Treating the Symptoms - A Critical Review of ... - Civic Exchange

Perverse Incentives34While the lack of organizational structures and the patchyenforcement of regulations have contributed to the problemof decaying buildings, the problems would have been lesssevere had property owners had an economic incentive tomaintain their properties. Unfortunately, for many owners,the incentives run in the opposite direction. The reasons forthis are varied, some having to do with government policiesand practices, and others having to do with uncompetitiveand distorted markets.The legacy of rent control andprotected tenanciesUntil fairly recently, Hong Kong had policies of rentcontrol and security of tenure which applied to mostprivate domestic rental properties and some commercialproperties. Rent control legislation, which limitedthe rate at which rents could be increased, was firstimplemented in 1921. 122 In the post-war period, thegovernment’s attempts to repeal rent control were defeatedby strong public opposition, 123 and rent controls werenot only retained for pre-war residential properties butalso extended to post-war properties constructed before1981. 124 Rent controls were finally phased out in 1998. 125Rent controls were supplemented by security of tenure,which restricted the ability of landlords to remove tenantseven after their leases had expired. By 1973, tenantsbasically had unlimited security of tenure as long as theywere willing to pay the prevailing market rent on the flat.Landlords could not force them to leave unless they appliedto the Lands Tribunal for permission to repossess the flat fornon-payment of rent, self-occupation, or redevelopment. 126Tenants were also legally entitled to compensation ifrequired to leave. Security of tenure was abolished in 2004,after which new rental leases were no longer protected.Existing protected tenancies were gradually phased outunder a transitional arrangement.Rent controls and protected tenancies were a responseto extreme housing shortages, especially in the post-warperiod when a damaged housing stock was met by a floodof immigrants. In the era before widespread public housing,tenants feared drastic rent increases and exploitationby landlords. 127 While the root causes for Hong Kong’shousing shortages lay in its artificially limited land supply,rent controls and protected tenancies offered a simple andpolitically popular solution, at the cost of introducingadditional distortions into the marketplace.The distorting effects of rent controls and protectedtenancies have been widely studied by economists, andit is not the intention of this section to discuss themcomprehensively. However, some of these distortions dohave important consequences for urban renewal, both interms of redevelopment and upkeep of buildings.By making it less profitable to be a landlord, rent controlsreduce the willingness of developers to build more rentalaccommodation, thereby depressing the supply of housingand achieving the opposite of what they are intended todo. If new buildings are subject to rent controls as well,redevelopment is likely to be delayed. 128 When landlordscannot charge the full market value for their properties,they will usually try to save money by cutting down onmaintenance. Properties are therefore more likely tobecome run down. This worsens living conditions andcauses properties to deteriorate further.Security of tenure can also act as an impediment toredevelopment to some extent since it imposes a transactioncost on the decision to sell, redevelop or to otherwise upgradeproperties. One unfortunate effect of security of tenure wasthat it encouraged landlords to repossess their properties byillegally harassing their tenants. Some property owners evenpreferred to leave flats empty instead of renting them out,forgoing rental income in order to more easily resell the flatfor profit later.While rent controls and security of tenure have now beenphased out, they have left a legacy of run-down tenementbuildings on the urban landscape.