Just a few months ago, the possibility of Hong Kong's property bubble bursting seemed so far-fetched that nobody even cared to mention it. Now, this once-ignored topic is taking center stage in a heated public debate.

Nobody can predict when property prices will crash, or what exactly would trigger such a calamity, but it is clear to even the most optimistic observers that the property market is grossly overheated; average home prices have risen for 18 straight months.

But the expected price correction that marks the normal free market cycle is nowhere in sight. In contrast, the ever-larger crowd of eager homebuyers who gather at site offices whenever apartments in a new project are put up for sale is often cited as an indication that the boom still has a long way to go.

Indeed, developers and real estate agents who are making millions from the market frenzy have argued that the boom was solidly underlined by what they described as "inelastic" demand, which, in turn, is fueled by vastly increased wealth.

To illustrate this point Shih Wing-ching, founder and chairman of one of Hong Kong's largest real estate agents Centaline, cited the much-enlarged size of total bank deposits in the past decade. Drawing a comparison with the credit-fed property bubble before the big crash in 1997, Shih and others suggested the current boom is driven mainly by real money put up by end users.

There are a growing number of doubters who note that total bank deposits are no longer a reliable measure of wealth. The large influx of external, mainly Chinese mainland, capital has become the major force that has pushed property prices to levels fewer and fewer Hong Kong people can afford.

Results of some recent surveys show the monthly mortgage loan repayment now accounts for close to half the total income of an average household. Many new home buyers cannot afford the down payment for mortgage loans from banks, forcing them to turn to finance companies that offer 100 percent financing at considerably higher interest charges.

To be sure, the overall gearing of the market is noticeably lower than that of the one before the 1997 crash. But the blow to market confidence by a sudden and rapid outflow of hot money when an opportunity for better investment returns presents itself elsewhere can be just as devastating as a credit crunch.

Rising interest rates in the United States, coupled with strong economic growth and an appreciating currency has made the bull market on Wall Street more and more attractive to overseas investors.

In contrast, the Hong Kong dollar has stayed weak at the bottom end of the band allowed by the linked exchange rate mechanism. What's more, stock prices have been moving listlessly within a narrow range and scope for further increase in property prices seems much less assured than in the past.

Nobody seriously expects the Hong Kong property market to implode largely because banks' exposure to the risk of a price correction in a normal down cycle has remained manageable. But the rapid increase in sub-prime mortgages on the books of finance companies can be worrying.

Some studies quoted by local media estimate that finance company lending to homebuyers who would not have qualified for bank loans surged to more than 16 percent of total mortgage financing so far this year, up sharply from a year earlier.

These finance companies have one major source of funding - the banks. The failure of one or more of the finance companies because of a fall in property prices can pose a serious threat to the integrity of the banking system.

Optimists said that the worries of "doomsayers" were grossly exaggerated, noting that the projected supply of new apartments in this cycle is much lower than at the height of the pre-1997 boom. But before taking comfort in this argument, it is important to note that developers appear to be in a big hurry to unload their stocks by working closely with finance companies to woo buyers of pre-completion apartments in their various projects.

These seasoned risk-takers obviously believe in the old adage: What goes up must come down.

The author is a veteran current affairs commentator.

(HK Edition 06/05/2017 page8)