Increasing tenancy control will just make things worse | Kwan Cheuk-chiu

Published (HKT): 2021.04.10 10:10

Last year, Carrie Lam’s government set up the Task Force for the Study on Tenancy Control of Subdivided Units (Task Force) for a term of 18 months, and the report was finally released on the 31st of March. The immediate reaction was largely negative as the tenancy control measures proposed in the report would produce a number of unintended consequences, turning the whole intention of rent control into a road to hell paved with good intentions.

The Task Force has proposed to regulate rent adjustment of subdivided units (SDUs) according to private market principles following the Rating and Valuation Department’s rental index for residential properties. However, without any measures in place to regulate the initial rent level, this in effect encourages owners of SDUs to substantially hike the rent in this regard to compensate for not being able to impose excessive rent adjustments in the future. Under this process, most of the landlords will first evict their existing occupants before the tenancy control is implemented, and then they will set a substantially higher rent level for their subdivided flats. If the government is so naive as to believe that most of the SDU owners will not react in the above way, the author can only say that these senior bureaucrats are truly detached. In particular, the Under Secretary for Transport and Housing, Raymond So, who is an academic, cannot possibly be oblivious to the seriousness of this problem!

In order to safeguard the rights of SDU tenants in renewing their leases, the Task Force recommended that leases should have a fixed period of two years with the renters having the priority to renew for another two years at the end of the lease. This proposal would appear to protect the tenant’s right to rent. However, there is no rose without thorns as the right to renew also represents a restriction for the landlords, and ultimately creates an incentive for the landlords to keep rents at a higher level in the first place to compensate for having less freedom to choose their residents.

The 2+2 proposal may sound beneficial to tenants. However, since the initial rent level is targeted at new renters, the priority renewal right also becomes an incentive for occupants to continue renting the same space so that they can avoid paying potentially higher rents for another subdivided unit. This right to renew, on the contrary, becomes a reason for tenants not to move out, even if their existing subdivided flats may not necessarily be the optimal choice. Yet, many works of literature have already pointed out that reducing tenant mobility will only lead to a decrease in the efficiency of resource allocation, which is definitely not a good thing for the whole society.

From the landlord’s point of view, keeping costs to a minimum becomes very important given that the rent cannot be increased within a short period of time once a subdivided unit is rented out. In the case of maintenance and repair of subdivided units, for example, it is obvious as to whether owners will cut their expenses in this regard under the influence of rent control. Even though the Task Force report suggests that maintenance expenses can be tax-deductible, there is a ceiling on the deductible amount. Moreover, most of the partitioned flats are operated in aged buildings, so the expenses may not be fully offset even if they are tax-deductible. Therefore, the author is worried that once tenancy control is implemented, the living quality of tens of thousands of subdivided flats in Hong Kong may become even worse.

Lastly, tenancy control of subdivided units will certainly reduce their availability. However, due to a strong appetite for subdivided flats, will the reduction in supply lead to more drastic rental increases or even create a further imbalance between supply and demand, possibly making it impossible for some renters with poor conditions to rent them? Furthermore, it is a reality that the rent of subdivided units is high, but should those living in caged homes who are facing the same problems receive the same attention from the government? It seems that this unfair phenomenon has been forgotten!

(Kwan Cheuk-Chiu is an economist and a director at the ACE Centre for Business and Economic Research.)

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