Hong Kong: The Hong Kong Monetary Authority (HKMA)

Hong Kong's overheating property market posed macro-financial risks to the economy, the city national's monetary authority warned in a statement on Wednesday.

"The loose world monetary conditions and the expectation of a protracted period of negative real interest rates could provide incentives for households to take up excessive mortgage leverage and pose upside risks on property prices," the Hong Kong Monetary Authority (HKMA) said in its Quarterly Bulletin.

According to HKMA, this, in turn, could further intensify the disconnect between property prices and economic fundamentals.

The statement comes a week after the International Monetary Fund cautioned the authorities against the rising property costs. "Property sector is the major source of domestic economic risk," the IMF said in a statement on December 12.

According to the Washington-based lender, a combination of limited supply of new housing, strong request from local and non-local purchasers, and low interest rates imported from the US has been driving up prices.

HKMA observed that in contrast to tepid income increase, housing prices surged by a cumulative 23.2 % in the year to October. Housing affordability deteriorated as a result, with both the price-to-income ratio and the mortgage payment-to-income ratio rising to their post-1997 highs.

The monetary authority, in mid-September, implemented prudential measures to contain the prices. They included hiking the Special Stamp Duty rates to 10-20 % from 5-15 % and extending the restriction period to three years.

The government as well introduced a Buyer's Stamp Duty of 15 % on residential properties acquired by companies and non-locals. The central bank said that that housing prices and transaction activity have moderated as a result.

"The near-term outlook for the Hong Kong economy continues to be relatively weak," the statement said. While there are signs of stabilisation on the external front, weak foreign request will continue to restrain Hong Kong's export performance for a time, it added.

In November, the government cut its full-year estimate for 2012 to 1.2 % from an before projection of 1 %-2 %. For 2013, the IMF expects that Hong Kong's increase will recover to 3 % as the drag from net exports further abates.

Hong Kong's economy is still faced with downside risks, particularly for the external environment, the HKMA statement found. It warned that a severe world downturn resulting from a further escalation of the euro area crisis or a fiscal shock in the US could exert considerable pressure on Hong Kong's exports and throw the broader economy into recession.

The HKMA reportedly sold HK$4.495 billion in Hong Kong dollars on Wednesday as the local currency again hit the strong end of its trading range. The HKMA intervened in the currency market on Tuesday, selling HK$4.42 billion.

The Hong Kong dollar is pegged at HK$7.80 to the U.S. dollar but can be traded between HK$7.75 and HK$7.85. The central bank intervenes whenever the currency reaches the strong end of the trading range.