Hong Kong's residential property prices may remain stubbornly high for now, but one big headwind could send prices down as much as 20 percent over the next two years, Goldman Sachs said.
In a note on Thursday, the bank said it saw "tough conditions of high prices and low volumes persisting in the residential segment."
Goldman cited a number of factors contributing to the holding pattern. Firstly, government cooling measures were unlikely to be loosened any time soon. Those are likely to keep a lid on buyers' demand.
The bank said it expected interest rates to remain relatively low for a while. That's set to support prices, which would also dampen demand.
Additionally, few speculators appear likely to be forced to sell, Goldman said. That would also likely work to keep prices high and sales volumes low.
But looking ahead, the bank forecasts declines in prices through 2018, projecting a 20 percent cumulative price fall over 2016-2018, largely on expectations interest rates will rise by 150-200 basis points.
Hong Kong's dollar is pegged to the greenback, which means interest rates in the protectorate tend to track the benchmark rates set by the U.S. Federal Reserve, which has indicated it will likely increase rates twice this year. The Hong Kong Monetary Authority raised its base rate to 0.75 percent from 0.5 percent in December in the wake of the Federal Reserve's move to increase its own interest rates.
Soaring property prices in Hong Kong have been the stuff of legend, but lately there's been a pullback amid a surge in supply.
Home prices have fallen nearly 12 percent over the past six months, with the number of cases of negative equity - which means the value of a property has fallen below the outstanding mortgage - rising by 14 times on-quarter in the first quarter, according to a South China Morning Post report in April.
The declines are in part due to cooling measures, including higher stamp duties, imposed by the Hong Kong government in stages starting in 2010 in response to increasing public anger over housing affordability.
But despite these measures, prices have more than doubled since 2009, consistently ranking the city among the world's most expensive property markets.
Demographia's International Housing Affordability survey for 2016, which cites data from 2015's third quarter, found that Hong Kong housing was "severely unaffordable," with median property prices around 19 times the median household income.
There is a lot of fresh housing supply on the cards. The government has said it wanted to get a record 80,000 new flats on the market by 2019. In September, CLSA estimated that 15,000-18,000 saleable units would hit the market over the next couple of years, up 40 percent from the 2013-15 period.
That backdrop is a driver behind Goldman's decision to downgrade its view on the sector from attractive to neutral. It also cut the stock of large luxury developer Kerry Properties, which is a constituent of the benchmark Hang Seng Index, to neutral, saying overall slow Hong Kong property sales would "add challenges to earnings delivery."
Goldman was also concerned about Hong Kong retail property, another segment with long-running affordability issues.
"We expect the retail segment to remain weak given softening sales of tenants. We see rents narrowing more steeply this year, with growth only returning in 2018," it said. It cut Hysan Development to sell, citing its high exposure to the segment and the bank's forecast that retail rents would decline 10-15 percent over this year and next.
Hong Kong retailers have been hit by a fall in mainland visitors amid an economic slowdown and graft crackdown in China. Hong Kong retail sales fell for the 13th straight month in March, Reuters reported on Thursday, citing government data that showed a 9.8 percent drop in sales value to $4.5 billion and a 8.8 percent slide in sales volume.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter