IMF warns against property bubble bursting

The International Monetary Fund says the property sector remains the main source of economic risk in Hong Kong.

It warned that the sharp rise in Hong Kong's home prices increases the chances of an abrupt correction that could severely batter the economy. Hong Kong’s housing prices have risen 20% so far this year, a level twice that of late 2008.

The IMF noted that half of the outstanding loans are currently from the property sector, and the use of real estate as collateral also poses risks.

It said that price increases in the mass market segment have been particularly pronounced of late, and that this is worsening affordability.

"A sharp price correction would lead to falling collateral values and negative wealth effects, which could trigger an adverse feedback loop between economic activity, bank lending, and the property market," it said.

It said, however, that the probability of a correction large enough to generate major macroeconomic and financial consequences is fairly low in the near term.

A renewed intensification of the Eurozone crisis and the U.S. fiscal cliff would be the main external risks to Hong Kong, with potentially large spillover effects through the trade channel. It also warned that a hard landing in China, "although a low probability," could weigh on the city's small and highly open economy.