Hong Kong has the highest home prices among major global
cities, including London, New York, and Tokyo, according to a report by global property consultancy Savills, and one of the big questions in global finance these days is predicting when the Hong Kong property bubble will burst.

Consensus is growing that the market is getting ready for some kind of setback, though opinions differ on how serious.

There are elements in Hong Kong’s situation that are all too familiar in Ireland. Since returning to China in 1997, Hong Kong’s economy has become irrevocably intertwined with China, and it needs Chinese trade flows and tourists to keep it simmering.

With the economy expected to weaken over the next couple of years north of the border, Hong Kong growth could come under pressure.

But the link to the US economy via the currency board peg means it will possibly have to deal with stronger growth Stateside next year, and a probable rise in interest rates, while mainland China’s economy stutters.

“As we see China and Hong Kong growth slowing, and US growth on the way back up, Hong Kong has a problem. Interest rates rising in the US would come at exactly the wrong time for Hong Kong,” said Freya Beamish, an economist at Lombard Street Research who covers China.

Bubble will bust
This scenario could play out negatively on the property market. With its robust links to the world's biggest and second biggest economies, Hong Kong was been awash with liquidity as the Fed slashed interest rates to counter the global downturn and began quantative easing.

“At this stage, the Hong Kong dollar along with the renmimbi was still substantially undervalued against the dollar,” said Ms Beamish.

" Having held onto the peg, even while China allowed some nominal appreciation, all of Hong Kong's currency
adjustment had to take place through prices."

So is it possible that US growth rising as Hong Kong and Chinese growth heads the other direction could, in fact, help the Hong Kong economy because it means the bubble will burst, and the Hong Kong economy can be rebuilt from a firmer base?

“If they keep the peg in any case, we will see the same problem again. They seem addicted to the peg, the stability of it. A run-up in property prices is not my definition of stability,” said Ms Beamish.

The scenario is similar to what happened in Ireland and other countries during the financial crisis, where countries built up large property bubbles on the back of low euro zone interest rates that were appropriate for countries like Germany, but not for those less solid economies on the periphery.

Raymond Lee, chief executive of Savills, described the property market as being like a “patient getting early stage cancer.

However, our government gives it medicine that is designated for final stage cancer patients . . . the high dosage kills both good cells and cancer cells,” said Mr Lee.

Tighter risk rules
Prices show no major signs of falling despite a housing shortage, low mortgage costs, and a buying spree by mainland Chinese. Repeated attempts by the government to curb gains have failed to impact on house prices.

But most of the smart money is now on prices falling in the next two years. Prices could fall as much as 20 per cent over that period, according to Deutsche Bank, after lenders last month raised home-loan rates by 25 basis points in response to tighter risk rules.

Hong Kong chief executive Leung Chun-ying has imposed extra property transactions taxes, raised mortgage down-payment requirements, and accelerated the pace of government land sale since taking office in July.

What is effectively a three-decade-old marriage is indeed hard to pull asunder, but calls for changes in Hong Kong’s currency peg system are growing.

Even from big names such as Joseph Yam, who was chief executive of the Hong Kong Monetary Authority until October 2009, and who last year made a high-profile call for the link to the dollar to be reviewed.