For many young adults who live packed and stacked in with their parents, it is becoming harder to imagine having a place to call their own.There are breathtaking views of Victoria Harbor from a 23rd-floor apartment that recently sold for $7,22,000 in the new Le Riviera building. The high-end German appliances and marble countertops evoke European luxury. In the entrance of the building, colourful wire mesh sculptures by Spanish artists hang from the ceiling.

There is just one catch. The apartment is only 275 square feet, with a bedroom just large enough to accommodate a double bed.
“If we don’t buy now, we might not be able to afford it later,” said Frank Wu, 60, the new owner of this so-called microflat in Shau Kei Wan, a former fishing village on the northeastern edge of Hong Kong Island.

Real estate in Hong Kong defies logic. The city is one of the most expensive places in the world to live and it has smashed one real estate record after another for years. As property costs continue to soar, even once improbable living spaces are now getting snapped up at astronomical prices.

At Le Riviera, three-quarters of the units sold so far have been microflats like the one Wu purchased. And Hong Kong developers are putting smaller and smaller units on the market — one recently built 165-square-foot apartments.

But the housing boom, and the inequality it has exposed, has been taking a toll. The high property costs faced by young people added to simmering discontent that prompted tens of thousands to take to the streets in pro-democracy protests this autumn.

For many young adults who live packed and stacked in with their parents, it is becoming harder to imagine having a place to call their own.

Rents have skyrocketed. And some here now worry that the real estate market could stumble, particularly if the United States Federal Reserve starts to raise interest rates next year. Lending in Hong Kong is tied to the American rates.

Speaking in her office down the street from the Le Riviera, To Pui-lui, a real estate agent who has sold two units of similar size in the building, hints at looming trouble ahead. She recently advised her daughter, a doctor, against buying right now. “It’d be disastrous if the price falls from such a high point,” To said.

Since a low point of Hong Kong’s property market in 2003, average house prices have increased by more than 300 per cent, according to data from the Centa-City Index, which is compiled by the real estate agency Centaline and the City University of Hong Kong.

Helping propel this rise has been Hong Kong’s thriving economy, which significantly expanded over the last 10 years after the rapid growth of China. Strong demand from wealthy mainland Chinese and limited land supply have also helped to prop up prices, although this effect has slowed since the government put into effect a series of cooling measures, like additional taxes paid on property purchases. First-time buyers now dominate the market, spurred on by the ultracheap interest rates.

“The mortgage rate is below 2 per cent, so it is very attractive for the buyers,” said Patrick Wong, a property analyst at BNP Paribas. At Le Riviera, only one buyer so far did not need a mortgage, according to Hip Shing Hong, the project’s developer.

Wu, a retired structural engineer who lives in the Mid-Levels, a more expensive part of Hong Kong Island, bought his microapartment as an investment. He already has a potential tenant, a Canadian woman whose family lives in the neighborhood, and said he planned to charge about 16,000 Hong Kong dollars, or more than $2,000 per month.

Many middle-income families now populate areas away from Hong Kong’s center, in neighborhoods like Kowloon East, where the commute is longer but prices are cheaper. In Tseung Kwan O, a neighborhood to the northeast in the New Territories, new properties have recently sold for as little as 10,000 Hong Kong dollars, or $1,290, per square foot, about half that of the units at Le Riviera. Even in these neighborhoods, though, prices have been lifted by the overall market.

But the frenzy in Hong Kong’s property market may soon fade. The Hong Kong dollar is pegged to the United States dollar, so the interest rate policies are linked.

When rates go up, those who have borrowed money to finance new homes will feel the effects as their mortgage payments rise. This concern is more pronounced in Hong Kong, where mortgages are not set at a fixed rate. “They are making themselves slaves to the property market,” said Nicole Wong, a property analyst at CLSA.

Many Hong Kong residents still remember the last property bust, which was set off by the Asian financial crisis in the late 1990s. As Hong Kong’s economy took a hit, unemployment rose and deflation set in, chilling prices. The outbreak of SARS in late 2002 exacerbated the descent in prices.