Hong Kong's residential property market enters the new year with a significant boost in the latter part of 2006 from expectations of falling interest rates, buoyant government land sales and a robust stock market.
But analysts say interest rates will ultimately determine whether the housing market will see a sharp improvement this year.

Midland Realty chief analyst Buggle Lau Ka-fai said interest rates did not behave as expected last year.

"It not only did not peak in the first quarter, but dragged on to the third quarter before [the picture] became clearer."

The US Federal Reserve hiked interest rates four times in the first half of 2006 to 5.25 percent, but has since maintained that level.

This dragged down transactions for Hong Kong's primary and secondary markets from Lau's original estimate of more than 100,000 sales to about 80,000.

Secondary market transactions fell about 20.5 percent year on year to 70,209, with properties priced between HK$2 million and HK$5 million dropping 29 percent to about 17,772 transactions.

Primary market deals were particularly affected as developers held off sales of new projects.

Midland statistics show only 3,577 new home transactions in the first half of 2006 - "the lowest figure since records started," Lau said - compared to 9,332 for the same period in 2005.

Market sentiment improved in the second half as the US Fed kept interest rates steady. Local banks waged a mortgage war and developers thought it was the right time to launch new large projects for sale such as Park Island, Le Point and Grand Waterfront.

Midland statistics show there were 8,581 primary market sales in the second half, bringing the annual total to 12,158, but this was still 19 percent lower than in 2005 and the lowest since 1996.

Centaline Property Agency estimates Cheung Kong (Holdings) (0001) sold the most flats in the first 11 months of 2006 with 3,160 units, followed by Sun Hung Kai Properties (0016) with 2,288 units, and Henderson Land Development (0012) with 1,914.

Overall property prices in 2006 held up despite higher interest rates, with mass residential units seeing a 2.4 percent increase while super-luxury residential units saw a 19.7 percent hike, Lau said.

For this year, buyers can expect potential new supply of 116 projects comprising up to 31,907 units hitting the market, according to Ricacorp Properties research.

Eight of the 116 are large projects comprising more than 1,000 units each, totalling 16,102 flats.

These include the Central Park Towers (2,960 units), the long-delayed Hung Hom Peninsula (2,470 units), Yoho Town phase 2 (2,247 units), and Dream City phase 1 (2,096 units) in Tseung Kwan O.

But competing for buyers' attention will be the resumption of sales of surplus government built flats.

On Tuesday, the Hong Kong Housing Authority began inviting applications from eligible persons for 3,056 surplus Home Ownership Scheme flats at Wong Tai Sin, Sha Tin and Tin Shui Wai, with prices set at 30 percent off assessed market values.

Meanwhile, the Hong Kong Housing Society will sell 576 HOS units at Kingston Terrace in Tuen Mun.

Lau said the property market can expect a strong performance this year, pointing to indicators such as pay rises, falling unemployment and higher inflation.

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