Fixing the Small House Policy
9 September 2014
A court judgment last week shines a spotlight again on the small-house game played by men from the New Territories of HK - not just any men, but those descended down the male line from a person who lived there in 1898 (note that in theory this includes descendants in the male line of men whose mothers lived there in 1898 even if their fathers didn't, but they usually did). This is known as the Small House Policy (SHP), although the term is something of a misnomer, because it allows a 3-storey house (27 ft. high) covering 700 sq. ft. of land, or 2100 sq. ft. overall, about 3 times as large as the average HK dwelling, and that's assuming you don't put an illegal structure on top or underneath it. Women, of course, have no such rights, so an exception had to be included in the Sex Discrimination Ordinance.
The roots of this policy date back to the 99-year lease from imperial China to the UK of the "New Territories" (everything except HK Island, Stonecutters Island and the Kowloon peninsula south of Boundary Street). The lease ran until the end of 30-Jun-1997. The notion is that the change of sovereignty in 1898 left villagers with a new master, and that they should be allowed to continue building homes on the village land they occupied.
According to the Legislative Council Hansard of 29-Nov-1972 (p189), in 1971 the Heung Yee Kuk (HYK), which in essence is the top organisation of indigenous villagers, asked the Government to review the policy and practice on the control of village houses in the New Territories. Agreement in principle (presumably, with the HYK) was reached in March 1972 and the SHP came into effect in December 1972. Politically, when it comes to the New Territories, the Government answers to the HYK, not the other way around.
According to the 1972 Hansard, at the time, only 7% of dwellings in the rural NT (presumably excluding the parts of Kowloon above Boundary Street) were what the Government called "permanent houses and flats", with 35% traditional village houses, 30% lawful temporary structures and 28% unlawful temporary structures. The massive new towns we see today had barely started. As Denis Bray, then District Commissioner, New Territories, said:
"I do not see these measures as anything more than interim measures which will complement the major job of producing a comprehensive development plan for the New Territories".
42 years later, the SHP (after modifications) is still with us. Notably, the Hansard only talks of 2-storey buildings; at some point later, 3-storey buildings were allowed, increasing the benefit by 50%.
In the year to 31-Mar-2014, Government figures show that 1048 Small Houses were completed, and the pace has stepped up from a 12-year low of 721 in 2004-5. In the latest year, 498 houses had the "restriction on alienation" removed, for a premium of $651m, or $1.307m per house, or $622 per gross sq. ft.. This restriction only applies to houses built on private land for 5 years after completion, or perpetually to houses built on land granted by the Government by Private Treaty. To us this premium looks remarkably low. In the case of private land it is probably dodged anyway with the use of deferred-sale agreements which push the transaction beyond the 5-year period.
Illegal transactions are unenforceable
Now, back to that court case: Chan Yau v Calvin Chan & Joe Chan Cho Wing, HCA 666/2007. The plaintiff Chan Yau sued the defendants for breach of contract from their agreement to develop a village house in Tai Po. The defendants argued that even if such an agreement existed, it was unenforceable on the grounds of illegality.
According to the judgment, Chan Yau had, at least since 1988, been in property development and real estate agency through Sweet Home Properties, which operated several branches in Tai Po. The defendants, who are half-brothers, are indigenous villagers of Ha Wong Yi Au, Tai Po. The plaintiff shares a distant common ancestor with the defendants (don't we all), but does not regard them as relatives. Calvin Chan inherited some land from his granddad in 1992, which already had a house on it, but also included some vacant land, which he carved out to be developed in the name of Joe Chan, his half-brother, who had not yet claimed his "right" to build a house under the SHP. Joe held the land as nominee for Calvin - that is, he became the registered owner but not the beneficial owner. The three men entered into three agreements in Nov-Dec-1997, which provided that Joe would get HK$300k for selling his "right", Calvin would get HK$400k for providing the land, and then Chan Yau and Calvin would jointly finance and share the development. Independently of this, Calvin also claimed his SHP "right" on a separate piece of land in 1996.
However, in 2000, Chan Yau and Calvin decided they could squeeze an extra house into the lot if they split it into two pieces, so in a fourth agreement, they agreed to split it into about 145 sq. m. (1561 sq. ft., presumably including a garden) and 50 sq. m. (538 sq. ft.). The second piece wasn't big enough for a house, so they successfully applied to buy some adjacent Government land to enlarge it to 700 sq. ft., which was finally approved in 2005, which apparently only cost HK$7,920 in land premium. They agreed that Chan Yau would own the first site (Lot 660 SERP) and would pay Calvin HK$200k for agreeing to split the site. In 2006, Chan Yau and Calvin began disputing whether the second house and site (Lot 745) was to be jointly developed or whether the old agreements were scrapped, with Calvin developing the second site alone.
Judge Godfrey Lam Wan Ho concluded that the 2000 agreement meant that the joint development enshrined in the 1997 agreements would apply to the second site, accepting Chan Yau's version of the facts. However, he then concluded that because all three parties knew that the scheme involved Joe Chan making a false declaration to the Government that he was the "sole owner" of the second site, in order to get Government approval for the house, the contracts were unenforceable on the grounds of illegality. He also ruled that Chan Yau and Calvin Chan were in pari delicto (love the Latin), meaning they were equally to blame for engaging in the transaction, and therefor Chan Yau could not have his money back from Calvin.
The civil finding of an illegal declaration to Government could open Joe up to criminal charges and the others to conspiracy to put him up to it, so pleading that the transaction was illegal was an interesting defence. Meanwhile, on 13-Nov-2013, Joe sued Calvin claiming that Joe owned Lot 745 and had paid Calvin HK$270,000 for it, in a separate case, HCA 2163/2013, which is ongoing.
This and other similar cases have highlighted the rampant abuse of the original intent of the SHP, which was to provide housing for indigenous villagers, not to allow them to just monetize what they now regard as "rights". The policy was defective from the start, because it assumed that every new male descendant would need a new patch of land and house, not just re-using their father's or grandfather's house when he died, even if they did inherit it, as Calvin did. That flaw, plus the much higher birth rates of the past, led to a proliferation of eligible men (some of whom live overseas), estimated by HYK in 2002 to reach 240,000.
Another issue with the policy is that the Government does not keep a register of eligible men (perhaps it has no register of the villagers in 1898, although it should have birth registry records from some point since then), but instead requires a declaration, signed by the indigenous "Village Representative" (read: chieftain) or by a Chairman of Vice Chairman of the relevant Rural Committee, certifying that the applicant is an indigenous villager. Currently, there are 588 Indigenous Villages (plus another 32 villages which are combined into 15 Composite Indigenous Villages). They elect 789 Indigenous Inhabitant Representatives to 27 Rural Committees. The Chairman and Vice-Chairman of each committee is automatically a council member of the HYK. The Chairman of each committee also automatically becomes a District Councilor. The electors are only indigenous men (down the male line from 1898) and their spouses or surviving spouses (spouse of course means wife, given that in HK men cannot marry men).
Readers can imagine the intricacies of getting that signature from the village chief confirming your "right" to a windfall. Did I know your father and grandfather? Hmmm, let me think. Show me some evidence, preferably printed on small orange bits of paper the size of bank notes or shares in your development company. We're not saying that happens in every case, but the structure invites corruption.
A market-based solution
No politician in HK seems willing to take on the HYK and its vested interests. Chief Secretary (then Development Secretary) Carrie Lam Cheng Yuet Ngor briefly floated the idea of terminating claims for men born after 30-Jun-2029 (i.e. they will reach 18 after what we call the "Second Handover" in 2047), but she quickly reversed, using that old "personal views" excuse. She's also shown a lot less interest in illegal structures since her new boss was caught with several on the Peak.
Webb-site has a voluntary, market-based solution to the potentially endless queue for Small Houses. Each year, the Government should conduct a reverse tender, with a small quota of say 1,000, and invite offers from men who can prove their 1898 male-line lineage, to extinguish all claims that they and their under-18 or unborn male descendants may ever make under the SHP.
To avoid remorse (having asked for too little), the lowest 1,000 offers would be taken at the highest price they offer, subject to a pre-determined cap. For example, if the lowest 1,000 offer their "rights" for up to $100,000, then they will each get $100,000, a total cost of HK$100m. Thus, in return for accelerating what could be a very long wait, they get a lower windfall, and the Government gets to extinguish the problem over time at a relatively low cost. The quota should be set to ensure scarcity, with no promise that it will happen every year, but if bids are low enough, then the quota could be increased. If repeated for 15 years, by 2029 the problem might even be small enough to end the SHP for newborn boys altogether as Carrie Lam had proposed, and to overcome political objection.
A registry should be established for all indigenous males who wish to benefit from that status. Standards of proof should be strict; a chain of birth certificates linking male ascendants back to a person living in the New Territories in 1898, or similar documentary support, not the word of a village chief who wasn't alive then. An appeal board would be needed to decide difficult cases.
Also, to avoid an avalanche of applications from overseas "indigenous" men who have no intention of living in HK, some of whom have never set foot here, applicants in the tender should have to prove that they have resided in HK continuously for 5 years up to the application date with absences of not more than, say 90 days per year.
At the same time, more should be done to ensure that the original policy intent is followed. In particular, the Government should stop agreeing to remove the non-alienation clause on land leases granted for small houses in return for premiums, because those premiums always leave room for a windfall and also reduce the stock of indigenous housing. Think of the current system as a bucket with a hole in it - we are pouring in indigenous housing almost as fast as it is flowing out into the rest of the market. The same should apply to building licenses for Small Houses built on private land. If you want to claim under the SHP, then the resulting house should remain in the indigenous market.
This would mean that these houses could only be sold or transferred to another indigenous male, who does not have to pay a premium. Any such buyer of a second-hand indigenous home would forego his "right" to claim under the SHP in future, and any indigenous male who inherits one would also have satisfied his claim, so he doesn't get both his late father's house and another house.
Returning to the policy intent, while still allowing indigenous males who genuinely need to occupy a small house to eventually have one, would reduce the money to be made from flipping them into the private sector, and this would then increase the attraction of the buy-back tender, thereby reducing the clearance price.
What about the girls?
For our female readers who think the SHP is unfair to them, well yes, of course it is. Unfortunately, if the Government were to apply the policy to all descendants of 1898 villagers, then millions of HK (and overseas) people would have at least 1 ancestor who was alive in the NT in 1898. That's due to the exponential effect of family trees. A 30 year-old person today might have 32 great-great-great-grandparents who were in their 30s in 1898, only 1 of whom has to have been living in the NT for their entire family to qualify. The gender-neutral alternative would be to take only the first-born child of each person down the line, but the logistics of proving who that was are much harder.
© Webb-site.com, 2014