Hong Kong's property market has been on a roller-coaster ride since its peak 10 years ago. Values plunged just after the handover, pummelled by the turmoil of the Asian financial crisis. They were aggravated by a government target to have 85,000 flats built every year. The market plunged to its nadir when the Sars epidemic hit in the spring of 2003. Prices dropped to only 37 per cent of their peak average levels in 1997, according to Census and Statistics Department data. A gradual recovery began after 2003 in tandem with a reviving economy, thanks in part to Beijing's free-trade deal, the Closer Economic Partnership Arrangement. Francis Lui Ting-ming, professor of economics at the University of Science and Technology, said prices first consolidated, then bounced back after years of decline. His personal experience illustrates the market's wild swings since the handover period. In the summer of 1996, Professor Lui queued to buy a two-bedroom flat in Metro City, Tseung Kwan O. He wanted it for his mother, who was then living in the United States, to use when she came to stay in Hong Kong. He picked one costing HK$4,200 per sq ft. Just a year later, he sold it for HK$6,300 per sq ft. He was no speculator - he decided to sell after his mother chose to stay in the US. But he also saw the crash coming when then chief executive Tung Chee-hwa pledged repeatedly to rein in property prices. Later events showed Professor Lui made the right call. Today, despite the recovery, property prices are just over half of their 1997 values. The flat Professor Lui sold is now worth about $3,400 per sq ft. Luxury properties are an exception to that trend. Koh Keng-shing, managing director of Landscope Surveyors, said top-end villas for the super-rich had not only recovered from the economic downturn but were 70 to 80 per cent more expensive than at their handover highs. He attributed the divergent price patterns to the increasing wealth gap in Hong Kong. A luxury residential project developed by Sun Hung Kai Properties - 8 Severn Road on The Peak - at the end of last year reached a record HK$36,500 per sq ft in terms of marketing floor area, which includes public areas such as lift lobbies. Shortly after the deal, Sun Hung Kai paid a record HK$1.8 billion for the lot at 12 Mount Kellett Road, making it the most expensive plot in the world. Such heady sums were not in the picture 10 years ago, as city property prices headed steadily south. That forced the Tung administration to take steps to rescue the market, abandoning the 85,000-flat target for new housing. In November 2002, Secretary for Housing, Planning and Lands Michael Suen Ming-yeung announced nine measures, including scrapping the Home Ownership Scheme and suspending land sales for a year. In October 2003, he introduced more controls on supply, including giving developers more time to bring new flats onto the market and selling land only through an application list. Mr Suen predicted demand would exceed supply within four years. Controlling supply is hardly new for Hong Kong. Under the Joint Declaration signed between Beijing and London in 1984, the Hong Kong government was allowed to release only 50 hectares of new land a year between 1984 and 1997. Since the market rebound, property developers, with limited land banks, have called on the government to resume regular land auctions - but to no avail. 'The government obviously wants to see the property market continue to rise by restricting land supplies,' said Shih Wing-ching, chairman of Centaline Properties. 'Hong Kong is haunted by high land prices.' Professor Lui said: 'The government denies it has a high-land-price policy. But I think it depends on what is meant by 'policy'. A high-land-price policy is to push up the price of land. What we have in Hong Kong is a policy to restrict land supplies. The result is the same as having a high-land-price policy.' Mr Koh said: 'There was no high-land-price policy during Mr Tung's reign: he wanted to boost home ownership. But the city returned to controlling supply after Mr Tung's experiment failed. I think the people of Hong Kong prefer expensive land to seeing their properties devalue.' When all eyes were on the housing minister's market-stabilisation measures, the government issued guidelines on property construction in 2001: the 'Joint Practice Note on Green and Innovative Buildings' was produced by the Lands Department, the Buildings Department and the Planning Department. It encourages environmentally friendly architecture by exempting certain features from the calculation of a building's gross floor area. By 2002, 12 features, including balconies, utility platforms, bigger lift lobbies and mailbox rooms, were considered green and innovative features. Developers could build more without paying an extra land premium for the additional gross floor area. Since then, buildings have become between 10 per cent and 20 per cent bigger, according to Vincent Ng Wing-shun, a former president of the Hong Kong Institute of Architects. He said Hong Kong had become more crowded, with fewer open spaces, less sunlight and restricted air flow. This has prompted environmentalists, town planners, architects and citizens to launch campaigns in recent years calling for more regulations to preserve the city's environment from further deterioration. Green features, as well as clubhouses, boosted developers' sales and profits as they were able to package their developments as luxury residences. The green features had another side effect. Home buyers complained that the habitable area of new flats had shrunk. The habitable area, excluding a share of public areas, is generally quoted in sale prices as about 70 per cent of gross floor area - but in some projects, it can be as low as 60 per cent. The situation in villas is more acute, with the habitable area about half of the gross floor area - and in some developments as little as 35 per cent. The South China Morning Post recently found that developers of two luxury residential projects in Sai Kung had included in their relaunch packs more ancillary areas, such as carports which were excluded from previous property sales - to give potential buyers the impression of a price cut of up to 22 per cent. Some Portofino villas, built by Cheung Kong (Holdings), are described as having a 1,400 sq ft bigger gross floor area than when they were first launched. This is because developers are becoming more aggressive in their definition of gross floor area: there is no legally binding definition, and developers are not obliged to disclose what they include in it. This loophole allows developers to list the green features and other facilities to make flats seem bigger or the selling prices lower. A better way to calculate a flat's actual size is by its saleable area. This includes the size of the interior plus the internal and external walls. The definition of saleable area is binding and, by law, sales brochures must include the gross floor area and saleable area. Despite these rules, industry practice is to quote sale prices on gross floor area, since the price per square foot is lower that way. The government was aware of the loopholes when it drafted a bill in 2000 to regulate the sale of unfinished properties. But the Sales Description of Uncompleted Residential Properties Bill was dropped after strong opposition from developers, who favoured self-discipline over coercion. But this is not how buyers see it, and there are calls for regulation. 'What Hong Kong has experienced in the past 10 years shows we are doomed to live under a high-land-price policy,' Mr Shih said. 'Mr Tung thought that by depressing property prices, it would be easier to own a property and improve people's quality of living.' He was wrong: his disastrous housing policy dragged down the economy and made many Hongkongers miserable, Mr Shih added. 'He did not understand Hong Kong is used to expensive land. Every world city is expensive. If people want cheap land, they can go to Tibet.' Professor Lui disagreed. 'Expensive land hurts competitiveness. We should not compare Hong Kong with London and New York, where property buyers come from different parts of the world.' If the government continued its tight rein on the land supply, he warned, property prices would eventually return to 1997 levels. He criticised the housing minister for a lack of long-term vision. 'If they don't relax the land supply, history will repeat itself,' Professor Liu said. 'People will be forced to buy because they have no idea when the rise will stop. The right way to ensure healthy development is to relax the land supply bit by bit.'