CHINA - Hong Kong's property market threatens to become bubbly as underlying occupier demand fails to keep pace with out-of-kilter pricing, according to economists at Lombard Street Research.
Hong Kong property-price increases have outstripped those in Singapore and London, fuelled by monetary excess and a lack of other investment options.
Residential property prices in the city increased by 68% in the last quarter of 2011 against the same quarter in 2008 - compared with 21% in London over a slightly different timeframe.
Meanwhile, commercial real estate prices have doubled since 2009, compared with a 35% increase in Singapore.
Economist Freya Beamish claimed the fact property prices picked up before the mainland Chinese monetary stimulus began to affect broad money in 2011 suggested it was the result of a natural correction following recession, rather than the result of excess capital.
However, Beamish added that excess liquidity - rather than the rapid expansion of broad money - was "the greatest threat to the Hong Kong economy since the Great  Recession".
Mainland Chinese investors facing underdeveloped financial markets and negative deposit rates at home were targeting Hong Kong as their first port of call, she said.
She also cited an upward trend in loans to finance property development - currently at 47% of GDP - as cause for concern given the poor outlook for economic growth.
"Signs that the underlying occupier demand does not justify the rise in prices have already been present in the economy for some time," said Beamish in a research note.
However, she added that an increase in supply of both residential and commercial had not kept up with macro growth.
As a result, the vacancy rate in commercial has fallen from 8.7% in 2008 to 7.9% in 2011.
"Nevertheless," she said, "the Hong Kong property market is exposed."
In a separate note, the LSR Asia team led by Hong Kong-based economist Diana
Choyleva forecast that the Beijing government would further relax the monetary tightening policy it adopted in the second quarter of 2011 to mitigate the resulting sharp downturn in domestic demand.