Hong Kong to suffer from increasingly unstable house prices

But on the flip side, HKMA's measures reduce the risk in the banking system.

According to Barclays, while the HKMA’s measures may reduce risk in the regulated banking system, the unintended policy consequence – a more extreme cycle dominated by property investors that tend to think of their properties as liquid investments – is increased instability in house prices.

Here's more from Barclays:

Ironically, as investors come to dominate the market, home financing is likely to shift from the speculative, in which rental income fails to cover the principle repayment portion of the monthly mortgage, to Ponzi financing, in which rental income fails to fully meet even the interest portion of the monthly mortgage.

When real interest rates ultimately rise, property investors will be forced to sell out to meet  their increased funding demands and property values will collapse. The market will flip from a sellers market on the back of teaser rate mortgages to a buyer’s market for only the creditworthy.

For the moment, however, there is little evidence of a catalyst to trigger a house price  correction – owners are simply not selling in the face of weak demand and are much quicker to withdraw property from the market should sentiment turn negative. Yet the longer the cycle lasts, the more extreme the likely ultimate price correction will prove.