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The Hong Kong authorities clearly wanted to deliver a short, sharp shock to the overheated local property market: on Friday, they suddenly tightened purchasing regulations. In the short term, they seem to have achieved their aim. Sales of second-hand homes fell 83 per cent over the weekend, and property stocks declined in Monday trading.

But will this prove enough, over the medium term, to cool one of the world’s hottest real estate markets? Much will depend not just on the authorities in Hong Kong, but on their counterparts in Beijing and the US.

On Friday, financial secretary John Tsang raised stamp duties and deposit requirements, and limited mortgage insurance – the toughest measures so far in the current boom to calm house prices that have soared 50 per cent since January 2009.

The impact on weekend buyers was immediate, with Centaline Property Agency reporting sales down 83 per cent from the previous week. Potential buyers were busy reassessing whether they could afford the extra costs and the risks involved making much bigger deposits.

On the Hong Kong stock market, the Hang Seng property index, which tracks the city’s seven biggest builders, fell 3.8 per cent in early trading and closed around 3 per cent lower. Midland Holdings, the biggest property agent, plunged 17.4 per cent (see chart).

Cheung Kong, billionaire Li Kashing’s company and the city’s second-biggest developer by market value, closed down 3.2 per cent, while Sun Hung Kai Properties, the largest, lost 3.1 per cent. However, the Hang Seng itself took the property story in its stride and closed down just 0.4 per cent.

Citigroup said in a note:

The measures announced are tougher than market and our expectations and it shows HK government is very determined to control the surging home price.

Credit Suisse Group said in a report that, by year-end, Hong Kong home prices may drop by 5 per cent and turnover by 40 per cent because of the measures.

Given recent price rises, this does not look so dramatic. But further action is not ruled out. Tsang wrote on the HK government website that the government “will closely monitor the market” and may introduce further measures if the latest curbs do not stem property prices.

Officials can take heart from the fact that Beijing is now tightening monetary policy, trying to slow credit expansion, although it will struggle to keep loan growth within its target of Rmb7,500bn ($1,300bn) for the year (down from Rmb 9,000bn last year, including a post-crisis one-off boost). As James Kynge writes in the Financial Times, Beijing’s efforts are complicated by the huge development of an unregulated twilight credit market.

But even if China succeeds in curbing credit as fast as it intends, QE2 looms large on Hong Kong’s horizons. Tsang wrote that the US bond purchase program announced earlier this month had heightened the asset bubble risk in Hong Kong and it was necessary for the government to adopt “pre-emptive” measures.

His words echo the International Monetary Fund which warned last week that asset inflation could derail the city’s economy. Perhaps more than anywhere else, the city is exposed to the dangerous combination of three currents of easy money – from local sources, from mainland China and from the US. These will be tricky waters to navigate.

Related reading:
Special report Doing business in Hong Kong, FT