Hong Kong developer shares have diverged from home prices by the most since a real-estate bubble burst in 1997, indicating that equity investors expect the government to take further steps to cool price increases.

The correlation coefficient for the Hang Seng Property Index and the Centaline Property Agency Ltd's index of housing prices fell to minus 0.22 on June 10, the lowest since October 1997, based on 90-day observations, according to weekly data compiled by Bloomberg. A correlation of 1 indicates the indexes move in lockstep, while a value of zero shows there is no relationship and a negative reading indicates opposite movements.

The property-stock gauge tracking seven developers has slumped 18 percent since 2010's high on November 8, after the government announced measures including higher stamp duties in October and that month. Stocks on the index trade at 9.2 times reported earnings, a 61 percent discount to the 2009 high. The city's home prices, rated by Savills Plc as the world's most expensive, have surged 15 percent since November 7 and 72 percent since the beginning of 2009, the Centaline index shows.

The November measures were "a turning point psychologically for many investors in developers because they started to believe the government will do anything to stop home prices from going up," said Nicole Wong, regional head of property research at CLSA Asia-Pacific in Hong Kong. "But home prices kept going up after November because there were still property investors who didn't believe the government had the determination to stop the surge."

The government further raised minimum down payments for homebuyers on June 10 and added a requirement that overseas buyers deposit an additional 10 percent. That's at least the fourth attempt since October 2009 to cool prices that surged on record-low mortgage rates and an influx of mainland buyers.

Real estate values tumbled 70 percent between 1998 and 2003 as confidence was undermined by the Asian financial crisis, the 2000 dot-com bubble, the September 11 terror attacks and the SARS epidemic. "We aren't seeing a correction in home prices yet because property is a very sticky asset and you'll need something more than what's been happening to trigger a sell-off," Wong said.

The home market is expected to see "softness", Tao Dong, Credit Suisse's chief regional economist for Asia, excluding Japan, said at a press briefing in Hong Kong on Monday. He expects home prices to be lower three years after.

Walter Kwok, former chairman of Sun Hung Kai Properties Ltd, the world's biggest developer by market value, sees a more imminent correction in home prices.

Lukewarm demand at an auction on June 9 for a parcel of land near the Peak district, about 10 minutes drives from the Central business district, will lead to a softening of prices of finished properties, said Kwok in an interview on the weekend.

"I wouldn't be surprised they will fall 10 to 15 percent," Kwok said. "We have already seen the peak."

Prices may drop 10 percent to 20 percent in 2012 and a further 10 percent in 2013 on rising interest rates, Andrew Lawrence, a Hong Kong-based analyst at Barclays Capital, said in a June 7 Bloomberg Television interview.

The Hang Seng Property Index, which includes Sun Hung Kai, has declined 12 percent this year, while the benchmark Hang Seng Index is down 0.44 percent.

(HK Edition 06/21/2011 page2)