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Hong Kong Property Bubble Likely To Worsen In Short-term: Capital Economics

9/11/2012 8:29 AM ET

The Hong Kong government's proposed measures to improve housing affordability are unlikely to have their desired effect, and the city's property bubble is set to deteriorate in the near term. With short-term property prices rising steadily, Hong Kong's real estate sector is on the verge of a crash, indicating a sharp decline in prices in the future, Capital Economics Asia Economist Gareth Leather said.

A number of factors, including a downturn in China, financial liberalization in the mainland opening up alternatives for cash-rich Chinese, or simply a realization that high-end property in Hong Kong is significantly overvalued, could trigger a fall in property prices, the economist noted.

Capital Economics forecasts that substantial price falls - in the region of around 30 percent - would be needed before Hong Kong's property market returns to balance.

The firm noted that the damage from a real estate crash to Hong Kong's banking sector would be limited. However, the construction sector is likely to be badly affected, while subdued sentiments could lead to a significant fall in private consumption.

According to the economist, the measures introduced by the government to improve housing affordability, including plans to boost the supply of homes, as well as new rules that favor local buyers over those from mainland China, would only push prices further up and increase risks to the wider economy.

Property prices in Hong Kong have nearly doubled since the start of 2009, driven mainly by low interest rates, strong credit growth, booming demand from mainland Chinese buyers and low levels of house building.

by RTT Staff Writer

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