THE Hong Kong government's toughest efforts yet to curb a growing asset bubble in the city's property market probably won't be the last as record-low mortgage rates drive demand for the world's priciest homes.

Policy makers last month imposed an extra 15 percent tax on all home purchases by companies and non-permanent residents, adding to steps to boost the supply of housing and tighten lending as an influx of buyers from other parts of China underpin soaring prices. Untouched is the major stimulant fueling prices: borrowing costs tied to the US because of the Hong Kong dollar peg and growth linked to China.

Pledges by Hong Kong Chief Executive Leung Chun-ying and his predecessor to rein in the property market have so far done little to stem a three-year surge that almost doubled prices in the city with Asia's biggest wealth gap. Leung has imposed three rounds of curbs, including accelerating new home sale approvals and tightening banks' mortgage lending, since taking over in July. His government in the past week has signaled it won't rule out additional measures.

"These are all buy-time policies," said Vincent Cheung, national director for valuation and advisory at property broker Cushman & Wakefield Inc. "The government's doing this because new housing supply won't come in for another two, three years. And between now and then, the forces that push prices up will always be here because the Hong Kong dollar stays cheap."

Hong Kong's banks, including HSBC Holdings Plc and Standard Chartered Plc, are charging home buyers an average 2.15 percent for loans, less than half of its level six years ago, according to Hong Kong-based mReferral Mortgage Brokerage Services. The city's consumer prices rose 3.8 percent in September from a year earlier, according to the government.

Containing risks

The Hong Kong Monetary Authority, the de-facto central bank, could raise the reference mortgage rates for banks as part of the government's package to cool the residential market, according to brokerage Sanford C. Bernstein H.K. Ltd analysts, who predict a drop in prices of 25 percent.

"The long bull run in the residential market is coming to an end very soon," analysts, led by Kenneth Tsang, said. "There's short-term price growth potential" due to the third phase of so-called quantitative easing initiated by the US Federal Reserve in September, they said. "We don't view this as a sustainable trend, particularly since we expect the government to step in to contain market risks."

They also cite rising vacancy rates because of new supply and a two-year "lock-up" period for a special stamp duty for sellers that ends in November as likely to weigh on prices.

The government in November 2010 imposed additional taxes on the resale of apartments within two years to damp speculation and raised down payments on residential properties.

A ratio compiled by Midland Holdings Ltd that measures the average mortgage payments relative to median household income in the city rose to 40 percent in the third quarter from 36 percent in January. The index rose to 93 percent before the city's last major property crash in 1997.

Hong Kong's borrowing costs normally follow those set by the Fed as its currency is pegged to the US dollar. Home prices that have surpassed their October 1997 peak, which preceded a six-year decline that saw properties lose almost 70 percent of their value, and rising living costs have fueled calls for a review of the peg.

"Raising interest rates is what you need to contain asset price inflation; it's a no-brainer and economics 101," said Leland Sun, founder of Pan Asian Mortgage Co and former chief operating officer of the Hong Kong Mortgage Corp. "Maybe Hong Kong needs to get away from having its currency backed by something else and say that our finances and fiscal reserve and taxation structure is strong enough to have its own currency and not dependent on someone else."

The link, which has been in place since 1983, will remain because conditions for a possible alternative peg to the yuan, such as currency convertibility, aren't in place, Goldman Sachs Group Inc said in an October 23 report.

The Fed said on September 13 it will buy US$40 billion of mortgage-backed securities per month, while Chairman Ben S. Bernanke has pledged to keep interest low until at least mid-2015.

Under the new rules unveiled by Hong Kong Financial Secretary John Tsang on October 26, non-local and corporate buyers will pay a 15 percent tax on purchase. The government also raised a resale tax on property by 5 percentage points and extended the period during which it will apply to three years from two.

A typical two-room, 600-square-foot apartment on Hong Kong Island costs about HK$5.4 million (US$700,000), or HK$9,000 per square foot, according to estimates by Midland, the city's biggest publicly traded realtor.

Before the latest measures, transactions would incur a stamp duty of as much as 4.25 percent of a home's value, normally split between buyers and sellers. A non-local buyer will now be charged an extra 15 percent at the time of purchase.

The tax on non-locals was the first aimed at raising buying cost of Chinese mainland buyers, which accounted for about 31.2 percent of new home sales in the third quarter according to Midland. The figure reached a record 53.9 percent in the third quarter of 2011, the realtor said.

A Midland survey conducted after the new measures were introduced showed 62 percent of the 229 Chinese mainlanders asked said they will hold off from buying properties in Hong Kong for the next six months, while 3 percent said they won't buy in the city anymore, the firm said in a statement on Thursday.

Secondary market

"What these measures will definitely do is choke off transactions in the secondary market because the owners would just pull the units off the market rather than cut prices," said Lee Wee Liat, an analyst at BNP Paribas SA. "It will push more buyers to the new home market."

It is too early to say how much home prices would drop in response to the new government measures, Robert Ng, chairman of Hong Kong-based developer Sino Land Co said at a briefing on Wednesday.

Citigroup Inc and Credit Suisse Group AG have said prices will remain stable.

Weekend transactions of used apartments in the city's 10 biggest private housing estates, including Tai Koo Shing and Mei Foo Shun Chuen, fell to a four-month low in the two days after the new rules were announced, according to Centaline Property Agency Ltd.

The city's home prices are 65 percent higher than Tokyo's, the world's second-priciest place to buy a home, said a study by Savills Plc published last September that compares prices in 10 global cities including New York and London.

The government still has other "back-up plans" and may introduce more taxes to cool prices if necessary, secretary for financial services and treasury K.C. Chan said on October 28.

Leung, a former surveyor, said in September that there will be as many as 65,000 new private units available in the next three to four years. That's at least 30 percent higher than the average under Donald Tsang, his predecessor, according to estimates by Nicole Wong, an analyst at CLSA Asia-Pacific Markets.

Leung has also sped up the approval of permits for private project sales and will sell public units that were originally intended for rents.

"There are still many things they can do to boost supply," said Alfred Lau, a Hong Kong-based analyst at Bocom International Holdings Co. "They can allow more industrial buildings to be converted to apartments and there're all these farmlands developers are holding."

Thousands of protesters took to the streets in July, hours after Leung pledged to do more to address poverty and boost public housing.