HONG KONG - Hong Kong's move to tighten regulations on mortgage lending last month showed the government wants to avoid a big property bubble, Hong Kong Chief Executive Donald Tsang said on Monday.

We do not want to see a huge property bubble developing in Hong Kong, Tsang told a business lunch. He said the government had tools available to stabilise the market but did not give details except to say any action would be motivated by a need for stability, transparency and smooth market operations.

Prices of mass market residential property have surged more than 20 percent this year, despite the economic downturn, while luxury property prices have soared more than 40 percent, benefitting from excess liquidity globally and an influx of cash from newly-rich mainland Chinese.

Tsang, however, said that the current surge in prices exhibited far fewer signs of speculative behaviour than a previous property market bubble in 1997 which burst amid the Asian financial crisis.

Last month, Tsang said the government, which sells land by auction, could make more available for residential property development.

On Monday, he said tighter mortgage restrictions, introduced by the Hong Kong Monetary Authority, the city's central bank, last month showed the government wanted to avoid a bubble.

The HKMA cut the mortgage limit on property worth HK$20 million ($2.6 million) or more to 60 percent of the property's value from 70 percent. For properties below that, the 70 percent ratio remains but the HKMA capped the maximum loan amount at HK$12 million.

HKMA Chief Executive Norman Chan said at the time that it was difficult to tell if there was a property bubble.

Property transactions have fallen in the past week since the HKMA imposed the tighter mortgage restrictions on Oct. 23, real estate agents said. However, many mainland Chinese buyers of luxury property in the city buy with cash, so mortgage measures might not calm the luxury sector, analysts said.

Financial Secretary John Tsang met last week with the city's property developers to express the government's concern about sharply rising property prices.

Developers, however, say the government should release land at more reasonable prices, arguing that plots proposed for auction by the government in the past couple of years have been priced too high. Before a site can be put to auction, a developer has to agree to pay 80 percent of the site's recommended price which is set by the government. (Reporting by James Pomfret, writing by Susan Fenton; editing by Jacqueline Wong)