Why the Rent of Smaller Sized Housing Units Grows Faster?

[Figure is added to show the time series of the difference between large-sized and small-sized housing rental growth rates, added on Jun 28 20:42]

Figure 1 shows a very stunning set of information about the housing markets of Hong Kong. The red line (HPI) refers to the housing price index, which has been increasing by almost 5 times (494%) since 2003. In the wake of the extremely unaffordable housing situation, more and more households have to rent. The orange line (HRI) refers to the housing rental index, which has also been increasing by almost 151% since 2003. It is almost a double of the median household income growth (84%, the brown line MHI) and almost 3 times of the inflation (47%, the light brown line CPI). They clearly show that low-income households especially are paying higher and higher proportion of the income on housing expenditure.

Figure 2 shows that the rent of smaller sized housing units has been increasing faster than larger sized units in the past decade. The red line (Class A — refers to smaller sized housing units, according to the Rating and Valuation Department’s definition). The grey line (Class E — refers to larger sized housing units). It is almost a reverse of the situation 10 years ago, as indicated by the cross-over between the red line and the grey line in Figure 2 since 2012. Why the rent of smaller sized housing units would grow much faster than larger sized units since 2012?

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Figure 3 shows the time series of the difference between the large-sized (Class E) and small-sized (Class A) housing rental growth rates (blue curve). It shows a decreasing trend from positive zone to negative zone. The 5-year moving average (red curve) clearly shows the inversion of the rental difference curve from positive to negative since 2010.

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Figure 3 Time series of the difference between the large-sized and small-sized housing rental growth rates, 1994–2019. Source: Rating and Valuation Department

There can be various reasons, but one of the arguments that I put forward in my recent article published in HKEJ (Yiu, 2019) is about the large number of tourists and short-term visitors.

It is commonly recognized that tourists and visitors can tolerate to stay at smaller sized units, and is much more elastic to price difference. It explains why most of the hotel rooms are smaller in size. In fact, Hong Kong has been ranked the city with the highest number of tourists in 2018. There are almost 60 million visitors per year (about 5 million per month, see Figure 4). The sudden huge increase in the number of visitors results in an insufficient number of hotel and guesthouse rooms. My estimation is that there are more than 60,000 housing units (Yiu, 2013) being converted into guesthouse rooms for tourists or Airbnb in Hong Kong. Since most of these rooms are smaller sized housing units, it explains why the rent of smaller sized housing units has been growing much faster.

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Figure 4 Number of Tourists visiting Hong Kong per month. Source: Trading Economics

Even though the supply of housing in the past 2 decades has been concentrating at smaller sized housing units, the supply has not been catered for the huge and unexpected increase in the number of tourists. It is mainly due to the implementation of the Individual Visit Scheme (IVS) for Mainland China’s tourists.

This phenomenon has been worsened since the popularity of Airbnb services. How to plan for the accommodation of tourists in view of the high volatility in the number would be one of the challenges of the most visited cities in the world.

[A Chinese version of this article is available at https://vocus.cc/hk_real_estate_econ/5d137947fd89780001a6c390]

References

Yiu, C.Y. 姚松炎 (2013) 房產學人 — — 到底遊客住在哪裏?頭條日報 11月19日。[Chinese] http://hd.stheadline.com/news/columns/222/20131119/262067/%E5%B0%88%E6%AC%84-%E6%88%BF%E7%94%A2%E5%AD%B8%E4%BA%BA-%E5%88%B0%E5%BA%95%E9%81%8A%E5%AE%A2%E4%BD%8F%E5%9C%A8%E5%93%AA%E8%A3%8F

Yiu, C.Y. 姚松炎 (2019) 細單位有租金支撐,15年升近6倍,信報財經月刊6月號, 507,106–108。[Chinese] https://monthly.hkej.com/monthly/article/id/2173049/%E7%B4%B0%E5%96%AE%E4%BD%8D15%E5%B9%B4%E5%8D%87%E8%BF%916%E5%80%8D?fbclid=IwAR34JgmxlIZwnKQicmNNnNik4mBZ1U34Ezkk6r4hvUfrfwqwLcz1xJJQTeE

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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