Purchasing a home in Hong Kong may become even more challenging in 2010, as home prices are likely to surge much higher amid the bullish property market conditions.

For example, like many local residents in Hong Kong, Connie Tsang can only afford to rent a flat in the suburban area now, as the city's home prices have gone up too high since the second half of last year.

"I thought of buying a flat in the New Territories in the second half of last year. However, the home prices have already jumped quite a lot, despite the very low mortgage rate," said the 28-year-old company secretary.

Tsang said she would not even consider purchasing her own property now, as the current home prices have already surged too much.

"Home prices at the moment are unreasonably high. Second-hand homes in Sha Tin are priced at almost HK$4,000 per square foot," said Tsang, who now pays HK$5,800 per month to rent a flat of 330 square feet in Sha Tin, a southeastern town in the suburban New Territories.

Driven by ample market liquidity, historic low interest rate and persistent inflow of hot money, the property market in Hong Kong has shown a significant rebound in 2009.

Average home prices in Hong Kong for the fourth quarter of 2009 leaped almost 23 percent from a year earlier.

Overall rental levels in the city also rose 2 percent in the fourth quarter last year, during which rents for small and medium units recorded the highest jump of 3.65 percent.

The limited supply of new flats last year is one of the factors pushing up the city's property prices. Only 7,160 new units were completed in 2009, compared to 8,780 new completions in 2008.

The department, however, expects new completions will jump to around 14,260 and 10,960 in 2010 and 2011 respectively.

Despite the possible surge in the number of new residential units in the coming two years, the market anticipates that property prices in the city will continue their climb in 2010.

Wong Leung-sing, associate director for research at Centraline Property Agency, said more than 1,000 new units, which should have been completed in 2009, have had their completion delayed to January 2010. The number of new units for 2010 should, therefore, be around 12,000 to 13,000.

"The new supply will not have much of an impact on the city's home prices, since overflowing market liquidity and inflow of hot assets are the main reasons pushing up the property prices in Hong Kong," Wong said.

He noted that overall property prices in the city have jumped 6.45 percent in the first two months of this year, while the price surge in small and medium units, with saleable area less than 100 square meters, overtook the large units to record a 6.7 percent increase.

"Prices for luxury units leaped too much in the second half of 2009, so the surge is much less significant in 2010," Wong said, adding that overall home prices will rise 10 to 15 percent in the first quarter of this year.

Henderson Land Development, controlled by billionaire Lee Shau-kee, in October last year sold a duplex in Mid-levels at a world-record of HK$439 million, or HK$88,000 per square foot, raising market concerns over a possible bubble in the local property market.

To reduce the risk of creating a property bubble, Financial Secretary John Tsang said in his third budget address in February that the government will increase the stamp duty on transactions of properties valued more than HK$20 million to 4.25 percent from 3.75 percent.

Real estate broker CB Richard Ellis said luxury residential prices rose 51 percent on average in 2009, boosted by the low interest rates and the surge in liquidity.

"Strong demand for luxury residential property was observed last year, with an increasingly significant portion of demand derived from mainland Chinese investment. We estimate that around one-third of new luxury residential property sold last year was snapped up by mainland Chinese investors," said Margaret Ng, senior director of research at CB Richard Ellis in Greater China.

Massive capital inflow is, meanwhile, another reason boosting the real estate market in Hong Kong. The Financial Secretary said over HK$640 billion of capital has flowed into the city's equity and property markets since the fourth quarter of 2008.

"I am particularly concerned that some citizens may no longer afford their mortgage payments if the interest rates were to reverse to a more normal level," Tsang said in his budget speech in February.

Amid the extra-low-interest-rate environment, mortgage rates in the city also reached a record low over a 40 to 50-year period. Borrowers now pay only around 1 percent for HIBOR (Hong Kong interbank offered rate)-based mortgage plans or 2 percent for the prime-rate-linked mortgage products.

To avoid a possible price war on mortgage plans, the Hong Kong Monetary Authority last week told lenders to price new home loans above their reference rates.

Patrick Chow, head of research department at Ricacorp Properties, said the reference rate offered by the city's de facto central bank is still quite low, which may not have much impact on the local property prices.

"Given a possible 2 percent inflation rate in the local economy this year, the 1 percent mortgage rate is not comparable. If mortgage rates cannot catch up with the inflation, local lenders will lose money in the mortgage lending business," Chow said.

Unless hot money gradually moves out of the local asset markets, property prices in Hong Kong can hardly retrace to lower levels, Chow said.

If this is not happening, home prices in the mass market will likely leap as much as 25 percent in 2010, with a 20 percent jump in rental price-levels as well, he added.

(HK Edition 03/09/2010 page2)