Flat buyers are likely to remain on the sidelines until the amount they pay in rent roughly matches the mortgage payments on a new flat, analysts say. The Government's plan to build 85,000 flats a year had wiped out much of the investment value associated with buying a flat, they said. As a result, flats largely were devoid of speculative value and of interest only for their basic use as personal accommodation. Despite the 40 per cent drop in prices of secondhand flats, today's buyer of a $7 million home would pay the equivalent of about $52,000 a month in mortgage payments at existing interest rates. The buyer could rent the same flat for $30,000-$35,000 per month in the depressed market. As well as this differential between the cost of renting and buying, purchasers face other compelling reasons for staying out of the market. These include high interest rates, increasing levels of unemployment, slower than expected economic growth and an increasingly conservative banking sector which virtually has turned off the taps on lending. A.G. Wilkinson & Associates assistant director Michael McGuire said this cocktail of negative factors had dampened buying sentiment - which arguably is one of the strongest factors affecting prices and buying activity in the SAR. Equally devastating to the market is that for the first time many middle-class buyers have been left in a position of negative equity. Many owners of flats purchased last year had seen the value of their asset depreciate substantially, analysts said. While no one likes to talk about it, large numbers of foreclosures are a possibility. Buying sentiment also has been plagued by the double curse of falling prices and falling rents, making investment unlikely. While there had been previous downturns in the Hong Kong property market, never had such forces conspired simultaneously against buyers, Mr McGuire said. However, analysts say that while the property market has had its share of price corrections, anyone who bought a property in 1986 has seen the investment increase in value sevenfold. In fact, over the past 12 years, from an investment point of view, it actually has made more sense to buy than to rent. In the past, there was no premium on buying a flat like there is today. In fact, many analysts previously said it was throwing money down the drain to rent a flat because it cost more to lease than to buy. Rents then were at parity or higher than the monthly cost of a standard mortgage, Mr McGuire said. Nobody cared about paying 50 per cent of their income on the monthly mortgage payments because it was insignificant to the amount of asset appreciation. As property prices escalated, punters made money on their deposits before selling their property off to another player. In 1986, even though prices dropped, it still made sense to buy because rents were relatively stable. For every dollar the market went down, the yields rose as rent levels held. Eventually, people came back into the market because they saw there was less incentive to lease than to buy. This time around, the opposite has happened. Rents have fallen 20-25 per cent and prices have come down as well. Homeowners are taking a bath as asset values fall and turn into negative equity. As a result, people had become cynical about the property market and were looking closely at the whole issue of home ownership, Mr McGuire said. Why own a house and pay a premium when the same place could be rented for less than repayments and the difference put in your pocket? As a result, potential buyers today were wondering at what point it makes sense to buy rather than rent, analysts said. In the present circumstances, it could be argued that it was when the cost of renting roughly equalled the cost of the monthly mortgage payments, they said. However, if rents kept falling, it could be a long time before that equilibrium was reached and people decided to return to the market to buy. While there is some evidence the fall in rents is slowing, this in itself will not be sufficient to bring buyers back, because yields are still too low. However, buyers might come back into the market if interest rates fall. While there does not seem much likelihood of that happening in the near future, the main drawing card for buyers has to be yields. According to many estimates, prices will have to drop another 25 per cent in order to achieve the standard 8 per cent yield which would attract investors. That would mean a $7 million flat would have to fall at least a further $1.75 million to about $5 million before buyers would return in numbers, Mr McGuire said. That would bring prices back to the levels achieved in the 1995 property slump, or perhaps slightly lower, he said.