WHEN the Hong Kong housing market rallied after the Lunar New Year, analysts were scratching their heads. They were puzzled as to why stock investors were not rushing in buying up developer stocks when their shares prices were historically so cheap. The stock investors were probably right. The rally in flat sales was short-lived. Now one report after another seems to paint an ever more disappointing picture about the short-term outlook for the Hong Kong housing market. The latest comes from Hang Seng Bank which says in its latest monthly economic report not to expect any recovery in prices or activity in the immediate future. Many had been long banking on a turnaround in the final quarter of this year. This now seems very unlikely to happen. If some developers don't sell an awful lot of flats quickly, their profits for the year or six months to June 30, 1996, could look pretty disappointing. Developers' profits reported for the year to June 30 this year were still respectable. Most were able to book profits from completed developments that had been pre-sold before the real estate market hit rock bottom. With all this in mind, one would have thought developer stocks would be out of favour at the moment. Instead the reverse is true. A lot of developers are trading above their net asset values even though some are having difficulty locking in enough property sales to maintain profit momentum in the coming financial year. It is a rare case of share prices having overshot fundamentals. Perhaps a correction could be just around the corner. Analysts have throwing up a variety of explanations for the recent rally. The cited excuse is Chinese Foreign Minister Qian Qichen's visit to London which has done much to patch up Sino-British relations and provide for potentially a more stable transfer of sovereignty for Hong Kong in 1997. When the stock market rallies, property stocks normally lead the way. When the Hang Seng Index corrects, developer stocks are typically the first to fall. Another reason could be that investors are buying property stocks well ahead. The real estate market has to recover at some stage. A third explanation could be developers' current attempts to relax unpopular restrictions on pre-sales of new developments.