Surging domestic demand is expected to fend off the effects of oversupply in a property market gradually making a recovery, analysts say. They said an upswing would be demand driven and predicted residential take-up to increase as Hong Kong's economic environment improved. ING Financial Markets analyst Eva Lee said: 'Oversupply is a resistance to rising property prices, but it is not a major driving force in a surging market. If no one is buying flats, the price will be stagnant and supply may even fall short. 'The market is much more sensitive to the supply factor when the property price is low and there is poor market sentiment. 'But when the [property] market is bottoming out, the scale of recovery should be demand driven, especially when share prices are on the up side.' Ms Lee said an improved macroeconomic environment, such as the growth in China's gross domestic product, would be more visibly reflected in the luxury residential market, in which many mainlanders were keen to invest. However, international property funds might not snap up Hong Kong developments immediately, she said. 'The yield is now 5 per cent, which may not be attractive enough,' Ms Lee said. According to Credit Agricole Indosuez, residential property take-up would rise to 27,000 units by 2005, from 20,000 last year, as GDP picked up. It forecast 2 per cent GDP growth this year, 4 per cent for next year and 5 per cent for 2005. UBS analyst Franklin Lam said the oversupply in housing units was only an illusion. Mr Lam said there were 78,000 apartments on developers' hands. This is 15,000 less than the supply during the 1996-97 property boom when prices were almost triple today's level. 'But many people were saying there was insufficient housing supply then and rushed into buying flats,' he said. 'A lot of analysts who say oversupply is a problem to property prices actually have not experienced a boom. They did not see what was happening before 1997.' Mr Lam said housing supply fell short of demand as the government suspended land sales. Increasing domestic demand alone was enough to revive the property market, he said. 'We have too much cash and too few properties, and the interest rate is the lowest ever,' Mr Lam said. K Wah International chairman Lui Chi-wo said buying demand came internally as well as from external markets. Overseas funds from Europe and other countries showed signs of moving in Hong Kong's equity and physical property market, taking advantage of the city's low interest rates, Mr Lui said. Following a more than 60 per cent decline in home prices in the six-year slump, Hong Kong properties became attractive when compared with other countries, he said.