What happens when mortgage rates rise to 2.8%

And household incomes are unchanged.

According to Savills, they expect the luxury residential market to remain quiet in the second quarter of 2013 as the market outlook remains unclear. 

Although underlying economic conditions are still healthy, the cooling measures, which aim to protect the banking system and present an asset price bubble, are deemed to cause additional market risk.

Here's more from Savills:

With an unclear market outlook, luxury transaction volumes on Hong Kong Island may drop by 30% in the next quarter.

As transaction volumes drop, additional liquidity risk will occur, in that sellers may need to offer larger discounts in order to sell, accelerating the property price decline during a downtrend in the market.

Assuming that the mortgage rate will rise to 2.8% with household incomes unchanged, residential prices need to adjust downwards by 20% for the affordability ratio to return to the historical (Q1/1998 to Q4/2012) mean of 40%. As a result, in a bear case, residential prices could drop by a total of 20%.