The timing of a Federal Reserve interest rate hike is one of the key risks for Hong Kong property stocks, according to Barclays.
Home prices in Hong Kong are among the world's most expensive, more than doubling since 2008 as buyers capitalized on low rates. Hong Kong's property sub-index surged to its highest level since May 2013 earlier this month, but has since fallen 4 percent.
A Fed rate hike could derail positive momentum in the sector further.
"While some may argue that the first 25 basis point increase in rates would only cause a negligible 2.3 percent increase in mortgage payments, we believe transaction volume would still decline as home buyers have no way of knowing whether this is the first 25 [basis points] out of 75 [basis points] or 275 [basis points]," Paul Louie, analyst for Asia ex-Japan real estate at Barclays, wrote in a note.
Most analysts expect the Fed to raise interest rates in mid-2015, although some suspect a rate hike as early spring. U.S. interest rates important for Hong Kong home buyers as the region's domestic interest rate is tied to the Fed funds rate.
If the Fed were to increase rates along with its current targets, Louie said the implications could be devastating for Hong Kong mortgage holders. Current Fed funds targets are 1.375 percent for 2015, 2.875 percent for 2016 and 3.75 percent for 2017, implying cumulative rate increases of 363 basis points over the next three years.
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"Assuming a 20-year mortgage, this would have the effect of increasing monthly mortgage payments by 12 percent, 27.5 percent and 37.1 percent. For those who have a 25 or 30-year mortgage, the increase would be even bigger," Louie added.
This could hit developers' transaction sales, Louie said, noting that when mortgage rates increased during the Fed's last rate hike cycle in 2005-2006, private housing sales dropped from 12,900 in March 2005 to a low of 3,649 in November 2005.
Property stock reversal?
Nicole Wong, property analyst at CLSA told CNBC that recent price cuts carried out by developers in Hong Kong suggest tough times ahead.
Caution among high-end investors - those who represent 'smart money' in Hong Kong's property market - is another telling sign, Wong said. She expects developer stocks to weaken in the fourth quarter of this year.
Barclays' Louie agrees: "Over the past two quarters, the property shares' rally has substantially closed much of the physical-stock price gap, we believe there is now more risk to the downside, especially if housing sales volume were to pull back," Louie said.
"We continue to recommend investors reduce their weighting to Hong Kong property stocks and await a better entry point," he said.
Some analysts remain bullish on the sector, however. Earlier this month, Citi Investment Research published a note arguing the sector is at the midpoint of its re-rating run, highlighting a number of positives including more developer friendly government policies and the reduced likelihood of further policy restrictions.
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