Lately, quite a few commentators have urged the HKSAR government to increase the size of housing units in Hong Kong, particularly Public Rental Housing (PRH) and Home Ownership Scheme (HOS) housing. This sounds great. Yet its unintended consequences could be disastrous. One commentator suggested that we start with the public housing in the Northern Metropolis, where land is more abundant. I am afraid, however, that this could not only adversely affect our fiscal position but could also undermine the more urgent task of helping poorly housed people improve their housing conditions.
According to my analysis, there is room for improvement in our housing policy. We must learn lessons from the past. The Tenants Purchase Scheme (TPS) was counterproductive because selling PRH units cheaply to existing tenants sapped the demand for HOS housing. In 1998, many buyers who were lucky enough to get the chance to buy an HOS flat walked away from their down payments as home prices spiraled down following the Asian financial crisis. Charming Garden in Mongkok was once billed as the most desirable HOS project. It opened for sales in the middle of 1997. Yet about 50 percent of buyers walked away from their down payments and never completed the purchases. One unit was marked sold at HK$2.41 million ($307,000) in February 1998. The transaction was canceled within five months. It finally sold for HK$2.07 million. Many people blamed the Asian financial crisis for the slump in the housing market. But we had a linked exchange rate; we had a huge fiscal reserve and were running a large fiscal surplus in 1997-98 at HK$77 billion on top of HK$25.7 billion in the previous fiscal year.
Considering that TPS units were being sold at prices of less than HK$100,000 to around HK$350,000, the HOS units were simply vastly overpriced. Declines in the prices of HOS units meant that owners were unable to trade up to private housing, which accordingly also collapsed in price. The domino effect led to a total collapse of the housing market and a serious fiscal crisis. TPS finally ended in November 2002. The housing market recovered in the summer of 2003 following the end of the SARS episode. With that, the government’s fiscal position quickly swung from deficit to surplus.
The government never reduced the unit sizes of PRH or HOS housing. As a matter of fact, the per capita living space in PRH has climbed steadily over the years. According to Housing in Figures 2025, the average living space per person showed a steady increase from 13.1 square meters in 2015 to 14.1 sq m in 2025. However, as Professor Michael Wong of the University of Hong Kong pointed out, the average size of a dwelling unit in Hong Kong fell from 50.4 sq m in 1995 to only 37.2 sq m in 2024, representing a decline of 26 percent. This is largely a result of the proliferation of tiny flats after the Special Stamp Duty (SSD) was introduced in November 2010. The policy had to wait till February 2024 to end. Under the SSD, homeowners had little incentive to trade up to better housing because three years must pass before a flat can be resold without the owner having to pay the onerous SSD. This reduced supply, leading to a sharp rise in the per-square foot price of small units. Profit-seeking developers responded by producing mainly tiny flats. Raising the size of PRH or HOS flats will not help and will also greatly increase the financial burden on the government, to the extent that it may not be fiscally sustainable.
Larger PRH flats and HOS will cost more to build and will require more land. Moreover, PRH tenants and HOS owners will have less incentive to move out. At the same time, they will attract more demand. This will come at the expense of private flats. Government revenue from land sales and profit tax from developers will fall. To cover the shortfall, the government may have to raise taxes and may even have to cut support for healthcare, education, and social services.
In any case, given that per capita living space in public housing is already rising and given that the waiting time for PRH flats is still long, it is more urgent to increase PRH supply than to raise the size of PRH flats. As a matter of principle, PRH should be reserved for those who cannot afford private housing. Rent-seeking is human nature. To curb rent-seeking, the most effective way is to ensure that those who can afford private housing leave PRH of their own accord. This means that PRH must not occupy prime land and must be relatively basic. If a household wants a bigger flat, it should seek it through its own efforts on the private market.
We should look at the statistics carefully when formulating housing policy. Sometimes, well-intended policies can be counterproductive. The TPS was supposed to be a quick way to raise the homeownership rate. Instead, it stagnated. The SSD was supposed to help first-time homebuyers. Starter homes became more expensive, and nano-flats proliferated.
The author is an honorary research fellow at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University, and an adjunct professor at the Academy for Applied Policy Studies and Education Futures, the Education University of Hong Kong.
The views do not necessarily reflect those of China Daily.
