The inflow of HK$567 billion into Hong Kong between October last year and this October is a simple demonstration of what surplus liquidity can do to property prices. There has been a huge jump this year in property prices, particularly luxury flats. According to real estate firm CB Richard Ellis, prices of luxury flats have risen by 40 per cent since January, and are now just 13 per cent below last year's pre-crisis peak. Records have been set for some luxury properties, including one apartment at 39 Conduit Road in Mid-Levels, which was sold in October for a world record HK$88,000 per square foot. Given that the Hong Kong economy remains weak - real GDP contracted by 3.8 per cent year-on-year in the second quarter, and nominal wage growth remains in negative territory - the property boom has the hallmarks of a liquidity driven bubble. The hike in flat sales has also pushed the shares of property developers up and prompted a flood of primary and secondary offerings in property-related shares. These developments are perpetuating Hong Kong's next boom-bust property cycle. But it's a pattern that is well established. The fundamental factors that have long supported the Hong Kong property market, from a shortage of housing to record low mortgage costs, are well known. After the boom years running up to the handover, the city's property prices succumbed first to the Asian financial crisis in 1998, then the dotcom bust and a downturn caused by severe acute respiratory syndrome (Sars) in 2003. In the Asian financial crisis, property prices fell about 70 per cent and didn't bottom out until late 2003. In the dotcom boom-bust in 2000-01, property prices came off their 1996-97 highs by about 40-60 per cent and, while the climate in 2002 became slightly more optimistic, the crash following Sars saw property rental prices fall by 40 per cent and the market stagnated through into 2004. When the Asian financial crisis hit Hong Kong in 1998, interest rates were raised overnight to 16 per cent to defend speculation on the Hong Kong dollar. The government's defence of the dollar sent property on a downward spiral, ultimately forcing the government to intervene by instituting in June 1998 a temporary nine-month moratorium on all new land sales to prevent a total loss of confidence in Hong Kong. Following the Sars epidemic, the city' property and real estate market had been combating rising unemployment and deflation. Overall, the Asian financial crisis and Sars were devastating to Hong Kong's property market. From the peaks of 1996-97 to the troughs of late 2002, property prices fell close to 70 per cent and then dropped a further 10 per cent in the first quarter of 2003. In the wake of the global financial crisis and subsequent dollar inflows into Hong Kong, the government's intervention has been limited. The only real direct response has been the requirement by the Hong Kong Monetary Authority (HKMA) that banks lend no more than 60 per cent of the value of properties selling for more than HK$20 million instead of 70 per cent. This requirement, however, has had an immediate impact on sale and purchase agreements - they fell by 24 per cent month on month in October this year. According to Jones Lang LaSalle's latest quarterly analysis, however, the luxury residential sales market remained lively going into the third quarter, largely because of sustained low interest rates, tight supply (with reports of many apartments being taken off the market in anticipation of even higher prices), the stock market rally and growing investment interest from mainland buyers. 'In an environment where finance costs are low and supply is tight, capital values of luxury residential properties will likely hold in the next 12 months ahead, with a mild potential upswing,' said Jane Murray, head of research, Jones Lang LaSalle, who was quoted in the firm's latest Asia-Pacific Property Digest. 'It is logical to expect an interest rate rise in 2010 but any upside pressure will be realised towards the end of the year, and luxury residential buyers are generally less sensitive to interest rate movement. The growing interest from mainland Chinese individuals also helps to broaden the buyer pool and offer further support to capital values.' Prices now have everything to do with local and, especially, mainland buyers. The government's restrictions on leverage in property transactions may not deter these customers. Some of them require mortgages - the percentage of mainland borrowers in Hong Kong has steadily risen over the past three years - but interest rates are low and many are apparently willing to pay cash. According to data from the HKMA, the amount of money approved for mortgages has been declining in recent months even as prices have been going up. According to market intelligence research firm Business Monitor International, with policymakers in the United States and the mainland unlikely to make the shift to tightening liquidity any time soon and the Hong Kong government highly unlikely to revalue the Hong Kong dollar, the property boom could continue for a long while yet. However, if and when a correction comes, this could have serious consequences on the overall economy, as was the case following the property crash of 1997.