The property market is bracing itself for further corrections in the new year, with continued uncertainties over Hong Kong's economy. It proved to be a difficult year for all sectors in 2002, as prices and rents were on a general downward trend. Sentiment was dominated by persistent pessimism though it lifted lightly in November with the government's drastic nine-point stimulus measures, including the scrapping of the Home Ownership Scheme and suspension of land sales until the end of this year. Following a fifth consecutive year of contraction, analysts expect still more pain for the office and residential markets due to excess supply and weak economic performance. Centaline Property Agency managing director Shih Wing-ching says overall housing prices in Hong Kong have declined about 10 per cent over the past year and is still on the downward trend. 'I am more pessimistic than in the past couple of years. The problem [leading to prices fall] involves the whole society instead of partially excess supply. The economic and political prospects of Hong Kong are in doubt,' Mr Shih says. Residential property prices have continued to slide in the past few years, with an accumulated decline of about 65 per cent from the 1997 peak. Mr Shih sees the pace of decline has slowed: 'Maybe the market is near bottom. However, the narrowing downward trend will possibly be followed by a weak rebound.' Midland Realty executive director Victor Cheung Kam-shing says the secondary market has been in serious contraction. 'The primary sales share is up to about 40 per cent of total market transactions in 2002. During the past 10 years, usually about 20 per cent of the sales were from the primary market,' he says. He expects an equilibrium of supply and demand in 2004. Morgan Stanley managing director Peter Churchouse estimates the total residential units available for sale in the coming year will reach 44,154. 'The market can gradually pick up in the second quarter of this year, but I do not expect the prices will rise too quickly,' he says, adding that flat values could rebound 6 to 8 per cent in the coming one to three years. Total private residential transactions for 2002 surpassed 2001's performance, agents say. In the first 11 months, private flat sales amounted to 60,048, with the primary market sharing 41.47 per cent, and the balance coming from the lacklustre secondary market, said Centaline Property Agency. This compared with 60,789 total flat sales recorded in 2001, of which 35.06 per cent were primary sales. Primary sales last year were the highest since 1998, while total sales volume was higher than the previous two years. The secondary market has been undermined by aggressive primary sales, and transaction volume hit a five-year low as developers continued to adopt below-market pricing strategy, linked with favourable mortgage repayment packages to draw cautious home-buyers. The market was happy to see Sun Hung Kai Properties' (SHKP) successful sale at Park Island in Ma Wan during August, with all 2,569 units taken up through public and internal sales within a few weeks. The government's stimulus measures were criticised as too focused on the supply side and had no significant impact in boosting short-term demand. Major new large-scale residential sales being launched after the new housing policy, such as Queen's Terrace in Sheung Wan and Coastal Skyline in Tung Chung, were initially priced at 10 to 20 per cent below market. In the office sector, excess supply forced rentals and prices to fall amid sluggish demand resulting from the downsizing of multinational corporations. DTZ Debenham Tie Leung research director Alva To says the grade-A office vacancy rate in Central edged up to 11.1 per cent last year from 8.3 per cent at the end of 2001. Net effective rent plunged 23 per cent year on year to HK$29 per square foot from HK$38 per sq ft. Mr To expects the vacancy rate in Central to soar to 15 per cent by the end of this year due to the completion of Two International Finance Centre, while office rentals could further drop 10 per cent. Jones Lang LaSalle research recorded a depreciation in the grade-A office value of 18 per cent in Central, compared with an overall 17 per cent. It says a sustained improvement in economic performance could lead to higher demand this year, but rentals might correct further before a recovery. CB Richard Ellis expects grade-A office rents to fall by 15 per cent in 2003, while Chesterton Petty tips a 20 per cent decline. Brokerage firm UOB Kay Hian is more bearish and predicts office rents to decrease 60 per cent before the end of next year.