Former financial secretary Antony Leung Kam-chung says the government's plan to boost the housing supply could flood the market with more flats than it can absorb if interest rates rise owing to a rally in the US economy.
Leung warned of a repeat of the failed "85,000 flats a year" target announced by then chief executive Tung Chee-hwa in 1997. By the time the new flats were ready, he said, the market would have shrunk due to external economic factors, leaving it unable to absorb all the flats.
Leung, a member of the Executive Council from 1997 who was named financial secretary in 2001, said the new administration was right to address the city's housing problem by increasing supply. But he was worried about complications arising from the US economy.
Asked if he thought the market slump following the announcement of the government's target of 85,000 flat completions a year would repeat itself, Leung said: "It is possible." He added that a rise in real interest rates led to the 1997 target not being met.
"Our inflation rate follows the mainland market, but our interest rate is tied to the US rate because of the linked exchange rate. We've had quite a seriously negative real interest rate for the past few years," he said.
"When this interest-rate environment changes, the property market will turn downward," Leung, a former banker who now works for investment firm Blackstone, said.
The target set in 1997 was affected by external factors, he said. The administration quietly abandoned the target the following year as the economic impact of the East Asian financial crisis was felt, but Tung only publicly confirmed in 2000 that it had been dropped two years earlier. Although the target was achieved in 2000 - with half the flats produced for private or subsidised sale the rest for public rental - by then the market had slumped.
The Hong Kong Association of Banks sounded a similar warning to Leung's last month, saying higher interest rates would mean an increase in monthly repayments for mortgage-holders.
The US Federal Reserve expects to keep interest rates at near zero until the unemployment rate drops to 6.5 per cent, which it forecasts to happen by 2015. But many economists fear the rate may change earlier.
Meanwhile, the Long Term Housing Strategy Committee met yesterday to discuss whether there should be a minimum income level for applicants for subsidised flats under the Home Ownership Scheme flats, said Secretary for Transport and Housing Professor Anthony Cheung Bing-leung. The scheme has only a maximum monthly income limit of HK$40,000.
"It sounds strange that some applicants say they have no income. If they don't, how will they pay the mortgage?" said Cheung, referring to Greenview Villa, a subsidised housing project that drew almost 60,000 applicants last month. The committee will make a decision later.