Despite repeated attempts to curb the gains made on Hong Kong property sales, prices remain in the stratosphere though many believe a correction is likely soon.
Is Hong Kong's property bubble about to burst?
When will Hong Kong's property bubble burst?
It's one of the big questions in global finance these days.
Hong Kong has the highest home prices among major global cities, including London, New York and Tokyo, according to a report by the international property consultancy Savills.
Many believe the market is ripe for a setback, although opinions differ on how serious.
"Hong Kong's property market is like a patient getting early-stage cancer. However, our government gives it medicine that is designated for final stage cancer patients," says Raymond Lee, the regional chief executive of Savills. "The high dosage kills both good cells and cancer cells. The patient will also die."
Prices show no serious signs of falling despite repeated attempts by the government to curb gains. Against that, there is a housing shortage, mortgage costs are low and there has been a buying spree by mainland Chinese.
However, most of the smart money is now on prices dropping. Prices could fall as much as 20 per cent over the next two years, according to Deutsche Bank, after lenders in March raised home-loan rates by 25 basis points in response to tighter risk rules.
Savills echoed the Deutsche prediction, saying property prices in Hong Kong may drop by up to 20 per cent across the board because of the latest anti-speculation measures taken by the government.
Since returning to China in 1997, Hong Kong's economy has become thickly entwined with the mainland, and it needs Chinese trade flows and tourists to keep it simmering. With the economy expected to weaken over the next couple of years north of the border, Hong Kong's growth could choke.
But the link to the United States economy via the currency board peg means that it will possibly have to deal with stronger growth there next year, and a probable rise in interest rates, while mainland China stutters.
"As we see China and Hong Kong growth slowing, and US growth on the way back up, Hong Kong has a problem. Interest rates rising in the US would come at exactly the wrong time for Hong Kong," says Freya Beamish, an economist at Lombard Street Research who covers China.
This scenario could play out negatively on the property market. With its robust links to the world's biggest and second-biggest economies, Hong Kong has been awash with liquidity. America's central bank slashed interest rates to counter the global downturn and began quantitative easing.
"At this stage, the Hong Kong dollar along with the RMB [China's currency] was still substantially undervalued against the US dollar. Having held on to the peg, even while China allowed some nominal appreciation, all of Hong Kong's currency adjustment had to take place through prices," says Ms Beamish.
So is it possible that US growth rising as Hong Kong and Chinese growth heads in the other direction could in fact help the Hong Kong economy because it means the bubble will burst, and the economy can be rebuilt from a firmer base?
"If they keep the peg in any case, we will see the same problem again. They seem addicted to the peg, the stability of it. A run-up in property prices is not my definition of stability," responds Ms Beamish.
Hong Kong's chief executive Leung Chun-ying has imposed extra property transactions taxes, raised mortgage down-payment requirements, and accelerated the pace of government land sales.
What is effectively a three-decade-old marriage is indeed hard to pull asunder, but calls for changes in Hong Kong's currency peg system are growing. Joseph Yam, who was chief executive of the Hong Kong Monetary Authority (Hong Kong's central bank) until October 2009, last year made a high-profile call for the link to the dollar to be reviewed.
Mr Yam has suggested a shift to a peg against the yuan, a widening of the trading band versus the dollar and a "corridor" that would be periodically reviewed.
In some ways the scenario is similar to the one that happened in Europe during the financial crisis, when countries such as Ireland, Greece and Spain built up large property bubbles on the back of low euro-zone interest rates that were appropriate for countries like Germany, but not for those less solid economies on Europe's periphery.
"Likewise if interest rates rise in the US, it doesn't work for Hong Kong," says Ms Beamish.
One of the by-products of the property boom in Hong Kong, with possibly long-term social consequences, has been the disappearance of the small business outlets downtown.
Walking through the trendy Soho district on Hong Kong island recently with the local entrepreneur Ian Carroll, he pointed to various shops that were until recently small family outlets that have been transformed into plush design stores.
"During Sars [the avian influenza crisis in 2003], I was paying US$6,000 a month for my shops, they are now US$80,000 a month. It's only 10 years later," says Mr Carroll, who owns The Hong Kong Candle Company.
Last year, 46 million mainland Chinese visited Hong Kong, and that is putting the squeeze on rents in shopping and tourist hotspots such as Soho and Causeway Bay, known for luxury stores that attract free-spending mainland tourists.
However, the fact that mainland Chinese are cutting back on spending as the economy slows across the border means that rental growth is not increasing by quite the same heady amounts.
Average prime shop rents in Hong Kong may rise 8 per cent this year, down from growth of 9 per cent last year and 27 per cent in 2011, according to CBRE, the property consultant.
The New York-based Cushman expects rents to rise about 5 per cent this year.
The chairman of John Swire, James Hughes-Hallett, said he thought Hong Kong home prices were close to peaking after more than doubling since early 2009.
Swire Properties made history in November when it sold an apartment in Opus Hong Kong, a building designed by Frank Gehry, for HK$455 million (Dh215m), or a record HK$68,083 per square foot.
"We're at the very top of the market for our global comparison," Mr Hughes-Hallett said. "If you look at the price equivalent you pay in New York, Paris, London, Tokyo, there should be a price ceiling somewhere very soon."