Hong Kong's housing market is nearing the end of a seven-year downturn, Morgan Stanley said in a report dated June 19, Bloomberg reported Friday.

According to the report, the bank anticipates a 2% growth in home prices in the second half of the year, ending the prolonged downturn.

The report said the rebound is likely to be driven by a surge in demand from mainland Chinese buyers, improved capital markets, and sharply lower interest rates. Morgan Stanley analysts added that the city may be entering a four-to-five-year upcycle in home prices.

The report said Hong Kong's rental yields now exceed those in China's top-tier cities, which is attracting more investors from the mainland. A recovering capital market is also creating a wealth effect that supports housing demand.

Lower borrowing costs are another tailwind, the report said, adding that the one-month HIBOR has fallen to a three-year low following last month's decline.

However, Bloomberg said Morgan Stanley cautioned that structural challenges persist. The report highlighted a growing backlog of unsold flats, rising cases of negative equity, and a climbing unemployment rate.

The bank expressed caution on New World Development (HKG:0017) due to ongoing liquidity pressures, Bloomberg added.

(Market Chatter news is derived from conversations with market professionals globally. This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed.)