November 7, 2024 · 《Ming Pao》
Although the Director of the Hong Kong and Macao Affairs Office, Xia Baolong, has already set Hong Kong a deadline to bid farewell to subdivided flats by 2049, and ending subdivided flats is also a consensus in Hong Kong society, the reality remains frustrating: low-income families living in subdivided flats will have to continue residing in cramped, unsafe, and unsanitary conditions for some time to come.
Fortunately, the Hong Kong government is implementing a series of measures to address the subdivided-flat problem: over the past few years, 17,900 transitional housing units have been completed; another 3,300 transitional public housing units will be built within the next two years; and over the next five years, a further 189,000 public housing units will be constructed. As these units come on stream, the government is expected to have the resources to improve the living environment of subdivided-flat tenants. At the same time, the government is legislating a “Simple and Modest Flat” (簡樸房) regulatory regime to ensure that subdivided flats meet standards for floor area, fire safety, ventilation, and hygiene, and to phase out substandard rental units in an orderly manner in response to market supply and demand and public housing supply.
However, the government’s plan has drawn criticism from concern groups. These groups claim that such measures are insufficient to rapidly ease the hardship of subdivided-flat tenants. On the contrary, they argue that the government must regulate starting rents if subdivided-flat tenants are to experience more immediate relief.
1. Rent Regulation Will Bring Untold Troubles
Yet academic research on rent regulation clearly demonstrates that rent regulation brings untold troubles, and will prove counter-productive, deepening the subdivided-flat crisis.
First, rent regulation reduces housing mobility. Research shows that the expansion of rent regulation in San Francisco reduced tenant mobility by 20%. This is because tenants are reluctant to give up the regulated low rents, and therefore no longer willing to move to better living environments.1 The result is the very opposite of the goal of saying goodbye to subdivided flats.
Second, rent regulation makes landlords unwilling to rent out their units. If the regulated rent is set too low, landlords will rationally assess that the controlled rent cannot cover their property costs, and will therefore reduce the supply of rental housing. Research shows that San Francisco landlords affected by rent regulation reduced the supply of rental housing by 15% through selling or redeveloping their properties, which over the long term pushed up market rents and ultimately undermined the goal of rent regulation.2
Third, rent regulation drives up rents in units not covered by the regulation. For example, a comprehensive review by Kholodilin3 shows that a large body of research has demonstrated how rent regulation increases rents in unregulated units, the reason being that below-market rents generate excess demand, which has to be absorbed by unregulated units.
Fourth, rent regulation reduces landlords’ investment incentives. One reason is that rent regulation locks in tenants, and landlords lose the initiative to attract tenants. As a result, landlords become less willing to provide suitable living conditions, and may even prefer to leave their properties vacant.
For the above reasons, the government should not regulate starting rents. If starting rents are regulated, landlords will not be able to recoup their investments in subdivided flats and will be unwilling to improve living conditions, while low-income tenants will be locked into substandard living environments for the long term. The result will be a permanent underclass of tenants living in substandard housing, and Hong Kong will find it all the harder to achieve the goal of saying goodbye to subdivided flats.
2. Hong Kong’s Experience with Rent Regulation: Easy to Invite, Hard to Send Away
In fact, Hong Kong has implemented rent regulation on several occasions in the past, and the experience has been the same as elsewhere: rental supply has fallen and market rents have risen over the long term. After the harmful effects of rent regulation gradually emerged, the government had no choice but to relax the controls step by step and ultimately abolish them. Since Hong Kong first introduced rent regulation in 1921, an “implement → lift rent regulation” cycle has recurred many times. The second author of this article once analysed this phenomenon in an article titled “The Vicious Cycle of Rent Regulation” (see the July 1981 issue of《Ming Pao Monthly》).
Under normal circumstances, the rental market is supplied by a large number of individual landlords, who find it difficult to form a cartel to control rents, and cannot be compared with property developers, whose market concentration is much higher. In other words, the rental market does not suffer from “market failure” or monopoly, and generally does not require government intervention. However, Hong Kong has historically experienced repeated waves of immigration, with massive influxes of migrants driving sharp increases in rents. Once large numbers of tenants are forced to move out, social instability may ensue, and the government has no choice but to introduce rent regulation as a temporary measure to reassure the public.
In the short term, rent regulation has a “robbing the rich to help the poor” effect, satisfying populist demands. Yet while rent regulation benefits existing tenants (those who signed leases before the regulation was introduced), it harms new tenants — by reducing the supply of newly available rental units, the starting rent for new tenants rises, leaving them worse off than before the regulation. In the short term, new tenants are the minority and existing tenants the majority; but as time goes on, new tenants grow from minority to majority. Long-term rent regulation will harm the majority of tenants, reduce supply in the rental market, and damage the interests of society as a whole.
Rent regulation is often easy to invite but hard to send away — once implemented, the protected tenants become a group with vested interests; moreover, the gap between regulated and market rents tends to widen over time, making it extremely difficult for the government to relax the controls. Hong Kong began implementing rent regulation in 1970, but it took 28 years, until 1998, when the Asian financial crisis caused rents to plunge sharply, for rent regulation to be lifted.
3. Sound Solutions to Accelerate Easing the Plight of Subdivided-Flat Residents
To accelerate the easing of the plight of subdivided-flat residents, there are many alternative approaches. As the first author of this article has argued (see《Ming Pao》, 16 May 2024, “Strengthen Well-Off Tenant Checks: Will Subdivided-Flat Households Be Spared?”), the surge in subdivided flats is partly due to maladministration of public housing. A key to reducing subdivided flats is to tighten the Well-Off Tenant Policy for public rental housing — because well-off tenants are unwilling to give up their excessively cheap existing units, poor families find it hard to move into public housing and are forced to live in cramped, expensive, and unsafe subdivided flats.
According to demographic data, the number of well-off tenants in public rental housing has risen sharply in recent years. The number of public rental housing well-off tenants whose real household income exceeds twice the 2021 public housing income limit surged from 18,900 in 2006 to 51,580 in 2021. Public housing has thus become seriously mismatched.
This year’s Policy Address proposes restricting the eligibility of well-off tenants and raising their rents. This sound measure will help ease the subdivided-flat crisis, encouraging well-off public rental housing tenants to surrender their units, so that families on the public housing waiting list can move in. At the same time, the government must also build more Home Ownership Scheme (HOS) flats so that eligible public rental housing residents can more readily purchase HOS flats, freeing up more public rental housing units in the process.
4. Expand the Unpaid-Premium Rental Scheme to Increase Rental Supply
Another major problem with current housing policy is that Home Ownership Scheme flats and Tenants Purchase Scheme flats cannot be used as rental units before the land premium has been paid. As a result, HOS and TPS units lack liquidity and cannot supplement the supply of private-market rental housing. To increase the supply of private rental housing, the government could expand and improve the “Unpaid-Premium Subsidised Sale Housing — Rental Scheme”, allowing subsidised sale units with unpaid premium (or part of a unit) to be rented out to eligible tenants. The eligibility criteria for tenants can also be relaxed — currently, eligible tenants must have been on the public rental housing waiting list for at least 3 years. This could be changed to allow any Hong Kong permanent resident to rent an unpaid-premium subsidised sale unit.
To ease the burden on subdivided-flat residents, the government can also provide direct support to the subdivided-flat tenant community. For example, community groups have recently set up community living rooms that provide subdivided-flat tenants with social services and public space. By expanding such programmes, the government can enable subdivided-flat tenants to enjoy more social services and public resources.
Similarly, the government can expand the Jockey Club’s “See the New Life” programme. The programme provides social-work and capacity-building support to low-income families in transitional housing. The authorities could consider extending this programme to subdivided-flat tenants served through the community living room network, providing the social capital that these families urgently need.
According to media reports, after this year’s Policy Address set out the preliminary plan to regulate subdivided flats, Legislative Council members have begun to receive pleas for help from subdivided-flat households, with landlords intending to repossess their units for renovation. Although the subdivided-flat regulation is expected to allow a grace period of several years for landlords to carry out conversion work, some landlords are expected to renovate ahead of time to avoid the surge in renovation fees when the conversion peak arrives. Subdivided-flat households forced to move out now, who have been on the public housing waiting list for less than 3 years, can only apply for Category B transitional housing; yet at present the ratio of Category A to Category B transitional housing is 8:2. Category A quotas (for those on the waiting list for 3 years or more) are ample, while Category B quotas are often oversubscribed. We suggest that the authorities raise the Category B quota to 30% or more, to look after the residents who are being made homeless because the government has announced the new plan to regulate subdivided flats.
In sum, the government should avoid regulating starting rents, and should seek out other innovative and feasible approaches to ease the plight of subdivided-flat tenants. Only through smart policy design can Hong Kong eliminate the subdivided-flat problem sooner, ahead of the 2049 deadline. The authors hope that concern groups supporting subdivided-flat tenants will consider the above proposals to accelerate the easing of the plight of subdivided-flat residents, and join us in our efforts to push for public housing reform.
(Translation supported by AI)
