Attempting to allay the concerns of local residents over the supply of small and medium-sized flats, the Hong Kong government has been putting up residential sites for auction/tender, with flat quantum and flat size stipulations listed in the conditions of sale, since late 2010. Apart from the public outcry over the difficulties in buying homes in the city due to surging home prices, I also see another logical reason why the government is laying down such a land supply policy direction.

There is a clear reduction in household size in recent years. According to the 2011 Population Census, the city’s population growth remains slow with an average annual growth rate of 0.6% during 2006-2011, while the number of domestic households increased by 1.2% over the same period. This faster growth rate suggests the demographic structure of a declining household size continuing over the last five years. And, it is getting smaller with the latest figure averaging 2.9 members per household compared with 3.1 in 2006 and 3.0 in 2001.

In absolute terms, the number of domestic households went up by about 143,000 during 2006-2011. On the supply side, did we have sufficient supply to cater to these new households over the same period?

In the private market, about 49,000 new residential units were completed in 2007-2011. Of course, the 143,000 new household demand not only includes households seeking accommodation in the private residential market, but also in public rental housing. The Housing Authority data shows about 70,000 rental housing flats being built in the past five years. Assuming all these newly completed residential units were taken up (public rental housing vacancy at only 1% and unsold completed private sector flats at only 4,000 units) and each new household occupied a flat, there was still a shortage of about 24,000 units.

In fact, the 143,000 figure only accounts for new household formation and neglects investment demand driven locally (i.e. a second or third property for rental purposes) and externally (i.e. investment demand for Hong Kong properties from overseas). Therefore, that housing demand exceeded supply is unquestionable.

In view of the trend of smaller-sized household continuing in the foreseeable future, with the government projecting household size to go down further to 2.8 starting from 2016, it is anticipated that residential demand for smaller sized flats will stay strong. With the first batch of residential sites having flat-size and minimum flat number restrictions coming on the market in 2015, the demand-supply imbalance should start to improve, especially in the mass and medium segment.

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