THE ECONOMY
The Property Market
The residential property market went from buoyancy to consolidation over the course of 1997. Flat prices escalated amid hectic trading in the first half of the year, backed by strong end-user and investment demand along with much speculation, and against a tight supply. In the third quarter, market activity began to ease, in face of the government's commitment to stabilise the market and to increase flat supply substantially in the longer term. In the fourth quarter, the market came under substantial downward pressure, as the contagion of the regional currency turmoil spread and as local interest rates were driven higher. Mortgage lending by the banks tightened, trading in the secondary market shrank sharply and cases involving forfeiture of deposits reportedly increased. Nevertheless, response to the primary sales of some new developments with substantial price cuts and more flexible financing packages from the developers were better received. Flat prices surged by 34 per cent during the first 10 months of 1997 to peak in October, before falling 13 per cent from the peak by December. Flat rentals for new leases edged down by about 1 per cent in the fourth quarter of 1997 over the preceding quarter.
On commercial property, the sales market for office space was active in the first half of 1997, before softening in the second half as economic growth tapered and as an abundant supply of new office space was anticipated to come on stream in the near term. The negative turn in sentiment brought about by the regional events further dampened acquisition interest. The sales market for shopping space was also active during most of 1997. After a short spell of particularly hectic activity in the third quarter, trading quickly quietened in the ensuing months. The rental market for commercial property held steady during most of the year, before easing towards the year end. The market for industrial property remained generally slack throughout 1997, in line with the continued relocation of production processes away from Hong Kong. Within this, the market for industrial-cum-office premises nevertheless fared better.
Government land sales in 1997 were generally met with an enthusiastic response. This was largely so even towards the year-end when the property market was already consolidating. In overall terms, prices fetched for the 18 sites in the eight land auctions held during the year were above market expectations. In particular, the sale of a residential site in Siu Sai Wan in March fetched the highest land premium ever achieved for a single site at government land auctions.
Inflation
Consumer price inflation moderated further in 1997. There was little price pressure from imported sources, owing to the sustained strength of the US dollar, generally soft world commodity prices, and low inflation in the major supplier economies such as the Mainland, Japan and the USA. Domestically generated inflationary pressures were largely contained, even amid the buoyancy in the early part of the year. The increases in wages and rentals were not particularly rapid. Sustained productivity improvement helped keep local prices in check. During the latter part of the year, inflationary pressures eased as the economy slackened upon the impact of the regional financial turmoil.
The Composite Consumer Price Index rose by an average of 5.8 per cent in 1997, representing a continued easing from the 6.3 per cent increase in 1996. The year-on- year rate of increase in the Composite CPI largely followed a softening trend during
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