Hong Kong's strong first quarter growth has added to concerns over unsustainably high property prices, Capital Economics Senior China Economist Mark Williams said in a note on Friday.
The city's economy expanded at the fastest pace in a year during the three months ended March. Gross domestic product rose 7.2 percent annually in the first quarter compared to a revised 6.4 percent increase in the previous three months.
The government said that the economy is poised for a real growth of 5 percent - 6 percent in 2011, faster than the 4 percent - 5 percent forecast announced in February, even after allowing for some moderation for the rest of the year.
The danger of overheating continues to increase with the underlying inflation, which excludes one-off measures, set to rise further given the strength of the economy and the rising rental costs, said Williams. Relative to incomes, property prices are now near the 1990s bubble high.
"Property bulls point to the strength of purchases by mainland buyers, but such demand could be a source of volatility rather than stability over the medium term," the economist said. He expects the Chinese government to implement measures at some point to discourage wealthy individuals from buying trophy homes overseas.
"Prices could plausibly halve if buyers started to question how long they can rely on low mortgage rates and on mainland buyers to prop up demand," Williams said.
The government can do little to limit property prices without allowing the currency to float or introduce capital controls. Both measures are unthinkable, according to Capital Economics.
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