The world’s most expensive property market, where average home prices have previously topped US$1.2 million, is taking a one-two punch from rising mortgage rates and an economy hobbled by strict virus curbs.

Property prices since the start of the year were already down by 8.2% as of Oct 10, with the full-year decline likely to hit double digits, while sales are set to slump to a 31-year low of 64,000 transactions, falling below a previous low of 70,500 deals in 2013, according to property agency Midland Realty.

“This is a foregone conclusion,” said Freddie Wong, Midland’s executive director, adding that prices would fall the most since 2008. “The full-year property price decline will widen to double digits.”

The slowdown has been highlighted by weak sales at several new residential developments in recent months.

Since going on offer in mid-September, only 44 of 203 flats were sold at Miami Quay, a new off-plan project jointly built by New World Development, Henderson Land, Wheelock and Empire Group.

The city’s property market is “frozen”, said Louis Chan, Asia-Pacific vice chairman of the residential division at property group Centaline.

“The current relaxation of quarantine measures has not been able to help the economy return to normal,” he added. “The public is worrying about the further decline of Hong Kong’s economy, and does not dare to enter the market hastily.”

Last month, Hong Kong dropped a hotel quarantine that had left the international business hub isolated from the rest of the world during the pandemic.

But the recent loosening may not be enough to restore confidence in a city facing a wave of emigration due to some of the world’s toughest Covid curbs and a clampdown on civil liberties since a Beijing-imposed security law was rolled out two years ago.

Reopening the still-closed border with mainland China is key to any rebound, according to some analysts.

But global real estate company JLL warned that prices could fall another 10% next year if the government doesn’t scrap its stamp duty on home purchases and other cooling measures.

“Opening up doesn’t mean money will flood in,” said Joseph Tsang, chairman of JLL Hong Kong. “Whether you open the border or not makes no difference.”

The Hong Kong Monetary Authority (HKMA) has lifted its base interest rate five times this year to the current 3.5%, following successive hikes by the Federal Reserve. Hong Kong’s dollar is pegged to the greenback, so its monetary policy mirrors the Fed’s.

Following its latest rate rise in September, Hong Kong’s de facto central bank relaxed a mortgage stress test requirement for property buyers.

Now, all eyes on are Chief Executive John Lee’s first policy address next week for signs of a plan to reverse the property slump.

But the weak market is also taking a bite out of government tax revenue with second-quarter receipts from a buyer’s stamp duty falling to 410 million Hong Kong dollars (US$52.2 million), the lowest since the property levy was introduced in 2012.

Government land sales came in at HK$9.5 billion from April to September, a 70% drop from a year ago, according to official figures.

The stamp duty and land premiums – revenue generated from selling land rights use – have accounted for an average of nearly 30% of total government revenue for the past five years, according to investment bank Natixis.

And Fitch Ratings forecasts that Hong Kong’s budget deficit will rise to 6% of GDP this year, double its annual target.

“We also see risks that the budget deficit could widen beyond our current forecast against the backdrop of a weakening in property market transactions and a softening in housing prices this year, given the importance of the real estate market to Hong Kong’s overall public finances,” Andrew Fennell, head of greater China sovereigns at Fitch Ratings, told Nikkei Asia.

There was “no doubt” that the weakening real estate market will dent Hong Kong’s fiscal health, said Gary Ng, senior economist at Natixis.

“The impact will not only come from fewer transactions through stamp duty as poorer sentiment may also affect land premiums,” he added.