The International Monetary Fund warned on Wednesday against a continued sharp rise in Hong Kong's house prices and said that the city-state's property sector posed a major threat to the prospects of the domestic economy.
"Property sector is the main source of domestic economic risk," the Washington-based lender said in regular annual report on the economy. The Fund pointed out that the run-up in property prices has resumed after a short respite late last year. Housing prices have increased 20 percent so far this year and are now double the trough of 2008.
"A combination of limited supply of new housing, strong demand from local and non-local purchasers, and low interest rates imported from the United States has been driving up prices," the IMF report said. In addition, the sharp run-up in prices raises the risk of an abrupt correction.
According to the lender, a sharp price correction would lead to falling collateral values and negative wealth effects, which could trigger an adverse feedback loop among economic activity, bank lending and the property market.
Hong Kong stepped up its efforts to cool the property market in the second half of this year. In October, the government imposed a 15 percent tax on non-resident and corporate property buyers and raised the resale stamp duty fees by about 5 percentage points.
Despite a jump in house prices, consumer price pressures have eased in line with the cooling economy. Inflation is expected to remain moderate, averaging 3.75 percent this year and 3.5 percent next year, according to IMF.
The Fund forecasts the growth in gross domestic product to slow to 1.25 percent this year due to the impact of widespread weakness in the global economy. The slowdown is being driven by trade developments, although domestic demand is proving resilient owing to a supportive fiscal stance and continued strength in the labor market.
IMF expects the GDP growth to recover to around 3 percent next year as the drag from net exports abates.
The report said that the Linked Exchange Rate System, or LERS, is "a transparent, credible, and effective exchange rate regime." It also noted that the recent purchase of U.S. dollars by the Hong Kong Monetary Authority amid fresh capital inflows was part of the normal functioning of the exchange rate regime.
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