On Feb. 15, the South China Morning Post reported that WL Ng, a 37-year old IT manager based in Hong Kong, had recently refinanced his 35-year-old Quarry Bay flat and cashed in HK$900,000 to buy blue-chip stocks. He had bought the 980 sq ft apartment for HK$4 million (US$512,000) about three years ago. DBS Bank valued the flat at HK$5.7 million, a 42 percent gain. As DBS only required a two-year binding period on a mortgage deed, Ng pocketed almost HK$1 million from the valuation gain and the cash rebate to play the market, the SCMP said.

Nobody is sure how many Mr Ngs there are in Hong Kong who are refinancing and taking out equity to play the market. But that ought to sound familiar to a major segment of the American population, and it ought to be ringing a loud and clear gong in the territory. The Hang Seng Index rose 52 percent in 2009, its largest one-year percentage rise in 10 years – a year in which real gross domestic product shrank by 3.1 percent. It is expected to grow a relatively moderate 4 percent to 5 percent in 2010. If interest rates start to climb or China begins to get alarmed about the money pouring into Hong Kong from over the border, the Hang Seng Index could start to descend. There are literally millions of people in the United States today who are deeply underwater for following Mr Ng's investment strategy and who may never float back to the surface.

That isn't to say it will happen soon, but it has happened before to Hong Kong, which has some of the most volatile property prices on earth. Hong Kong residential property prices skyrocketed by 71.5 percent in the two years from October 1995 to October 1997 when the Asian Financial Crisis let the air out. Then they fell by 44 percent in a single year and continued to fall for seven years as deflation saddled the city, hitting the nadir with the onset of SARS in 2003. Now, despite Hong Kong's lackluster 2009 economic performance, the average price for luxury flats has finally exceeded the zenith hit 13 years ago and lower income properties are moving up rapidly as well, driven by hot money flooding in as wealthy Chinese businessmen and officials look for a safer environment.

As many as 40 percent of new home buyers in Hong Kong are from the mainland, paying stunning prices and making Hong Kong the world's fifth most expensive city after Tokyo, Osaka, Moscow and Geneva. Even a relatively modest 1,250-square foot flat in an elderly building in the down-market district of Wan Chai, for instance, is estimated as worth over HK$10 million (US$1.28 million). Nearly 30 percent of the territory's residents live in public housing. The median income, according to the government, is HK$210,000 annually

Housing prices have already risen 5.5 percent in the last two months – a 33 percent annual rate, and prospective buyers and speculators are storming new development offerings. Sun Hung Kai Properties sold 900 flats in its YOHO Midtown development in a single weekend, bringing in HK$4.2 billion. And, despite Sun Hung Kai's characterization as YOHO being in midtown, it is about as close to midtown Shenzhen, across the Chinese border, as it is to midtown Hong Kong.

Despite sporadic warnings by government officials, the Hong Kong Trade Development Council forecast on Feb. 1 that "It is widely believed that property prices could rise further, as new supply is expected to be fairly tight, and new marginal buying activities from both investors and end-users will likely be sustained." So far the government's only response has been to increase the stamp duty on home sales of more than HK$20 million -- (US$2.56 million) and to warn that similar measures could be extended to cheaper properties "if there is excessive speculation."

Property analysts are sanguine. According to a survey by China Daily, CB Richard Ellis says luxury prices could surge by 20 percent, mass residential by 15 percent. Cheung Kong Holdings forecasts that prices for luxury homes and new mass-market homes will rise 10 to 15 percent and 15 to 20 percent, respectively. Goldman Sachs believes concerns over a bubble are largely overdone. UBS expects price rises won't be "irrational," expecting the possibility of more cooling measures by the government.

But it depends on whose definition of irrational. David Webb, Hong Kong's irrepressible market gadfly, this week in his widely read online newsletter webb-site.com, picked out a so-called "luxury industrial-cum-residential development" by a consortium of property developers Paliburg, Sun Hung Kai and Kerry Properties overlooking an industrial site that was purchased by a Paliburg subsidiary for HK$255 per gross square foot, converted to residential use in 2005 at HK$4,336 per gross square foot and is now being touted to buyers at HK$25,000/gsf. Thus it is now worth an estimated HK$22.8bn (US$2.94bn) as property buyers swarm into Hong Kong.

"You can't blame them for trying, but if this isn't evidence of a bubble, then what is?" Webb asked. The flats range from 1,000 to 2,600 square feet, implying a purchase price of HK$25 million (US$3.2 million to HK$65 million.

The property "faces North-East across Aberdeen typhoon shelter, behind some noisy boatyards and sawmills which one day will likely be redeveloped, potentially blocking the view. Most residents will have to crane their necks to see the South China Sea which is, not unnaturally, to the South." What's more, Webb wrote, "The Gem on Hong Kong Island," as it is advertised, is not Hong Kong Island, but rather on Ap Lei Chau, an island connected by road bridge to the main island.

Originally zoned as an industrial site, it is now called Larvotto after a section of Monte Carlo. Unfortunately, the windows are unopenable. Webb details some fancy footwork with the local Town Planning Board, which approved the project even though the Environmental Protection Department did "not support" it because the noise from the steel boat repairing activities in the boatyards, which are only 30 meters away, exceeded the noise limit in the Hong Kong Planning Stndards and Guidelines. Nonetheless, it is being advertised to the public as having "inherent supremacy blessed by nature."

The Town Planning Board originally rejected a plan for 1290 units in towers up to 50 stories because of the noise from the boatyards and the "visual impact on Aberdeen Harbour and its coastal area." The Metro Planning Committee of the Town Planning Board also rejected a plan for 1336 units in five blocks up to 38 stories on a three-storey podium, again because of the noise problem.

However, the Town Planning Board overruled the planning committee and approved the plan, Webb wrote, which by now included an additional 1,000 square meters of retail space and 3,000 square meters of club house despite the objections of the Environmental Protection Department. The noise problem had been discussed at a town planning board meeting on in 2004when the scheme was first approved on review. The applicant had incorporated "mitigation measures" including "non-openable windows," but towers 1 to 3 of the nine would still exceed the noise limit and nothing further could be done. It was noted that the boatyards provided "supporting services to the Aberdeen fishing industry" and that the Short Term Tenancies of the boatyards prohibited steel boat repair (presumably allowing wooden boats), but this was "difficult to enforce."

"Larvotto is named after a region and beach in Monaco, Webb wrote, "a place about as densely populated as Ap Lei Chau, so it is fitting in that sense, but unless you enjoy "unopenable windows" or the pleasant sound of saws on steel in the mornings, you might prefer not to pay $25,000 per sq ft (plus stamp duty), or anything like that, for this "inherent supremacy blessed by nature" - especially when it's only on a 37-year lease," he concluded.

Mr. Ng, welcome aboard.