Hong Kong - It is home to some of Asia's wealthiest and most successful people - a city where tycoons, celebrities and high-fliers live in sumptuous surroundings in some of the world's costliest properties.

A pad on Hong Kong's exclusive Peak will cost you in excess of 7,000 US dollars per square foot (75,000 US dollars per square metre) - more than in New York or London - and a down payment on a shoebox-sized studio flat will set you back as much as a town house in other world cities.

In the past five years, luxury property has flourished in Hong Kong, bouncing back spectacularly from the slump of the Asian financial crisis 1997 and the dark days of the 2003 SARS (Severe Acute Respiratory Syndrome) outbreak which saw prices fall 60 per cent from their 1990s heyday.

The last year was especially bountiful with prices increasing by 25 to 30 per cent as interest rates in the former British colony, which pegs its currency to the US dollar, fell in line with those in the US, keeping lending rates low.

The volatility of Hang Seng Index, which has lost 50 per cent of its value in the last 12 months also boosted property markets with investors choosing bricks and mortar rather than stocks and shares.

But now the tide is turning and a fall in year-on-year transactions since April indicates that not even the Hong Kong property market is immune to the global meltdown.

According to Peter Smith, head of research and consultancy with Savills Valuations and Professional Services, the luxury sector looks set to fall by 25 to 30 per cent in the near future, wiping out all of the gains of the past year. This compares to a fall of 15-20 per cent fall in the mass market.

"The reason why the luxury market will be worst hit is that it has come a lot further than the mass market over the last couple years," said Smith, adding that affordability at the mass market remained quite good.

The recent economic boom in Hong Kong and Asia generally over the last few years has moved upper quartile incomes a lot further than other incomes - particularly in cities with a significant financial services sector such as Hong Kong or Singapore, he said.

"That has meant prices at the top end of the residential market have risen quite quickly because they have seen a quite sizeable increase in demand for luxury stock both for rent and for purchase driven by the partly growth upper tier financial services economy and the high income growth we have seen among those people."

Smith said this demand, fuelled by the scarcity of new luxury development coming on stream had spurred prices significantly upwards over quite a short period of time.

"Now a lot of that froth has to come off the market," said Smith. "There is uncertainly. Transaction volumes have been slipping since April on a year-on-year basis suggesting people are holding off making major capital commitments.

"Also the luxury residential market is quite highly correlated with the stock market on a one or two quarter lag and so as the stock market comes off, then the luxury market will follow."

When exactly that fall will happen, how fast or over what time period of time is more difficult to predict, he said.

But the good news, said Smith, is that the low volume of luxury supply in Hong Kong will help support prices and the market should show signs of bottoming out and improving in the latter half of next year.

Peter Tebbutt, Senior Director of Financial Institutions, Hong Kong, Fitch Ratings, is similarly optimistic for Hong Kong in the longer term.

"The market will be soft, particularly in the higher end residential market," Tebbutt said.

"But I think Hong Kong will do fine. During the Asian crisis prices went down 50-60 per cent and the losses Hong Kong banks made on mortgages was negligible," he said.

"People continued to pay back on their house. They (the banks) have been lending to many property developments in China but from what I gather most is to a handful of very large property developers here in Hong Kong, and they do have very strong balance sheets."

China too remains a factor in the equation that cannot be ignored. "Asia generally seems to have learnt its lessons from the 1997 Asian crisis which has put us in a slightly better position to weather this one. We also have the motor of China growth for as long as that continues," Smith said.

"At the moment that is positive. But if that economy slows too rapidly and there is evidence of a hard landing then that is going have a knock-on effect on somewhere like Hong Kong."