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Hong Kong's property sector may face dire predictions of a crash after the breakneck pace of price increases in recent years, but that wouldn't be an Armageddon scenario for the economy, market watchers said.
"With the Federal Reserve set to tighten policy this year and growth likely to slow further in the mainland, there are rising concerns about a possible collapse in house prices," Chang Liu, an economist at Capital Economics, said in a note Tuesday. "While the economy would be weakened if this happened, we would not expect to see a severe and protracted economic downturn."
Read More Hong Kong is in a recession: Expert
Hong Kong's property prices have more than doubled since 2009, pushing them to levels higher compared with average incomes than prior to the 1997 crash amid the Asian financial crisis, he said. In December, Hong Kong's private home price index climbed to a record high, up 13 percent on-year, after rising for nine straight months, according to official data released Thursday.
The city is largely captive to U.S. monetary policy as it has pegged its currency to the greenback and tighter Fed policy would push up mortgage rates in Hong Kong, Chang noted, adding that at the same time, mainlanders are buying fewer properties.
The banking sector, private consumption and construction are the main ways a crash would hit the economy, he noted.
Banks may be cushioned by low loan-to-value ratios averaging around 55 percent for last year's new mortgages as well as government efforts to rein in speculators, keeping delinquency ratios low, Chang said.
In addition, studies suggest every percentage-point decline in home prices causes a 0.1 percentage-point fall in the city's private consumption growth, Chang said, noting that the 70 percent price drop in the 1997 crash lowered consumption growth by 7-8 percent over five years.
"While the impact is sizable, it also suggests that even a total collapse in house prices would be unlikely to lead to a slump in private consumption," he said.
Construction, meanwhile, accounts for only around 4 percent of gross domestic product (GDP), suggesting a collapse there would be "manageable" for the economy, Chang said.
To be sure, the concern may be academic, with home prices rallying around 13 percent after hitting a bottom in the middle of last year.
Citigroup is more concerned the government may introduce further cooling measures to contain prices as the Federal Reserve increase interest rates at a slower-than-expected pace.
But it's still positive on the city's residential property market over the next year.
"Further tightening may cool the property market only for a short while," Citigroup said in a note Tuesday. "We expect the annual supply shortage of over 6,000 units to continue for the next three years. Families that do not buy a house would opt for a lease, which would drive up the rental rates – another support to physical home prices."
Others note Hong Kong's banks will be getting an additional buffer if credit turns sour. Moody's tips a "credit positive" from the monetary authorities' move last week to make the city's banks will be subject to a "countercyclical buffer" of 0.625 percent, starting next year.
"The authorities' objective in setting the countercyclical buffer is for banks to accumulate additional capital during periods of fast credit growth that will help them when the cycle turns," Sonny Hsu, senior analyst at Moody's, said in a note this week.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter