helped them to organize an invasion contract, settle in, keep order in the settlement, and fight for their “expectative property right”, Hong Kong also has  political and social advocates that provide support for the non-indigenous villagers. They are motivated by either their civic opposition to government, a conservationist ideology to preserve an alternative lifestyle against urbanization, resistance to encroachment by anything associated with the mainland or mainlanders, or a “city state” political mindset. Many are politicians and politicians in training.


Property Rights Influence Villager Decision


Non-indigenous villagers in Tsoi Yuen Village and the North East New Territories have been settled in these villages often for decades. Their dwellings have long been tolerated by government just as Lima’s informal settlements were tolerated. The villagers have made investments in their dwellings, many of which are spacious, and they are familiar with and attached to their village neighborhoods.


It is far from obvious that a public housing unit in the urban area would be adequate compensation. As with their village home, a public housing unit would not offer full private property ownership rights. The villager would become either a tenant or a partial owner of an HOS unit that cannot be disposed of without paying an exorbitant land premium. The compensation package they would receive would have no upside potential because the government subsidized housing unit provides shelter only; it is not a bona fide asset.


Is it surprising then that the attitudes of non-indigenous villagers are completely different from the indigenous ones? The difference stems from property rights as they are recognized by the government. The “expectative property right” of the rural squatter today is different from the urban squatter of yesterday. If the government wants to  redevelop land in the New Territories, it  has two choices: either recognize that the non-indigenous villager has legal property rights over their dwellings and land  or offer a better compensation package. The former path is similar to Peru’s, the latter to Singapore which will be discussed next week. But if the government sticks to the present policy, it will have to pay a very high transaction cost for every redevelopment project. And society will be divided again and again.


In the recent political show of force at the public forum on redeveloping the North East New Territories a scuffle broke out when some participants raised the English flag. I have no idea whether these individuals are loyalist of the ex-colonial government, but the Peruvians had found similar gestures to be a worthwhile political theatrical. The Peruvians often named their newly successfully invaded settlement after the President’s wife or some celebrity political figure in a bid to gain their support. Political theatricals are the same the world over whatever your history. It took the Peruvian government 60 years and a terrorist movement to change its policy.




Hernando de Soto, The Other Path: The Economic Answer to Terrorism, Basic Books, New York, 1989

Alan Smart, Making Room: Squatter Clearance in Hong Kong, Hong Kong University Press, 1992.

AlanSmart, The Shek Kip Mei Myth: Squatters, Fires and Colonial Rule in Hong Kong, 1950-1963, Hong Kong University Press, 2006.

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