The tightening of the money tap in China is tempering the rush to buy increasingly smaller property in Hong Kong © AFP/Getty
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Hong Kong: the city where most people live in shoe box-sized apartments that make those in New York or London look palatial — and yet still wins the title of least affordable housing market in the world.

It is an accolade the former British colony does not wear lightly. Here, where the most modest flat will set you back at least $1m, developers — ever eager to maximise income — have worked out that you can make apartments smaller still — at just 500 sq ft — and access a slightly less well-off pool of buyers.

But cracks are appearing in the bricks and mortar. Price tags are rising to new, and ever less sustainable, heights. A combination of curbs on foreign buyers and tightening capital controls in China — the money tap that has buoyed up property sales from Sydney to London to New York — are starting to temper the rush to buy.

Take affordability. According to Demographia international property affordability survey, prices in the third quarter of last year were 19 times annual pre-tax household income (both on a median basis), propelling Hong Kong to the top slot ahead of second-ranking Sydney’s 12.2 times and London, which comes eighth on 8.5 times.

Add on asset inflation so far and between 2003 and their September peak, property prices soared 370 per cent, fuelled by a potent cocktail of limited supply, record-low interest rates and, of course, mainland Chinese money.

The result? As millennials — those aged between 18 and 35 — the world over are discovering, people are living with their parents for longer, often until marriage and, increasingly, afterwards as well.

Foreign buyers are starting to lose their nerve, too. And no wonder. There are few spots on the planet where so much money buys you so little space. Many are now taking their cash and seeking relative bargains in Europe and Japan instead.

Appetites were further tempered by the imposition of a 15 per cent tax on foreign buyers and investors, which came into effect in October 2012 in a bid to cool spiralling prices. To a certain extent, it worked.

Transactions volumes dipped, prices stabilised and estate agents squealed that the policy was killing off the secondary market.

But that pales beside the chillier winds to come, this time from China, which itself is turning the taps off. The renminbi is weakening — down 5.8 per cent against the dollar since a one-off 2 per cent devaluation rocked global markets in mid-August last year — and there are many who see further depreciation or even another devaluation down the line.

China has responded by tightening capital controls, making it tougher to move money out of the country. Quotas are being more firmly enforced and application processes to invest overseas tightened.

The anti-corruption purge in China, a keystone of Xi Jinping’s presidency, has also had an impact — by following money trails overseas there are far fewer places to hide. All of which means fewer funds crossing the border and into property.

There have already been some red flags. In February, a plot of land in the residential New Territories went for nearly 70 per cent less per square foot than a similar one just six months earlier.

Home prices are 11 per cent below their September high, according to the Centaline Property Centa-City leading index.

Developers are starting to sound increasingly bearish; more bullish agents take heart from the mantra that the rich will always be rich and have access to legal ways of circumventing capital controls.

This is certainly true. But it is also true that Chinese money is drying up, that yields have been squashed and that homes are still out of reach for a huge swath of the population.

As US investor Warren Buffett says, “It’s only when the tide goes out that you learn who’s been swimming naked.”

Actions across the border are set to reveal plenty of nudity in Hong Kong’s property markets — and very possibly in London, New York and Vancouver, too.

Louise Lucas is the FT’s Asia news editor

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