Two slides to every storey

In case there is still any doubt as to whether Hong Kong property prices are heading down, it can be assuaged by news that property developers have started to pay much higher commissions to agents selling their new properties. In some cases the rate has doubled from 2 per cent to 4 per cent. Hong Kong property developers don't hand out money without reason.

In general it appears that residential property prices are falling by about 10 per cent, with indications that office prices may be falling more sharply. The Centaline Property agency says that, at the beginning of this month, residential prices registered their biggest drop in 17 weeks and that sales volumes had been cut in half.

So, is this a temporary market blip or the start of a more sustained and profound price decline? The government and its best friends in the property development world would have us believe that this is an orderly decline that should not provoke concern. The problem with this sanguine view is that it belies Hong Kong's history of property price movements.

We are coming off a period of steady but profound price increases that took residential property prices up by around 70 per cent in less than three years following the price collapse of September 2008. But even this rise failed to reach the heady levels of 1997, which ended with the even larger collapse of 1998, dropping prices for five years.

The local market has a history of finding peaks then rapidly retreating from them. This is set to repeat as the price conditions that prevailed until the middle of this year turned into a sudden decline.

Hong Kong's property market tends to be more volatile than those of other developed regions, not least because, even in the residential sector, owner-occupiers are frequently tempted into joining the ranks of speculators and trading their homes for profit.

Moreover, Hong Kong's situation is unusual for a capitalist economy because the sole supplier of land for development is the government. This is problematic because the government is forever wavering between the powerful demands of the property-developing elite and public pressure that spills over into large street protests.

Official indecision is in full flow right now, following a nervous tip towards public pressure in the shape of a very modestly revived Home Ownership Scheme, a relaxation on conditions for land sales and lots of talk about initiatives to change zoning regulations. The basic message is that the interests of the property developers must not be undermined while public concern over affordability needs to be addressed. These two aspirations are never going to be compatible.

So it's all a bit of a mess, one that leaves investors scratching their heads. But a few things are pretty clear: first, the declining prices have yet to run their course, but it remains uncertain whether a steady decline will turn into a rout. Second, the share prices of property developers are declining at a faster pace than the overall stock market. And third, although Hong Kong is pegged to the US dollar and has an economy dependent on markets in the United States and Europe, the local property market is in far better shape than those of its overseas counterparts.

I won't attempt the folly of predicting property prices in these volatile conditions, but it is possible to identify a couple of investment strategies. First, precisely because there is volatility and uncertainty, it makes far more sense for those who want to play the property market to do so through readily tradable shares of property developers as opposed to physical property purchases. Conventional wisdom says that in Hong Kong share prices lead property prices, so it is not difficult to identify the moment at which it becomes worth taking a look at property counters.

Second, for those who remain nervous about direct investment in the property market, the best proxies are local bank shares. Locally listed banks, with the bulk of their loan portfolios in Hong Kong, are not suffering the default problems of their overseas counterparts and, although the shares are trading at more demanding prices than international banks, they will benefit from a pick-up in property investment and do so rather quickly, even if it means waiting a while.