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By Chris Oliver, MarketWatch

The skyline of central Hong Kong and Victoria Harbor.

HONG KONG (MarketWatch) — For some real-estate analysts in Hong Kong, the weakening housing market is beginning to stir up uncomfortable memories.

Sellers are cutting asking prices in some areas by 10%, while reports say some aspiring buyers earlier this month walked away from apartment deposits worth as much as 235,000 Hong Kong dollars ($30,142) in the expectation prices — which have been flat to lower in recent months — could fall further.

The environment is a major turnaround for a real-estate market that’s been one of the world’s best performing since the 2008 financial crisis, lifted by record-low interest rates and an influx of buyers from mainland China.

Analysts now expect property prices to extend their drop, though it’s not clear whether the current weakness is a soft patch or the beginning of a more serious downturn.

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Some of the property bears say what’s shaping up holds a striking resemblance to conditions 14 years ago. At that time, home prices sputtered out in autumn 1997 following a long summer marked by financial turmoil in the region and political change, as Hong Kong reverted from British to Chinese rule, ending a long period of property-price gains.

“This market has had a pretty good run, and a lot of people feel it’s quite highly priced, not necessarily at the top, but pretty fully priced,” said Colliers International’s head of valuation in Asia, David Faulkner.

One concern is that prices have been pushed higher in part by a government policy on land supply that’s depressed the availability of building sites and kept some new housing supply from the market.

That approach, however, appears to be shifting, according to analysts, who point to an auction of a residential development site in the territory’s Kowloon district earlier this year. The government accepted an offer on the site well below the expected price range, which analysts say signals a policy shift to encourage cheaper housing.

CB Richard Ellis analyst Edward Farrelly said the auction result showed the government’s “change from seeing land as pure revenue driver to seeing it as a source of social housing.”

If indeed the government continues to offer more land at less cost, Farrelly said, it would add up to “one more tool on the supply side” to help push down prices in a city that ranks along with Vancouver and Sydney as the world’s least affordable.

Farrelly expects modest declines of 5% to 10%, but wouldn’t rule out a 20% drop under a worst case scenario of global recession.

Signs and omens

So far, the warning signs of a big crunch, such as widening defaults and forced sales, are not showing up, Farrelly said, adding he doesn’t think “investors are going to leave the market en mass.”

Home prices in the city fell 0.2% in the second week of August from the prior week, according to an index published by Hong Kong realtor Centaline.

Prices have been broadly flat in June and July, after rising 13% in the first five months of the year. In the two years through the end of 2010, house prices rose 56%.


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