A recent survey by Midland Realty also found that affordability for first-time buyers also was improved. It estimated that buyers were spending about 41 per cent of monthly income to serve mortgages on flats in the New Territories.

While analysts said the increase in affordability has been significant, a combination of factors including the economic downturn, higher real interest rates and fears about unemployment have dampened buying sentiment.

Some analysts said the high mortgage rate of 11.25 per cent was making people cautious about buying a flat. Others said the higher mortgage rates would be offset somewhat by lower prices.

'Assuming that incomes stay flat, and with property prices having come down by 45 per cent, then potential buyers would be paying less in terms of a mortgage today than if they bought some time ago,' said Winnie Chiu, an analyst with DBS Securities.

Percy Au-Young, sales manager for greater China with DBS, said a decline in income coupled with high interest rates would deter buyers.

'If there is a decline in income coupled with a high interest rate environment, I think the market would only accept lower prices,' he said.

DBS Securities said prices would have to drop as much as 20 per cent for people to come back into the market. Sentiment also was hurt by interest rates being higher than inflation. Between 1991 and 1994, Hong Kong was in a negative interest-rate environment.

However, as inflation has come down and prime interest rates increased, mortgage rates are in a positive interest rate situation.

According to Mr Au-Young and others, this move into positive interest rates will continue to increase as wages and inflation decrease.

Analysts cautioned that affordability assumed that both husband and wife were employed.

With economists talking about a looming unemployment rate of more than 5 per cent, home buyers were nervous about buying a new flat, said property analysts.