IMF warns Hong Kong property market at risk of sharp fall

The International Monetary Fund warned yesterday that Hong Kong's property market faced the risk of a sharp correction as prices had doubled from the trough in 2008.

Property prices, which have risen 20 per cent this year, posed a severe risk to the domestic economy because half of the outstanding loans in the city were based on real estate as collateral, the IMF said.

"A huge run-up in property prices in Hong Kong pose policy challenges to government authorities in the city," said Steven Barnett, the fund's Hong Kong mission chief.

Barnett said bank lending and domestic economic activity would face headwinds because of a sharp fall in property prices.

He said policies such as increasing land sales and ramping up construction of public housing for sale to the middle class were the keys to tackling the red-hot property market in Hong Kong, where gross domestic product is expected to expand 1.25 per cent this year, with an inflation rate of 3.75 per cent. The IMF projects GDP will expand 3 per cent next year.

Despite lukewarm economic conditions, Hong Kong's home prices have surged to become the world's most expensive, surpassing the heights of the property bubble in 1997 - which burst that year and put thousands of homeowners in negative equity.