A shock jump in the Hong Kong dollar. Rising interbank rates. Both moves are synonymous with limited liquidity, which is driving Hong Kong borrowing costs sky-high, and is a troubling sign for its bubbly housing market.

The Hong Kong dollar saw its largest spike since 2003 on Friday, blasting off its lows where it traded a narrow lateral range for six months. The currency move reverberated across the city’s money market instruments on Monday, with interbank rates rising by the most since the global financial crisis.

Meanwhile, between the expected hike in the prime rate which caps the cost of some mortgages, rising deposit rates, and the likely increase in the Federal Reserve's interest rate, credit conditions are set to tighten further. This is bad news for Hong Kong's property market.

"It’s a warning shot" to Hong Kong’s overpriced assets, said Cliff Tan, Hong Kong-based East Asia head of global markets research at MUFG Bank quoted by Bloomberg. "I expect interbank liquidity to be even tighter and bank funding needs to be more pressing, hence higher money market rates and higher mortgage rates."

Citigroup and CLSA have warned of a reversal in real estate prices on expectations that mortgage servicing costs will soar. A currency peg with the US, open financial borders and a hot economy were some of the catalysts that transformed Hong Kong into the hottest real estate market in the world.

Hong Kong, an autonomous territory, and former British colony, in southeastern China, was one of the greatest beneficiaries of ultra-low lending costs in the wake of the global financial crisis, where home prices have soared more than 170% since the crisis low,  making the city essentially unaffordable today.

"The market has underestimated the pace of interest rate increases in Hong Kong," said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets Hong Kong Ltd. This “will bring pressure to the property market and leveraged home buyers."

Here are a few charts from Bloomberg that show the wild fluctuations in Hong Kong’s money markets:

As of Monday, the one-month interbank borrowing costs, known as Hibor, surged the most in nearly a decade, as liquidity dried up amid bets local banks will increase the prime rate for the first time since 2006. That came after Hong Kong Economic Times reported eight of the city’s most significant lenders including HSBC Holdings and China CITIC Bank International raised time deposit rates last week.

In the foreign-exchange market, the Hong Kong dollar’s one-week forward tagged the highest level since October 2007 on Monday, adding more evidence that credit conditions have significantly tightened.

Societe Generale analyst Jason Daw wrote in a note on Monday, "the gap between Hong Kong banks’ prime rate and the Fed funds rate has narrowed to around 300 basis points, close to the lowest in a decade. A tighter spread suggests the chance of an increase in the prime rate is quite high."

"Friday’s move suggests borrowing costs in Hong Kong have tightened a lot and will tighten further," said Ken Peng, an investment strategist at Citi Private Bank in Hong Kong.

"The short-Hong Kong dollar carry trade has come to an end" Peng said, confirming what we reported over the weekend.