SO THE Government has thrown in the towel over property prices. Only four months after Governor Chris Patten declared war on the rising residential market, calling it Hong Kong's ''number one domestic issue'', his officials have abandoned the battle. Some would say they never showed much stomach for a fight. Certainly last week officials seized with enthusiasm upon the recent modest fall in prices - of 10 to 30 per cent - as an ideal excuse to avoid taking any further action. It does not seem to matter that flat prices are still far beyond the reach of most Hong Kong people and that even those who do scrape together enough money to buy one, face cripplingly high mortgage repayments. There is now no prospect of the Government introducing real measures to correct the fundamental flaws in the property market, such as punitive capital gains tax on speculators, and prohibitive levels of stamp duty on short-term resales. Although technically still available as contingency options, neither is now ever likely to see the light of day, short of a major earthquake. Secretary for Planning, Environment and Lands Tony Eason made clear as much when he cited the modest fall in property prices as reason to indefinitely put on hold any additional action, saying the Government had no views and no timetable on whether further measures might be necessary. For good measure, Mr Eason added that the Government's forthcoming proposals on commercial rents would be even milder than its half-hearted package on residential prices announced last June. Even the developers' ill-timed show of strength during last Tuesday's land auction has apparently failed to dent official resolve to get out of the property market as soon as possible. A stronger-willed Government might have interpreted those events - when CITIC Pacific snapped up two plots in Tai Po and Kwai Chung unopposed, while a lot in Yuen Long had to be withdrawn because it attracted no bids - as a sure sign that the big property tycoons were still manipulating the market and needed further action taken against them. Instead the developers, not for the first time, seemed certain to get away with it, with Mr Eason declaring he didn't believe - in the face of more analysts' observations - that they use ''auctions to send signals or warnings to the Government''. For, despite their ham-fisted behaviour, the developers' actions on the auction floor have highlighted a point that is all too often forgotten in the debates over property prices: that the administration has a very real interest in keeping them high. Indeed the entire increase in this year's Budget surplus, which helped to finance popular tax concessions, can be attributed to a massive increase in the Government's income from land premiums - up 160 per cent from the previous year to $43.94 billion, or $33.6 billion after costs were deducted, 80 per cent higher than the Government had originally estimated. China, too, has a stake in keeping property prices high, since half this income goes to the Land Fund, which is reserved for the use of the Special Administrative Region government after 1997. That helps to explain why the Government, with Beijing's blessing, continually shies away from taking radical steps to sort out the property market, and was last week so eager to rule out any prospect of taking further action. Even last June's package of anti-speculation measures, although more significant than anything done before, still fell far short of the more drastic steps originally envisaged. But the Government's dilemma is that without the sort of ''exceptional measures'' the Governor originally promised last April - only to be talked into allowing them to be watered down by his officials - it is only a matter of time before the same problem arises again. The extra measures already announced, to help boost the supply of land for building new flats, may help a bit. But it won't be long before property prices start to soar again, perhaps even before the end of this year. And, having failed to bite the bullet and take any serious steps this time round, few will believe the Government the next time it tries to cool the market by threatening action against speculators.