HONG KONG (Reuters) - When first-time buyer Judy Kwan heard a flat was for sale in a street she admired in Hong Kong's Wanchai district, she snapped it up within 24 hours without even seeing it, inheriting a tenant she had never met.
Now she wants to buy another as the property market surges from a strong economy and mortgages become cheap as local interest rates drop in line with rates cuts in the United States. Kwan hopes property investment will allow her to retire in five years' time, aged 50.
"The price was right and the market's going up," said Kwan, an accountant, who paid US$282,000 for the boxing ring-sized flat in November.
The apartment's value has risen 10 percent since then and analysts predict that falling interest rates and rising salaries will propel prices back to a heady 1997 peak.
Hong Kong's economy is riding on the coat-tails of China's boom, but its currency peg with the U.S. dollar forces the territory to officially track U.S. interest rate cuts. Local banks have more leeway but have still slashed rates by 100 basis points in the past two weeks as the U.S. federal funds rate has fallen to 3 percent.
So the housing downturn and mortgage crisis that threatens the U.S. economy has indirectly bolstered Hong Kong property.
Monthly transactions for mass market housing in the final three months of last year were on average 63 percent higher than in the rest of 2007, hitting their highest level for a decade.
Real Hong Kong mortgage rates are now negative, below inflation of 3.8 percent and it has become cheaper to buy than rent, analysts say.
A Merrill Lynch property analyst has predicted a 50 percent rally in property prices in the next two years, prompting several Hong Kong employees at the bank to go on an apartment hunting spree. UBS has the same forecast.
Geoff Lewis, head of investment services at JF Asset Management, said the property might "catch fire."
The expected boom fed a price rally late last year in Hong Kong's biggest developers, including Sun Hung Kai Properties, Cheung Kong Holdings and Henderson Land Development but Hong Kong's property sub-index has see-sawed this year.
Several Hong Kong developers are also expected to get an extra kick from their fast-growing mainland China businesses.
But many analysts say buying an apartment is better than buying shares, as equity markets will probably stay volatile. Others suggest that investors suffering share losses might have less cash to invest in real estate.
New housing supply in the next three years is forecast at half levels seen during the 1990s boom, and interest rates could fall further while inflation heads above 4 percent, economists say.
With no control over monetary policy and inflation on the rise, a 50 percent appreciation in flat prices could pose a risk for an economy that saw property prices nosedive 65 percent when the last property boom burst 10 years ago.
Economists, however, are not worried about an asset price bubble just yet.
They think a strong property market will create wealth, spur consumer spending, and enable the territory to still notch up 4-5 percent economic growth even if the U.S. economy tips into recession and hits exports from one of the world's busiest ports.
Hong Kong's gross domestic product (GDP) has grown an average 7 percent annually in the last four years.
"Mass market property prices are still 35-40 percent below their peak in 1997," said Nicholas Kwan, Asian head of research at Standard Chartered Bank.
"So even if they rise 30-40 percent, prices would only be what they were 10 years ago," he said. "It's hard to argue that would be a bubble."
Hong Kong home prices slid after the 1997 Asian economic crisis. Home prices were rocked by the bursting of the dot.com bubble and they slumped in a 2003 outbreak of the SARS respiratory disease, before rebounding about 80 percent in the last four years.
Clifford Lam at Credit Suisse believes a steady Hong Kong economy could send home prices up 15-20 percent this year but warns against complacency.
"If the U.S. goes into recession and China's economic growth slows, Hong Kong businesses, including exporters and high rollers in the financial industry are going to get hit," Lam said.
"Some of the home buyers that are jumping into the market on the assumption property prices will rise 40-50 percent will be disappointed."
Prices for luxury property, on a four-year roll, have already returned to 1997 levels, with an Indonesian fund paying $30 million for a house on Hong Kong's iconic mountain, the Peak, last month -- an Asian record on a per-square-foot basis.
With the pegged Hong Kong dollar's weakening, property has become attractive to foreigners and mainland Chinese.
For Judy Kwan, buying an apartment allows her to diversify out of a Hong Kong stock market that surged 39 percent in 2007, and get a yield on her investment of 5.6 percent a year.
Bank deposit rates range between 0.75 percent and zero.
"I don't believe in putting money in the bank, inflation is rising," said Kwan, who has doubled her money on some mutual fund investments over the past four years.
"You need to diversify your investments and rental income will cover my mortgage. It's a win-win situation."
Editing by Dominic Whiting and Megan Goldin