The ‘Minimum flat size’ requirement fails to address the reason of nano-flats’ existence

    06/15/2022 - 11:07

    This article appeared originally in the China Daily on 21 June, 2022
    Authors: Ryan Ip, Research Director and Head of Land & Housing Research, and Jason Leung, Researcher of Land & Housing at Our Hong Kong Foundation.



    [Read related report - Annual 10-Year Housing Supply Forecast]

    As a prosperous “Asia’s world city”, Hong Kong is renowned for its high efficiency stemming from its high-density development. Yet, this also comes with shortcomings, including limited living space and unaffordable housing prices. According to the “Hong Kong 2030+: Towards a Planning Vision and Strategy Transcending 2030”, promulgated in October 2021, Hong Kong’s per capita living space is merely 161 square feet (15 square meters), much lower than Tokyo’s 210 and Singapore’s 270. The gap is even more glaring when we compare it with Shenzhen’s 300 square feet, which is almost two times that of ours. Society’s demands for larger homes are a vivid manifestation of the shortage of land and housing supply. This article aims at exploring our living quality from both private- and public-housing perspectives, particularly the trend in living space.

    The proportion of small units in total private housing completions has been increasing over the past two decades. In particular, the proportion of Class-A units — those with saleable area of 430 square feet or less — rose more than twofold from a low of 10 percent in 2005-09 to 34 percent in 2015-19. It is estimated that the percentage would rise further to 45 percent in the first half of the 2020s. Similarly, there is a decreasing trend in the average gross floor area (GFA) of newly completed private housing units. By analyzing currently available sales brochures and building plans, we estimate that the average GFA will drop to a new low of under 600 square feet in 2023. Based on the general efficiency ratio of 80 percent, the saleable area will be less than 480 square feet.

    As for “nano-flats”, i.e., residential units with saleable area of less than 215 square feet, according to available sales brochures and building plans so far, completions will continue to rise, reaching a peak in 2023 and gradually plateau in 2024-25. In terms of geography, nano-flats were mostly built in the urban areas of Hong Kong Island and Kowloon. In particular, Kowloon was, and is expected to continue to be, the major source for nano-flat completions. However, as a departure from past trends, Kowloon and the New Territories will both contribute a similar amount of future nano-flat completions. A plausible explanation for this phenomenon is that as housing prices climb and become less affordable, the decline in unit sizes will begin to spread from the urban areas to the New Territories, since the latter is where most homebuyers traditionally buy their first flats.

    Upon the first announcement of the minimum flat size requirement in December 2021, speculation has been rife on the future of nano-flats, as some wondered if this will mark the end for the supply of these units. It is worth noting, however, that despite the extended application of the restriction starting from February 2022, private projects not subject to lease modification and/or land exchange, mostly private redevelopment projects, are still not covered. It is foreseeable that in the coming four years, nearly half of the newly completed nano-flats will come from private redevelopment projects. Nevertheless, while it is too early to conclude that we have seen the back of nano-flats, the increasing trend in completions is expected to halt.

    As for public housing, they also cannot refrain from nano-flats supply, especially the Green Form Subsidised Home Ownership Scheme (GSH). Since the pilot GSH project, King Tai Court in San Po Kong, was launched for sale in 2016, nano-flats have accounted for a significant proportion of all GSH projects. Looking back at the GSH projects sold in 2016, 2018, 2019 and 2021, on average 15 percent of the units each year are below 215 square feet, i.e., nano-flats. While the exact flat size distribution for GSH projects to be sold in 2022 is yet to be fully disclosed, the smallest flat size in GSH has been decreasing, dropping from 192 square feet in 2016 to 184 square feet in 2022.

    Similar to GSH, the Home Ownership Scheme (HOS) is also going south in its flat size. In the first year of the resumption of HOS sale in 2014, flats over 430 square feet constituted 97 percent. However, the proportion plunged sharply to below 50 percent in the subsequent years, further dropping to 38 percent in 2020. The smallest flat size under the HOS has also been continuously shrinking from approximately 370 square feet in 2014-17 to 277 in 2018-20, and it will shrink further to 186 square feet in 2022. In other words, nano-flats will make their debut in the HOS 2022, among which the 186-square-foot Kai Yan Court flat in Kai Tak will be the smallest HOS flat ever.

    Given the incessant decline in the average flat area of both public and private housing units, larger homes remain a long-term ideal. The special administrative region government’s imposition of the minimum flat size requirement for private housing may halt the decreasing trend of unit sizes, but the emergence of nano-flats itself is a form of market equilibrium reflecting limited affordability and rising property prices. The restriction is merely a stopgap measure, as it only addresses the symptom, but not the root cause in the imbalance between demand and supply of private housing units. Moreover, it remains to be observed whether the government will cease building public housing units of less than 280 square feet in line with the minimum flat-size requirement for private housing.

    As pointed out in our recently launched Annual 10-Year Housing Supply Forecast, both pursuits of increasing housing production and living space would require additional land. Hence, as we have repeatedly advocated, all land and housing supply measures must be expedited to tackle the problem at its root. It is only with the stabilization of land supply and rebound in housing completions that average living space per capita may increase.