An empirical study of the rising trend of the completion of micro-flats in Hong Kong

Abstract

In view of the increasing completion of micro flats in Hong Kong in recent year, this research aims to study the reasons behind the phenomenon. This research would extend the work of previous studies to differentiate initiatives that drive developers to construct the micro-flats in the supply side, and the psychological forces and investment motivation in demand side. its empirical findings would serve as evidence for the policy makers to evaluate the polices related to the micro-flat as a remedial measure for housing shortage problem. This study firsts elaborated factors that possibly caused the trend of rapid completion of micro-flats from both supply-side (Developer) and demand-side (Purchasers) perspectives. It is found that the trend of micro-flats was initiated by the government through inclusion of restrictive covenants such as the minimum amount of flat provided within the tender documents, and promoting small size flat by URA development projects. Private developers then followed the pace of the government and resulting in nearly 50% of the newly completion belongs to micro-flats. In demand side, it is found that the 90% mortgage-to-loan ratio for small lump-sum flats made small unit more affordable to purchaser. The incentive for purchasing the micro-flat can also be related to a trade-off between different factors including but not limit to, social norms, geographical features, and affordability. An online survey was conducted to find out the background information on those residents including the age, occupation, and household salary of the occupants of micro flats, and reasons that motivated them to make this decision in a ranking order. Telephone interviews were also conducted to interview 3 – 5 potential micro-flat buyers on understanding why they will make this decision in-depth, and explore potential area or perspective that this study may overlook. The result obtained from both online survey and telephone interviews regarding to the factors that occupants mostly considered during their choice of micro-flat is nearly identical. They agreed that affordability is the major reason, following by the accessibility to transportation/workplace. Additionally, the survey also found out that the major group of people willing to own/rent micro-flats are young adults with age between 30-35 and household salary above $60000 per month. Respondents from telephone interview further elaborated that their incentive of purchasing a flat is being limited to the hurdle of stress test offered by Hong Kong Monetary Authority as well as some social norms besides the affordability problem. It is also suggested that the young couples chose to live in micro-flat has less incentive for family planning, which is another social problem in the making. Another focus of this study is the profitability of micro-flat as an investment instrument. People has expressed their incentive for purchasing micro-flats as investment purpose from both literature finding and survey finding, however, not being examined by rigorous statistical figure. The evaluation of profitability is separated into 2 parts, capital growth and annual rental yield. A regression approach with 3 hedonic price models were constructed to study the price level changes and control for different attributes of the building. The transactions of 56 housing estates across KL, HKI and NT has been used for data analysis. Additionally, the rental yield of micro-flat is used to compare with the rental yield of Hong Kong overall property market and other common financial instruments. The empirical model shows that some common attributes such as open kitchen, enclosed toilet may also bring intrinsic value to the property. While only micro-flats in New Territories region perform better than the region’ average capital growth, the capital growth of micro-flats in other regions are either identical or slightly poorer than the average. By considering the annual rental yield, it is found that the yield of micro-flats prevails among all the comparable during the study years. Therefore, it is suggested that investing in micro-flat is considerable, but the performance will be varying according to the location. In addition to the academic contribution of this study, the outcomes of this study also have policy implications to toward the future city planning and amendment of Ordinance. The empirical results show people’s dissatisfaction toward their living space and view dominating micro-flat development as a short-term measure due to its negative impact to future labor force and existing living condition. Policymakers should figure out a balance between supply and quality of housing.