Correction coming for Hong Kong home prices

Brent Lewin | Bloomberg | Getty Images

Home prices in Hong Kong, one of the world's most expensive property markets, could see double-digit declines next year, forecasts from major banks show.

Prices are expected to drop 15 percent in 2015 on the back of an increase in unemployment, "a rising interest rate environment [in the U.S.] and competitive pricing by developers," Credit Suisse said in a report this week.

The bank expects the Federal Reserve to increase borrowing costs by a quarter-point in the second quarter of next year followed by another half point in the second half, boosting mortgage rates in Hong Kong, which effectively imports interest rate policy from the U.S. through its currency peg. This could dissuade buyers from the property market.

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Meanwhile, Deutsche Bank anticipates a 20 percent price decline next year on expectations of higher U.S. rates.

The property sector has defied a string of measures aimed at cooling runaway prices, including a flip tax on properties resold within six months and a doubling of the stamp duty. The latter measure was relaxed earlier this year. Average prices surged to all-time highs in October, data from local real estate agency Centaline show.

Other factors supporting price falls

Increased land supply next year should also see prices move off record highs as abundant supply typically leads to competitive pricing among developers, Credit Suisse said.

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Nearly 14,000 units are expected to launch across Hong Kong, Credit Suisse estimates, the bulk of which are located in the district of New Territories. The top four districts seen providing the most private residential supply from 2015 onwards are Yueng Long, Tseung Kwan O , Tsuen Wan and Kai Tak. Meanwhile, over 4,300 units may be launched city-wide in the remainder of 2014.

A potential rise in unemployment could also weigh on demand, sending prices lower.

"There is a chance of modest increase of unemployment rate, especially if the market and social stability outlook in Hong Kong continue to be short-sighted. This might in turn slow down the momentum of home purchase by first-time buyers and upgraders," the report said.

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Not so fast

Not all agree that prices are headed lower. According to Alan Jin, property analyst at Mizuho Securities Asia, a 75 basis point rate hike in the U.S. would have minimal impact on home prices. Rather, the Fed would need to hike rates by at least 150 basis points to see prices knocked off their current levels, he said.

Moreover, Jin believes the city's solid economic fundamentals will see prices remain on their current uptrend for most of next year. Figures last week showed Hong Kong's economy expanded a faster-than-expected 2.7 percent on year in the third quarter.