'Clearly, the market is going through a period of soul-searching and undergoing a reality check, with many now sitting out the global turmoil and those that are buying dictating the level of pricing rather than the vendor,' said Nicholas Brooke, chairman of consultancy Professional Property Services.

'In the short term, I think adjustments will be greater in the mass- and middle-market, say 10 to 15 per cent, with the luxury sector showing greater resilience,' Brooke said.

In June, Brooke had said he expected to see a short-term cooling followed by renewed activity after the Hong Kong government announced efforts to cool off the red-hot property market. But the unexpected global economic crisis had made the market more unstable.

'Over time, I think we will see the flow of funds from mainland China fall away significantly so that in 12 months time we could be off 20 per cent across all segments,' Brooke said. 'It is fair to say that there is a good deal more negative than positive sentiment and this is spooking the market.'

Analysts are coming around to the view that prices have peaked, after having risen more than 70 per cent since the start of 2009, according to Centaline Property Agency.

The data shows that prices surpassed their previous peak, reached in 1997, on June 5 this year but began softening after the government introduced new measures the same month to rein in home prices.

Up to October 30. prices were down 2.8 per cent from their peak, but researchers at Morgan Stanley expect a sharper decline as mortgage rates rise.

Hong Kong banks have raised effective mortgage rates three times - to 2.9 per cent from just 0.8 per cent - in the last six months. The increases were driven by a rising loan-to-deposit ratio that had reached 86.6 per cent by September.

Morgan Stanley warned in a recently released report that instructions to banks from the Hong Kong Monetary Authority to reduce those ratios could drive deposit rates higher. Banks would have to lift rates even higher to maintain a positive spread.

The investment bank expects nominal mortgage rates to hit 5 per cent by the end next year.

'Real mortgage rates have a strong correlation with property prices and thus we expect property prices to fall by more than 10 per cent by the end of 2012,' it said.

Some observers take a less pessimistic view.

'We are in a cyclical nine- to 12-month downturn,' said Lee Wee Liat, the regional head of property research at Samsung Securities (Asia). 'This is more because of uncertainty in the global market conditions that is prompting buyers to stay on the sidelines. But the structural bull market is not over.'

Lee believes the market will continue to be supported by demand from mainland buyers, citing Centaline data that 51 per cent of buyers in the primary market in the third quarter were mainlanders.

Marcos Chan, head of greater Pearl River Delta research at the property consultancy Jones Lang LaSalle, agrees.

'I would not use the term 'bear market', though I do believe the market will probably experience some downward pressure in the next six to 12 months,' said Chan.

He expects prices to drop 5 per cent in the fourth quarter and 10 per cent next year.

'But we expect this to be a temporary downturn and not a structural one,' Chan added. 'We expect the market will regain momentum post-2012, assuming there will be a pick-up in economic growth.'

Yu Kam-hung, senior managing director of CB Richard Ellis' valuation and advisory services, Greater China, said while it was difficult to predict the length of any potential economic downturn, fundamentals in the Hong Kong market remained strong.

Credit Suisse property analyst Joyce Kwock said she remained cautiously optimistic about the housing market, although its 'golden period' - when the US Federal Reserve's 'quantitative easing' stimulation efforts, low interest rates, pent-up demand and a severe shortage of new homes fuelled positive sentiment - was over.

Her optimism, she said, was based on resilient demand from first-time homebuyers and those who want larger flats.

'At the same time, rents have been rising and show no sign of declining,' Kwok said. 'Therefore, flat owners are not too willing to slash prices, as happened during the 2008 financial crisis.'

The bleakest view came from Barclays, which warned last week that a hard landing - a deflationary economic environment of rising unemployment, falling incomes and weak homebuyer confidence - would cause a 35-45 per cent drop in prices.

1st

Hong Kong's ranking on the Savills list of the world's most expensive luxury-home markets, at HK$81,778 per square foot