ASIA – The Hong Kong Monetary Authority (HKMA) has warned of an "acute" disconnect between the special administrative region's property market and economic fundamentals.
Prudential measures implemented in Hong Kong in mid-September – including an increase in top-rate stamp duty to 20% and the introduction of a residential buyer's stamp duty for companies and foreigners – appear to have moderated transaction activity.
But despite a resumption of economic growth in the third quarter of the year, property prices presented a continuing upside risk, the HKMA said in a quarterly report published this week.
Even if Hong Kong escapes recession – that is, if there is no severe global downturn resulting from the euro-zone crisis or fiscal shock in the US – loose global monetary conditions and protracted low interest rates could result in excessive mortgage leverage and a further increase in property prices, the regulator said.
The end result would be to intensify the dislocation of the property market from the broader economy.
The regulator contrasted tepid income growth in the nine months to October with a 23% rise in house prices.
According to the IMF, the trajectory increases the risk of a significant house price correction.
The IMF has also pointed to risks to the Hong Kong banking system from a sudden correction in house prices.
It said the banking system had proven resilient to previous corrections, but, in this case, the property sector represented 50% of outstanding loans, with additional risks posed by the use of real estate as collateral.
"A sharp price correction would lead to falling collateral values and negative wealth effects, which could trigger an adverse feedback loop between economic activity, bank lending and the property market," it said in a recent report.
The report identified the property sector as "the main source of domestic economic risk".
