Amid growing calls for help from both the industry and the tens of thousands of people living in negative equity, the government released a nine-point plan in November to arrest the price slide. Measures included the suspension of all land auctions until the end of next year and an end to subsidised home sales.

Optimists hoped this year would finally see property prices start to pick up again, but few could have foreseen the debilitating effects of a previously unknown virus.

The severe acute respiratory syndrome (Sars) outbreak that began last month has paralysed the territory, halving economic activity in a matter of weeks.

In the present climate, Hong Kong residents have decided to hunker down and wait for the storm to pass. Viewing - let alone buying - a property now seems very low on most people's list of priorities. Last weekend, only 109 flats were sold, down 22 per cent from the previous weekend and equivalent to only about 10 per cent of the homes being sold before the outbreak.

Deutsche Bank head of property research Andrew Lawrence said the impact of Sars on the broader economy would eventually feed directly through to property prices.

'If [Sars] lasts a short period, then most people will defer purchases rather than postpone,' he said. 'The problem being that the longer it lasts the more it feeds back into the economy, unemployment goes up as our confidence falls, wages get cut and it feeds back into the property market so volumes drop off and prices fall.'

Morgan Stanley forecasts residential prices could fall 15 to 20 per cent in the next 24 months.

UBS Warburg analyst Franklin Lam said the level of fear in the local populace - rather than the actual spread of the virus itself - would be the ultimate arbiter.

He said in the next few weeks people would either come to accept Sars as an extra threat in their lives and continue to live as they did before - albeit with a few extra precautions - or 'permanently change their consumption behaviour, which would have a catastrophic effect on Hong Kong'.

Either way, the longer potential home buyers remain paralysed by the Sars crisis, the more serious difficulty property companies will find themselves in.

Developers are saddled with 26,000 completed but unsold homes, as consumers hesitate to buy in expectation that prices will keep falling.

The longer these homes remain unoccupied, the more holding costs rise, cash flow is hindered, end-of-year targets go un-met and shareholders are likely to ask tough questions.

Based on the performance of the Hang Seng property index it seems they already are. The index has dropped 16 per cent since the start of last month, compared with a 5 per cent decline for the Hang Seng Index as a whole.

Property developers need to shift their surplus stock at a time when fewer people than ever are willing to buy. Enticing reluctant purchasers means reducing prices further, continuing the demonic cycle of deflation in the process.

The prospect of a further slide in prices so alarmed Standard Chartered director Peter Wong Tung-shun that earlier this month he called for developers to hold back projects until the worst of the outbreak was over.

'It's a big dilemma,' said an analyst at a major foreign brokerage. 'If you don't sell, you won't meet your sales targets and you'll have much less earnings to book, which will translate into a much lower share price. If you sell, it's at a much cheaper price.'

So far, the property companies have decided low prices are better than no sales. In anticipation of the traditional bumper period around the Easter weekend, developers have slashed prices and are offering sweeteners. Sun Hung Kai Properties, the biggest developer in terms of sales, is offering mortgage rebates equivalent to a 14 per cent discount on its Aegean Coast flats in Tuen Mun.

Cheung Kong (Holdings) has offered to pay part of buyers' mortgages at its Hampton Place complex in Kowloon, while New World Development and Henderson Land Development have slashed 10 per cent off the remaining flats at Seaview Crescent in Tung Chung.

Sun Hung Kai Research analyst Eva Cheung described selling at low prices equivalent to the secondary market value as a form of 'dumping' that often happened during periods of crisis.

'The purpose of selling flats at low prices is to get cash back as soon as possible. There are costs when you carry inventory. It's beneficial for the management rather than holding back the flats until prices go up. It may be that margin squeezes are unavoidable for this kind of business,' she said.

Mr Lawrence said it was important to remember that while property prices had been sliding, land prices had been going down as well.

'The land gets marked-to-market each year,' he said. 'If property prices fall 10 per cent, land prices fall 10 per cent. Because the land is getting marked down, as long as you can turn your assets around fast enough you can still make a profit.'

Mr Lawrence said an 'effective developer' needed to 'try to shorten the period [between] when they buy the land and sell the project as much as possible', adding that he was 'negative on all the big property developers' because they were still running margin-driven businesses that sat on land too long as it depreciated in value.

Of the major players, he prefers Sino Land or Hang Lung Properties because they buy, build and sell quickly. 'Sino Land has sold 68 per cent of its 2004 developments whereas the others have sold 5 to 15 per cent.'

As Sars continues to hammer the property sector, analysts are in agreement that government intervention in any form is not the solution.

'You've got to let the price continue to adjust downwards to a level where there is demand volume coming through,' said the analyst at the foreign brokerage. 'If you don't let prices adjust to a level based on the current demand, prices will never actually reach bottom.'

Graphic: unit21gbz