• Stamp duty increased to 4.25 pct from April 1
• Government plans to increase land supply
• Hong Kong property shares outperform market (Adds detail, quotes)

Hong Kong's government plans to raise the tax on luxury apartment deals and increase land supply to try and prevent the property market from overheating, a trend evident in many Asian markets.

Financial Secretary John Tsang said in his annual budget speech that stamp duties for luxury apartments worth more than HK$20 million ($2.6 million) would be raised to 4.25 percent of the transaction value from 3.75 percent from April 1.

By 0409 GMT, Hong Kong's property stocks had erased some earlier gains and were up 0.3 percent, outperforming the broader market's 0.9 percent fall. Sun Hung Kai Properties, Asia's largest property developer, was up 1.2 percent.

"The increased risk of a bubble forming in the property market has also aroused public concern about the difficulty in buying homes," Tsang said. "Any such fluctuations in property prices would have a profound impact on the economy, on hundreds of thousands of flat owners and on the public."

Average house prices in Hong Kong have risen nearly 30 percent since the first quarter of last year, sparking concerns that it faces a higher risk of a property bubble than most of the rest of Asia.

Residential property prices have been rising strongly due to demand from wealthy mainland Chinese, tight land supply and loose monetary policy.

The plans outlined by Tsang will curb some speculation in high-end property, though the impact will be muted on the overall real estate market.

BUY SMALLER & CHEAPER

"That tax increase has been rumoured in the market for quite some time," Wong Leung-shing, analyst at Centaline Property. "The negative impact will be limited because frankly, the super-rich will still be able to afford the new stamp duty."

"There could be another side effect. The rich speculators will likely shift their focus and buy smaller and cheaper apartments, so that's not particularly good news for the mass market."

And that is what the Hong Kong government will be watching out for next.

"We will closely monitor the trading of properties valued at or below HK$20 million. If there is excessive speculation in the trading of these properties, we will consider extending the measures to these transactions," Tsang said.

Prices of luxury property in Hong Kong have surged more than 40 percent last year. A weak dollar and expectations that interest rates in the United States, and therefore in Hong Kong, will stay low are also encouraging foreigners to buy.

The government has also said may release more land for sale to ward off a property bubble. The market, however, has shown no sign of slowing, with a large-scale land auction this week fetching $432 million, well above expectations.

Some Asian governments have been implementing policies to prevent asset bubbles from bursting, which would derail hard-earned economic growth.

Last week, Singapore imposed a new stamp duty on homes sold within one year of purchase and capped the maximum housing loan at 80 percent of the property value. ($1=7.761 Hong Kong Dollar) (Editing by Jan Dahinten)

    By James Pomfret and Lee Chyen Yee HONG KONG, Feb 24 (Reuters)

-Reuters, Wednesday February 24 2010    guardian.co.uk © Guardian News and Media Limited 2010