Hong Kongers are endlessly fascinated with real-estate prices, and it's not surprising. The market's booms and busts are more dramatic than virtually anywhere else on earth. Since the low in 2003, there have been gains of more than 15% in five out of eight years. As a result, the high cost of real estate is reflected virtually everywhere you turn, whether you're parking your car at HK$32 an hour in Central or sending in a monthly rent cheque for thousands of dollars. This is a property town. 'Either you are paying your mortgage or you're paying someone else's mortgage,' communications consultant Chris Dillon notes. 'Whether it's going to the drug store and buying a Band-Aid or going to the grocery store and buying corn flakes, everything has a real-estate price tag to it.' Dillon is the author of Landed: The expatriate's guide to buying and renovating property in Hong Kong, a primer on the ins and outs of real-estate ownership in the city. He notes that most of the fortunes in the city were made through property - and most of the city's conglomerates have real estate at their heart. 'Almost all the money in Hong Kong comes from property one way or another,' he says. 'It's the only game in town.' Still, the rapid run-up in prices over the past two years leads many wealth managers to warn about taking on too much risk with property holdings at the moment. They caution against buyers getting overextended, lured in by record-low interest rates and a market that was widely forecast to continue to move higher again this year. Martin Hennecke, the associate director at the investment advisory company the Tyche Group, sees this as a risky time when Hong Kongers are getting overexposed to property, and making many of the same mistakes as they made in 1997. 'People do make most of their money in real estate,' Hennecke concedes. 'But we wouldn't suggest to have more than one-third of your assets in property.' Property prices have risen 51.5 per cent over the past two years, according to figures from Midland Realty, and advanced a surprising five to six per cent in the first two months of this year alone. Though the momentum is slowing, and there are signs of transactions tailing off, the strength of the market has surprised most property professionals. The run has had a direct effect on the bank balances of many people in the city. According to a report put out in March by Citibank, just more than one in 10 adult Hong Kongers is a Hong Kong dollar millionaire, with liquid assets of more than HK$1 million. In raw numbers, 558,000 people have that level of wealth. It's a figure that shot up 42 per cent last year. And how they got there is instructive - 29 per cent of the newly minted millionaires made their money by selling real estate at a profit. Another 47 per cent crossed the threshold because of investment gains. As you might expect, the vast majority - 83 per cent - of those wealthy Hong Kongers own property. And their real estate holdings make up 65 per cent of their net asset value, a proportion that has risen from 57 per cent last year, largely thanks to value gains in Hong Kong homes. Property is the top holding, followed by stocks and then foreign currency. To Hennecke, those levels are too high. Investors should reassess their financial position and diversify into other asset classes, he feels. 'This is a place where property is too highly rated, and generally commodities are too lowly rated by investors,' Hennecke says. He added even though gold is a 'liked' investment here, many locals still haven't got any. 'Many have paper-backed schemes that don't even claim to be backed by the gold itself.' He would advise holding physical gold, or buying exchange-traded funds that are backed by physical gold or silver. Tyche believes the global financial crisis still has some way to run and will eventually result in sovereign debt crises not just in places such as Greece but also potentially in the US and Japan. Buying a home to live in makes sense - some would say an asset that you can live in and use every day is the best form of investment there is. But it is not wise to chase the market after it has risen strongly. 'Don't take for granted your salary for the next 30 years,' he cautions. 'Better miss out on some gains than being bankrupt.' Citibank also recommends property should make up no more than a third of an investment portfolio. Investment property shouldn't be something that you get overly sentimental about, the bank cautions. 'You should treat it as just another asset class, a medium-term to long-term asset class,' Simon Chow, the deputy business manager for Hong Kong with Citibank's global consumer group, says. Chinese people in particular overemphasize property as an investment, Chow says, seeing it as a 'legacy' investment that's easy to pass on to a second generation. Many take to heart the Chinese saying that 'You have to first have land before you become wealthy.' As a result, real estate is the favourite investment play not only in Hong Kong but also in Taiwan, Singapore, and mainland China. While property is a good hedge against inflation, and may hold its value well over the long term, it has its disadvantages over other asset classes. The principal drawbacks are its illiquidity, high transactional costs, ongoing carrying costs, and the risk of leverage [see sidebar]. Charges to enter and exit stock investments typically run around 25 to 50 basis points (i.e. 0.25 to 0.5 per cent) of the amount invested - compared with around five per cent of the total cost for a property purchase. That means you'd be paying HK$250,000 on a HK$5 million apartment. The biggest cost, stamp duty, is just HK$100 on apartments below HK$2 million but is 4.25% alone on apartments over HK$21.7 million. The special stamp duty introduced by the government in November has increased short-term transaction costs, with a tax of five per cent on properties sold within two years of purchase, 10 per cent on those sold within a year, and 15 per cent on those sold in six months. Virtually all short-term speculators have exited the market as a result, property professionals say. The two-year holding period to avoid that tax illustrates how tough it can be to exit property investments. Even without the special stamp duty, the rule of thumb is that most properties need to be held for at least five years before they pay for themselves and cover their transaction costs. Stocks are much more liquid, and can be bought and sold within seconds, while property deals takes months to complete. But there are, of course, many other ways to gain exposure to real estate without going through the process of buying an apartment - including buying property stocks and funds. Investment advisors often say single-company risk is too great for individual investors to bear. So it may be better for investors to buy an exchange-traded fund like the Tracker Fund, mapping the Hang Seng index, than invest in any of the property developers included in it: Cheung Kong (Holdings), Henderson Land Development Co., Sun Hung Kai Properties, Sino Land Co., Hang Lung Properties, China Overseas Land & Investment and China Resources Land. There are also eight real estate investment trusts, or reits, listed in Hong Kong, and many more across Asia. Though normally staid holdings best known for oversized dividend payments, Asian reits have performed well recently. According to CB Richard Ellis, the Hong Kong market rose by 24.8 per cent in the second half of last year, well ahead of the 14.4 per cent gain for the Hang Seng index. The Link reit, the Prosperity reit, the GZI reit and Champion reit all gained more than 25 per cent. Property investors can also buy parking spaces in Hong Kong, strata-title office space or retail shops. Those investors who can't afford to buy the place they want to live in could think about purchasing an investment property, to give them a foot on the ladder, while living in a rental apartment. 'There are lots and lots of ways to get exposure to real estate - it doesn't have to be the apartment that you live in,' Dillon points out. Still, all of those investment plays have also seen major gains after the run up of the past two years. Retail real estate has hit record highs this year, and office space is approaching its peak set in 2006. Like residential real estate, where rental yields are three to four per cent, and often lower on luxury property, rising prices mean rents are only just keeping ahead of inflation. Puru Saxena, the CEO of Puru Saxena Wealth Management, says he does not hold any property shares for his clients. He says he is very apprehensive about how far this property bull market has to run. By his calculations, the value of the total residential property stock in Hong Kong is now 330 per cent of the territory's gross domestic product. The figure is 350 per cent in China, he says, approaching the 370 per cent figure before the bursting of the property bubble in Japan in 1989 and 1990. 'I really think this is no time to invest in property in Hong Kong or China, or Australia or the UK,' he says. The first three have yet to see much effect from the property downturn that has swept the rest of the world, and low interest rates have kept British property owners in variable-rate mortgages that may be tough to afford when rates rise.' So is now the time to get out? 'If you own the property in which you live, keep it,' Saxena says. 'But if you have investment properties, especially if you are leveraged, and you cannot withstand a 30 per cent or 40 per cent decline in prices, you have no business owning that property.' It all depends on whether you can service the debt load you have taken on. At some stage, there will be a correction in prices, and that's when the test of your holding power will come. 'Property, like any asset class, is cyclical,' Saxena says. 'There is no permanent boom and no permanent bust. Those who believe things are different this time in Hong Kong obviously haven't lived in the city long enough.'