Heyday of nano flats in Hong Kong may be ending, but more housing progress is needed

    05/13/2023 - 09:00

    This article appeared originally in SCMP on 13 May, 2023.
    Authors: Jason Leung, Researcher and Wing Poon, Policy Advocacy Manager at Our Hong Kong Foundation

    Heyday of nano flats in Hong Kong may be ending, but more housing progress is needed.jpg

    As “Asia’s World City”, Hong Kong is renowned for its high efficiency, which stems in part from its high-density development. But this also comes with shortcomings – epitomised by the city’s shoebox housing units and a residential property market that is the least affordable in the world.

    According to the 2021 population census, Hong Kong’s per capita living space is just 172 sq ft, much smaller than Tokyo’s 210 sq ft and Singapore’s 270 sq ft. The difference is glaring when we compare it with Shenzhen’s 300 sq ft – nearly double that of ours.

    Hong Kong’s high housing prices have had a significant impact on market behaviour in recent years, most prominently the building of nano flats, some measuring only 128 sq ft – the tiniest flats earned themselves the nickname “king-size bed” units.

    Buyers snapped them up despite having to spend millions of Hong Kong dollars on a home that is often smaller than a typical car park space (130 sq ft). Ultimately, this is the consequence of the severe land and housing shortages in Hong Kong and the resulting demand-supply imbalances.

    But there are encouraging signs. The government is clearly setting out to improve living space, and market dynamics are shifting. It seems first-time homeowners are no longer scrambling for any unit that requires a smaller lump sum initial payment – no matter how small the flat – just to get a foot on the property ladder.

    Against the backdrop of high housing prices, small flats – classed as those with a saleable floor area of 430 sq ft or below – have an edge in that they carry a lower price tag and down payment. Before the first quarter of 2020, small flats had a sell-through rate consistently above 90 per cent, a greater percentage of the small housing stock being sold than that of mid-sized units, which have a saleable floor area between 430 sq ft and 752 sq ft.

    The relaxation of mortgage rules in October 2019, and again last February, was a game-changer, making it easier for homebuyers to get mortgages for pricier flats. With the down payment required substantially lowered, buyers’ ability to afford and appetite for larger units were boosted. This is reflected in the sell-through rates, for which mid-sized flats overtook small flats in the second quarter of 2020, a trend that has continued.

    The increased supply of subsidised housing also offered a competitive alternative to small flats in the private housing market. Subsidised flats offer a larger living space for the same lump sum initial payment, and are more attractive to prospective homebuyers with a limited budget who would otherwise have to consider smaller private flats, even nano housing.

    The impact was evident. The sell-through rate for small flats fell during and immediately after the apartment selection process for the sale of Home Ownership Scheme flats in 2019 and 2020, suggesting that purchasing power was drawn away from small and nano flats towards subsidised housing.

    With more affordable home-ownership opportunities becoming available, more prospective buyers are expected to wait, rather than rush into the private housing market for small, even nano, flats.

    Moreover, the government has made clear its intention to improve living space by introducing a minimum flat size of 280 sq ft in December 2021 and extending this rule to all private homes in February 2022. Together with the above-mentioned favourable demand and supply factors, changes are gradually feeding through from the sales phase to the upstream design and construction stage.

    Last year, 9,881 small flats were built, making up 47 per cent of the private housing completed. Based on our analysis of the latest sales brochures and building plans, we expect the percentage of small flats built to peak this year, with mid-sized housing forming the bulk of completions after 2024.

    There are also signs that developers are no longer so keen to build more nano flats. But the effect will be gradual as there are still units under construction that predate the minimum flat size requirement imposed by the government. Based on available sales brochures and building plans so far, we expect nano flat completions to peak this year and gradually plateau in 2024−2025.

    While the heyday of small housing – including nano flats – may finally be behind us, there is still some way to go before Hong Kong can fulfil its aspirations of “living bigger”. It would require tackling the land and housing shortage at the root.

    The government must strictly adhere to its housing supply strategy and press on with major land development projects such as the Kau Yi Chau artificial islands and the Northern Metropolis. These will provide a solid foundation for a better quality of life, worthy of Hong Kong’s standing as a vibrant and global metropolis.