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[HONG KONG] Buoyed by record-low borrowing costs, a Hong Kong housing boom has seen prices more than double in six years, making it one of the world's most expensive property markets, but experts warn a US interest rate hike could send valuations plunging.
The expected hike by the Federal Reserve has also renewed debate on whether Hong Kong should maintain a decades old peg with the US dollar, as its ties with China grow ever closer.
At the height of the global financial crisis in 2008 the Fed slashed interest rates to near zero and introduced an unprecedented bond-buying scheme that effectively kept long-term borrowing costs down.
With Hong Kong bound by US monetary policy this fuelled a borrowing spree in the city that helped feed a surge in property prices - making it one of the least affordable places in the world to own your own home.
A 40-square metre flat would be expected to set a buyer back more than US$750,000, according to data from the Hong Kong Property Review.
However, with the US economy crawling back into rude health, the Fed is considering an end to the days of cheap loans as it looks to prevent bubbles forming that could knock a recovery off course.
And analysts warn homeowners could see their investments hammered.
"When the cycle starts and prices go down, we will start to see cases of negative equity. When that happens, consumption may take the brunt," said Hong Kong-based real estate analyst Buggle Lau.
Although the US central bank is not seen hiking rates at its next policy meeting Wednesday, its head Janet Yellen has repeatedly said she expects the first increase in nine years to come before the end of 2015.
And while speculation is mounting that lift-off could be pushed back to next year owing to concerns about China's growth slowdown, a rise at some point is virtually certain.
Hong Kong-based brokerage CLSA warned the residential market was at a "turning point", with prices possibly dropping 17 per cent by 2017, while other firms have tipped falls of up to 30 per cent.
Economists say government restrictions on borrowing mean there is unlikely to be the widespread bankruptcies and defaults seen after the SARS crisis in 2003. Still, mortgage holders are worried.
Social worker Angus Chow, who has a 90 per cent mortgage on his HK$4.5 million (S$810,000) two-bedroom flat, said: "It is going to be a big bite into my income... when we bought it to start a family in 2013, we never thought the (low rates) environment could end so quickly." The 29-year-old and his wife are now new parents and repay around HK$16,000 a month - a quarter of their joint income - but a one percentage point rate increase would see that rise by HK$2,000.
"I can sell and rent a place, and wait for prices to drop. But then I have no idea when I can buy back," he said.
A potentially more dicey issue for the government is whether to maintain the peg that keeps Hong Kong at the mercy of Fed policymakers.
The city's dollar was linked to the greenback in 1983 in a bid to prevent a sell-off as it wobbled over fears about China's reunification talks with Britain.
And it has fared well. While some Asian economies were forced to abolish their dollar pegs during the Asian financial crisis of the late 1990s, Hong Kong stood strong.
But, with China now a global economic powerhouse, some analysts say a tie-up with China's yuan could suit the city better.
"As the Hong Kong economy becomes more closely tied with the mainland's, it will be increasingly inappropriate for Hong Kong to import US monetary policy through the peg," said Duncan Innes-Ker, regional director for Asia of the Economist Intelligence Unit.
"Ultimately your choice of a currency is a political one," he said, adding any switch can be controversial.
But British economist John Greenwood - one of the original advocates of the peg - backs the link-up.
"Hong Kong has been successful in adapting its economy to the fixed exchange rate for over 30 years," he told AFP.
"Unless anyone can propose a currency system that is more appropriate for a small, highly open economy with large-scale free capital flows... then it is better for Hong Kong to remain with the current arrangements," he said, noting that the US dollar was still the world's major trading currency.
Greenwood added Hong Kong should not shift to a yuan peg until China's currency "is fully and irreversibly convertible, with all capital controls removed".