Analyses on supply and self-enforcement mechanism of sub-divided units in Hong Kong

Abstract

Informal housing sector is featured by the existence of rent gap with quasi- rent, which emerges temporarily before formal market fully responds to the housing demand. In Hong Kong, sub-divided unit (SDU) market has been a key component of the informal housing sector. Property owners supply rental units through subdividing their housing units while renters’ housing needs are met at the expense of living qualities and tenure security. This study is a pioneer attempt to examine the supply factors and self-enforcement mechanism of SDUs. SDU supply analysis is conducted through deploying SDU subdivision conditions collected through on-site visits to 419 private domestic buildings in Hong Kong. This study finds that SDU supply is positively correlated with size of the rent gap, disinvestment conditions and accessibility of the housing units. The results not only provide a fuller market landscape about Hong Kong SDU supply but also offer important academic and policy implications for future studies and affordable housing policies. SDU landlords have also been observed to overcharge on utility to capture quasi-rent from the tenants. Through an econometric analysis of a survey conducted for 185 SDU households, this study further provides new evidence to better understand the institutional factors underpinning the competition of quasi-rent in this informal housing market. It postulates that the level of quasi-rent captured by the landlords in the form of electricity surcharge is a function of contractual formality, landlords’ governance strength and households’ characteristics. Written agreements strengthen security of tenure and hence the legal positions of SDU tenants. Empirical findings show that on average SDU household pays 33.8% more utility surcharge if households are without written tenancy contract. Besides, due to the potential fire hazards and hygiene problems associated with high population density in SDU properties and buildings, landlords may use utility surcharge as a device to deal with the issues. The empirical results show that SDU electricity surcharges increase with household density. Estimations show that SDUs with medium and high subdivision density are overcharged 25.5% and 29.9% more on electricity than those with low subdivision density. If there is no garbage collection service in the buildings, SDU household pays 18.6% more on electricity surcharge. Households with one less employed member are also found to face 14.8% more overcharge. This is a pioneer study to examine the effects of tenure security, governance strength and households’ characteristics on self-enforcement mechanism of Hong Kong informal housing market.