Investment bank Citigroup has adopted a pessimistic view of Hong Kong's property market.

A Citigroup report forecasted that the average price of homes will drop by between 5 and 10 percent by the end of next year, as the market is consolidating.

The report stated that the housing-market boom seems to have ended - indicated by a drop in home prices and turnover level in recent months.

Home prices fell in April by 2.5 percent. It was the first decrease in 16 months.

Housing transactions also dropped for the fourth-straight month in May, when the transaction total reached just HK$26 billion - down 31 percent, year-on-year.

When the inflation rate rose from 2.7 to 4.2 percent between September and March, the real mortgage rate fell from 1.8 to 1.5 percent. As a result, housing prices surged 21 percent.

But the report cites figures indicating the negative real interest rates no longer propped up the housing market in April.

And banks are expected to raise mortgage rates by between 25 and 50 basis points in anticipation of the United States Fed ending its rate cuts, the report said.

Also, the disappearance of negative interest rates may cause banks to raise interest rates faster than the inflation rate.

The interest-rate reversal and lower income growth are expected to trigger a housing-market consolidation with a mild 5-to-10 percent decline.

Henderick Leung, the director and general manager of Centaline Finance, said that the extent of the price adjustment is reasonable, and it doesn't indicate that the market will plunge into a recession.

"Homebuyers will not be scared off as a result of the mortgage rate rise, as the rate would still remain far below 5 percent after the expected adjustment," Leung said. "Furthermore, the mortgage conditions are much healthier than during the housing bubble in 1997.

"Overall, the market fundamentals remain strong, and a short-term correction wouldn't diminish homebuyers' confidence in tapping into the market."

Ronald Wan, managing director and head of investment for BoCom (International), said the downside forecast is expected because the home prices have seen a significant 30 to 50 percent increase since the fourth quarter of last year.

"It's premature to say whether the upside trend of the housing market has finished," Wan said. "Investors might wait and see if the US Fed paints a clearer picture for its interest policy."

(HK Edition 06/12/2008 page2)