Two weeks ago, estate agents were trotting out the accepted bullish vision on the housing market and disagreed only on how high capital values would go. At that time, potential buyers were rushing to join the property sector and flat owners were slow to sell unless they received a very aggressive bid. Now buyers are becoming scarce, and owners are finding it hard to attract interest even after slashing selling prices. In anticipation of a downturn in the housing sector, purchasers who have signed preliminary agreements with sellers are beginning to default on their transactions and forfeit initial deposits. Hong Kong Property Service (Agency) managing director Michael Choi Ngai-min said: 'The default cases happened in various districts last week, but it is not a disaster.' The property market's confident sentiment has taken an abrupt U-turn. Some districts saw a 50 per cent drop in the number of transactions compared with the same period in March. 'The sentiment has suddenly changed, triggered by the Government's anti-speculation measures and the higher interest rates,' Mr Choi said. The Government on March 26 announced measures to curb property speculation. Although it relaxed the maximum pre-sale period from 12 months to 15 months, it also introduced harsher conditions governing the release of properties on to the market that would prevent developers from withholding units. Under the new restrictions, developers must put all the flats in a given development on the market within six months of the issue of pre-sale consent. The measures will dampen the homes market, which saw a 30-40 per cent rise in prices last year and has witnessed a jump of about 20 per cent in the first quarter of this year. The new measures were announced on the same day that banks raised their prime lending rate to 8.75 per cent from 8.5 per cent. Under the new restrictions, the Government also requires developers to offer for sale a minimum of 20 per cent of the total number of units in a project at each release. Mr Choi said the measures were mild compared with those announced in June 1994. However, he said the measures were a signal to speculators that the Government was determined to interfere in the market. 'That makes speculators cautious,' Mr Choi said. 'People will happily buy property in anticipation of rising prices, But when prices fall, they can only stand back and keep their fingers crossed. 'As long as prices are falling, a number of people will consider withdrawing from the property market.' Defaults usually happened in decentralised districts such as Tuen Mun, where initial deposits involved were relatively small. Midland Realty said about 10 default cases had been noted over the past week. Ivan Yeung Hing-chung, assistant sales supervisor of the property agent's Tuen Mun branch, said purchasers would rather forfeit a deposit if it was less than $100,000 than risk losing even more with a big fall in prices. For instance, a buyer who had signed a preliminary agreement to buy a 495-square-foot flat in Tuen Mun's Siu Hei Court for $1.98 million before the Government's new measures were introduced would already be looking at a loss of $280,000 on its new market value of $1.7 million. If the buyer continued with the purchase he would face the risk that property prices could fall further. However, if he defaulted on the deal now, Mr Yeung explained, the buyer would only lose the deposit of $86,400 on the agreed price of $1.98 million. This excludes the stamp duty payable to the Government. Mr Yeung said buyers defaulting now were newcomers to the property speculation game. He said some of them did not have strong financial back-up. 'When they decided to buy the property, they had no plan to complete the transaction,' Mr Yeung said. Instead, they hoped to re-sell it and make immediate profits before the completion date of the transaction. 'However, they face setbacks when property prices drop.' Defaults are more common in the large housing estates which have attracted strong speculation. Over the past week, two buyers defaulted on agreements to buy completed Kingswood Villas apartments. Mr Choi said defaults were less common in large housing estates in urban areas because those would-be tenants or speculators were stronger financially. He said buyers were less likely to default on deals worth more than $5 million because each forfeited deposit would be more than $300,000. Mr Choi said defaults were unlikely to be widespread. Buyers who had signed preliminary purchase agreements just before the end of last month would be required to sign the formal agreement in the next few days. 'Buyers seldom default on their transactions if the formal sale and purchase agreement has been signed because their losses will be too huge,' Mr Yeung said. By law, buyers are required to pay just 3 per cent to 4 per cent of the purchase price when they sign the preliminary agreement. A 10 per cent deposit is required when the formal sale and purchase agreement has been signed - usually 14 days after the signing of the preliminary agreement. Mr Choi said many buyers who had paid the 10 per cent deposit were required to complete their transactions within one or two months. In order to cut their losses, speculators would dispose of some properties at a discounted price. He expected to see a 5-8 per cent drop in residential prices in the coming two months. Estate agents said taking into account the aggressive lending policy of bankers, speculators could have found financial support to complete their deals. Some agents took a more pessimistic view, saying they believed the worse had yet to come. If those who entered a formal sales and purchase agreement failed to complete the deal, sellers were also entitled to sue them, agents said. That would further damage property market sentiment and could prompt a further drop in housing prices, they said. It was too early to say whether the recent cases of buyers defaulting marked an end or a beginning to the property market's downturn, agents said.