The sharp run-up in Hong Kong's home prices raises the risk of an abrupt correction and the government should take further measures if necessary to contain the situation, the International Monetary Fund (IMF) said on Wednesday.
Hong Kong has one of the world's most open economies and a property market that is easy to enter, making the city's housing market a popular target for "hot money".
Prices of homes in the former British colony have increased 20 percent this year, doubling from a trough in 2008 and driving the market beyond record 1997 levels. The surge forced the government to introduce new cooling measures in October.
The government's efforts to ensure a steady and adequate supply of new housing including through public housing are welcome, although the impact may be limited in the short run given planning and construction lags, it said in a statement.
"Policies on a variety of fronts are needed to contain macroeconomic and financial risks from the housing market," the IMF said, although it added that the likelihood of a correction big enough to cause major consequences was fairly low.
Global economic weakness has also been hurting the Asian financial and trading centre. The IMF, which last year projected Hong Kong to grow 4 percent in 2012, in October cut its forecast to 1.8 percent, and now projects only 1.25 percent. A big drop in exports means a reduction of 1.75 percentage points from the growth rate, it said.
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An intensifying euro zone crisis and the U.S. fiscal cliff were the main external risks, with potentially large spillover effects coming through the trade channel, it added.
Domestic demand, however, was resilient thanks to a supportive fiscal stance and strength in the labour market, which would help economic growth rebound to around 3 percent next year, the IMF said.
Hong Kong's economy expanded faster than expected in the third quarter, helping the trade-dependent territory avoid a recession as its exports and retail sector regained traction thanks to a pick-up in the world's two largest economies.
Foreign Fund Inflows
But the government remained cautious and revised its full-year 2012 economic growth forecast to 1.2 percent from 1-2 percent, down sharply from 4.9 percent expansion in 2011.
Despite the slowdown, foreign funds have been flowing into Hong Kong to seek opportunities to cash in on China's recovery, bringing the 29-year-old currency peg under pressure and raising fresh debate over the currency regime.
The IMF said the city's Linked Exchange Rate System was a credible and effective exchange rate regime and warranted continued support as the best arrangement for Hong Kong.
Recent purchases of U.S. dollars by the Hong Kong Monetary Authority (HKMA) amid fresh capital inflows was part of the normal functioning of the system, it added.
The HKMA has injected a total of $9.25 billion worth of Hong Kong dollars into the market since Oct. 20 in order to curb the strength of its currency.
The Hong Kong dollar is pegged at 7.8 to the U.S. dollar but can trade between 7.75 and 7.85. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.