A series of tightening measures have put the brakes on Hong Kong's overheated property sector, forcing developers to cut prices and prompting a warning from Asia's richest man Li Ka-shing: speculators stay away.
Developers say a sixth round of cooling measures imposed last month to rein in prices and to avoid an asset bubble are now having an impact on sales.
"If you are speculating, I would suggest that you stay away in such a volatile market because no one knows what will happen next," Li told a news conference after his company Cheung Kong [Holdings] Ltd. announced its first annual decline in net profit in five years.
"Look at your pocket first and don't take risks," Li said.
In late February, Financial Secretary John Tsang imposed a new round of steps to curb prices that have doubled since 2008, saying they were needed to keep the potential economic risk from spreading in the financial hub.
The new measures included higher stamp duties and home loan curbs on property transactions.
In the first three weeks of March, second-home transactions plunged to their lowest since the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, when Hong Kong's real estate market hit an all-time low, according to data from property agent Midland Realty.
"We only recorded two deals from the 10 large-scale residential estates during the past two weeks," said Wong Leung Sing, an analyst at Centaline Property Agency, who described the market as the worst he's ever seen.
"The market might head in two different directions: Prices stay the same with a plunge in transactions, or prices will just collapse," Wong added, explaining that home prices may drop as much as 20 percent in the second quarter.
Sun Hung Kai Properties Ltd., the world's No.2 property company by market value, has also cautioned about the impact of the tightening measures and lowered its sales target for this financial year by 9 percent.
Analysts say Cheung Kong has been forced to cut prices to boost sales in a lethargic market.
Cheung Kong, Hong Kong's second-largest property developer after Sun Hung Kai Properties, cut the price of a new project in the city by 6 to 17 percent, according to Macquarie Equities Research.
Cheung Kong on Tuesday logged a 30 percent fall in 2012 net profit from a year earlier, although the total net profit of HK$32.2 billion ($4.1 billion) beat analysts' expectations.
Over the past three years, property prices have surged in Hong Kong, one of the world's most expensive property markets, on ultra-low interest rates, tight supply and abundant liquidity.
Correction on the cards
Along with government tightening, a number of banks raised mortgage rates by 25 basis points earlier this month.
"We think the rate hike has psychological impact more than actual impact to buyers," Dennis Wu, research analyst at Phillip Securities, wrote in a note last week.
Wu said a big drop in property prices in the past was only triggered by major events, such as the financial crisis in 1997 and the SARS outbreak in 2003.
"But in view of property prices at historically high levels, government damping non-user demand and some property developers offering a price discount, we maintain a 5 to 10 percent reasonable correction forecast for 2013 property prices."
Despite signs of slowdown, the Centa-City Leading Index, a widely used indicator of the city's residential price trends, is now at a record 123.7. That's 1.7 percent higher than mid-February.
Property developers in the Chinese special administrative region have so far seen limited impact from ongoing government tightening.
On Monday, Henderson Land Development Co Ltd. recorded a 28 percent year-on-year rise for 2012 underlying profit, while Agile Property Holdings Ltd.'s net profit rose 22 percent during the same period.
Henderson said in statement the cooling measures had resulted in a moderate downtrend in property prices and a drastic drop in property transactions.