Pedestrians walk past stores on Russell Street in the Causeway Bay district of Hong Kong, China, on May 17 2012
Selling point: Causeway Bay is home to high-end retailers

It is a rite of passage to gripe – and occasionally gloat – about Hong Kong property prices. Companies setting up in the territory have to accept they will pay some of the highest prices in the world for office space and possibly dole out equally large housing allowances.

Likewise for retailers. Burberry, the British luxury brand, pays about $1m a month in rent for its store in Hong Kong’s Causeway Bay shopping district. Ralph Lauren is heading to Hollywood Road, traditionally home to purveyors of antiques, memorabilia and general tat rather than expensive US clothing.

But it is not a uniform picture of sky-high rents, as those who took space during the bleak days of Sars, the infectious disease that swept through the territory in 2003, or the Asian financial crisis in 1997-98, can testify.

“Hong Kong doesn’t do stable,” says Craig Shute, a senior managing director at CBRE, the real estate services adviser. “It is rare that prices remain in a 10 per cent band on either side.”

That is testament to the volatility attendant upon a spit of land that effectively has its interest rates set by the US – courtesy of the Hong Kong dollar currency peg – and its demand dictated to a large extent from across the border in mainland China.

Land is in pitifully short supply and government policy on land sales has mostly kept it that way. During times of high inflation, property was seen as a classic hedge.

Car parking spaces have gone for $1.3m, enough to buy a street of houses in parts of England or the US. H&M, the Swedish clothing retailer, shuttered its flagship store leaving its Central District location to Zara, its Spanish rival, to take up the keys and pay double the rent.

And there has been a veritable exodus of banks and businesses across the water to Kowloon, once viewed as a hinterland by many expat bankers.

Recently, however, clouds have been appearing on the horizon. In February, the government took steps to cool the market, doubling stamp duty on properties worth more than HK$2m ($258,000) and introducing a lower duty on cheaper homes.

At the same time, the Hong Kong Monetary Authority, the territory’s de facto central bank, cut the maximum loan-to-value ratio to 40 per cent for commercial and industrial spaces and introduced a similar ratio for parking spaces, the latest subject of speculative investment.

More recently, developers of big projects have been offering rebates and discounts which, in some cases, have served to lop 20 per cent off the price – although this “teaser” strategy has helped them to sell subsequent batches at higher prices. “Hong Kong seems to be at a crossroads,” says Mr Shute. “There are a lot of opinions on what will happen to pricing over the next 12 months or so.”

In one corner are the pessimists – or optimists, depending which side of the desk you are sitting on. Barclays, UBS and Merrill Lynch Bank of America foresee a downturn, with prices falling 30 per cent or more by the end of 2015 on the back of supply increases and stalling income growth.

“The magnitude of the fall is underestimated,” wrote Barclays’ analysts. “The property market is about to enter its first real downturn since 1998.” That was when Hong Kong was caught up in the sell-off triggered by the Asian financial crisis and homes lost two-thirds of their value over a six-year period.

Several factors support their caution. The latest run-up in prices has been strong: the property market has more than doubled since the onset of the financial crisis in 2008.

Buyers from the mainland, accounting for as much as a quarter of home sales at the peak in the fourth quarter of 2011, dropped to only 8 per cent in the first quarter of this year, according to Centaline, a property agency.

CY Leung, Hong Kong’s chief executive, is on a mission to make housing more affordable for the territory’s 7m inhabitants, or at least to stem the upward spiral.

This means increasing supply – a similar policy launched by one of his predecessors Tung Chee-hwa after he came to power in 1997 quickly damped exuberance.

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