The investment bank sees Sars affecting a market already suffering from weak demand and an oversupply of flats Bank of China International has joined a number of research houses downgrading the outlook for Hong Kong's battered property sector, with a dismal forecast of residential prices falling another 15 per cent in the next 18 months. With prices down about 68 per cent from their peak of 1997 - and a 10 per cent drop already having been seen in the first four months of this year - analysts are wondering how much further the slide can go. But with the impact of the atypical pneumonia outbreak adding to an already depressed market, they are finding it extremely difficult to see the bottom. The forecast from BOCI, the investment banking arm of Bank of China and usually one of the more sensitive research houses on the issue of property prices, comes as the latest government statistics show the number of empty homes surging to a record 74,200 at the end of last year. BOCI thinks the vacancy rate will rise to 7.3 per cent this year and peak at 7.4 per cent next year. The severe acute respiratory syndrome (Sars) outbreak was certain to have an effect, BOCI analyst Manfred Ho said in a newly released report. It would at the very least delay purchasing decisions of home-seekers and ensure price wars continue among developers. Already, residential prices had dropped about 6 per cent since the beginning of March, he said. But Mr Ho said the market was already burdened by an oversupply of flats, a weak economy and the increase in the salaries tax rate, which had all contributed to weak demand in the past three months. The latest figures had brought the accumulated price decline to 68 per cent since 1997, and were indicative of the gloom hanging over the sector, where developers are struggling to unload a backlog of unsold flats and large numbers of new projects coming on stream. BOCI is not alone in its pessimism. Last month, Morgan Stanley warned that home prices would fall a further 15-20 per cent over the next two years. The BOCI report said developers had begun slashing prices more aggressively during the Easter holiday last month. Prices of some unsold stock had been cut effectively by 10 to 15 per cent. 'However, developers are likely to cut prices more aggressively amid Sars as unsold stock levels climb further in this already oversupplied market,' the report said. 'As a result, we believe residential property prices still have a 10-15 per cent downside.' Prices in Kowloon and the New Territories would be hit harder because they had a larger supply of new flats, it said. With more downside to prices and the weak economy, BOCI said more property owners were likely to default on their mortgages, which could raise the number of properties repossessed by banks for sale and hence further depress the secondary market. Market participants were not quite as downbeat. Sun Hung Kai Real Estate Agency manager Eric Chow Kwok-yin said more home-buyers were returning to the market as the Sars situation stabilised. He expected sales would improve gradually, saying prices were 'very reasonable and affordable'. Midland Realty chairman Freddie Wong Kin-yip said prices had dropped 11 per cent in the first four months, or 20 per cent from a year ago. But he said sales had picked up in the first week of May after an exceptionally quiet April.