After 15 years since the Asian Financial Crisis of 1997-1998, Hong Kong’s residential property market has finally scaled back up to the nosebleed heights it reached before a crash that carried it downward for seven years without stopping.

The property industry is euphoric. One realtor with Midland Realty, one of the city’s biggest property firms, told Asia Sentinel the company doesn’t fear a bubble and confidently predicted that prices would go on rising into the future.

But there are plenty of reasons to fear that at some point the market could resume its roller coaster ride. According to a new report by Andrew Lawrence, head of Asia ex-Japan Real Estate for Barclay’s Capital in Hong Kong, the average deposit for a first-time buyer on a 400-square foot flat in the New Territories, well beyond the fashionable enclave on Hong Kong island itself, is 3.3 times the average annual income in the territory.

That was exactly where the market topped out in 1997. It is also exactly where the market topped out in September of 1980 and precipitated a fall in property that took it all the way down to below 1.25 times average income six years later, by March of 1986. It then took 13 years to climb back to its 1997 peak.

The market has reached these current heights at a time when stress is beginning to show in Hong Kong’s economy as the intensifying Eurozone crisis and the sharp slowdown over the border begin to take their toll -- and Chinese authorities start to take a closer look at the over-the-border multimillionaires snapping up the territory’s high-end properties. Despite the fact that retail sales remain healthy because of the Chinese visitors – 27 million last year – local businesses are starting to record less profligate tourism spending.

The Hang Seng Index, the territory’s main market index, has fallen sharply since the Lunar New Year, cutting into the wealth effect of its 7.5 million citizens. Hong Kong, described by economist Enzio Von Pfeil as the water skier behind the Chinese motorboat, could increasingly be daring wet feet.

These phenomenal home prices have led to the fact that ”fewer first-time buyers believe they can afford to get on the housing ladder,” Lawrence wrote in his report, which was published on Aug. 22. “Since 2009, the Public Housing Waiting List has expanded from 114,000 households to 152,000 households, driven almost entirely by non-elderly one-person applicants, a sector which has expanded from 38,700 in 2008 to 63,800 in 2011.”

Some 69 percent of applicants are currently in private or subsidized-sale housing units. More than 79 percent of the applicants are still living with their parents Fifty-three percent of them have post-secondary educations, an indication that even higher-earning households are struggling to find the funds to buy. They may well have to spend a long time living with their parents.

In any event, the high prices are being driven by a confluence of events including historically low interest rates, which have meant that investors have no other choice but to direct their investment funds into property. A flood of buyers has come from a government policy change that allowed low-income owners of subsidized housing under the territory’s 1970s-era Home Ownership Scheme (HOS) to sell their property without having to repay the land premium.

That caused these low-income buyers to begin selling their flats and use the equity to move up the property ladder, taking advantage of the low interest rates to buy new properties – at a time when the government has fallen far behind in land sales to developers, meaning there are not enough properties to buy.

“For the near term, it is difficult to see what is going to change those conditions,” Lawrence said in an interview. “There could be a policy change on the pre-sale period (the period during which developers are allowed to sell flats under construction). But in the near term we see no major catalysts to change the dynamics. Cash-rich investors have no alternative except the property market.”

Mainland Chinese, Lawrence said, have clearly injected money into the market, “but we feel demand is well overstated. And given the recent investigations into assets coming into Hong Kong, mainlanders are coming to recognize that they are no longer outside the reach of authorities over the border.”

Extremely wealthy mainland buyers are not what is having an impact on the mass real estate market. They are after luxurious properties on Victoria Peak and other super-wealthy areas.

So how long can this go on? Lawrence has put a Negative rating on the Hong Kong property market.

“Younger households are heavily constrained by the limited availability of equity to meet the required housing deposit: the ability to raise a deposit through savings is limited by the size of deposit required and the current low saving rates,” Lawrence wrote. “Unlike the equity-driven upper rungs of the housing ladder, the traditional measures of housing value such as affordability and house-price-to-household-income matter greatly in these markets. For many would-be first-time buyers, funding the deposit has overtaken the cost of mortgage repayments in determining housing affordability.”

The average monthly mortgage payment now stands at what Lawrence calls a “relatively healthy” 47 percent of household income. Although the long-term ratio of home price to household income is 7.1 times, the current ratio has risen to 11 times.

“Hong Kong’s housing market may have a high amount of equity in the upper rungs of the housing ladder, but it has never been more leveraged at the bottom of the market. The low cost and availability of debt has done much to drive the last leg of the property price cycle by providing first-time buyers the ability to inject ‘equity’ into the market, highlighting the extent to which Hong Kong’s housing market, despite its high level of equity, remains interest rate sensitive. There is increasing evidence that fewer first-time buyers believe they can afford to get onto the housing ladder.

“Timing the end of the cycle is almost impossible,” Lawrence wrote, “but knowing it is coming allows investors to discount the likely reversion of property prices back to their long-term trend.”

That long term trend, he writes could mean a 25 to 30 percent correction in prices.