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When former South Korean president Park Geun-hye went to a Seoul prison cell last spring, many residents of Hong Kong could only express envy.

The 125 sq ft in which she was incarcerated is bigger than many Hong Kong flats. And yet, Hong Kong grows ever more unaffordable.

Some months ago, the government approved developers’ plans to sell flats that are 60 sq ft (or about the size of a double bed) and are expected to fetch about US$500,000.

Further evidence of the upward pressure on property prices came at the end of November, when at least a dozen bidders showed up to buy a portfolio of 17 shopping centres from Link, Asia’s largest listed real estate investment trust, with the winning bidder offering just over $3bn, a 50 per cent premium to the value of the assets at the end of the September quarter.

That auction followed the sale of a single office building, The Center, to a mainland developer for a dizzying $5bn.

The latest transactions come at a time when property in China and Hong Kong is the subject of conflicting trends; tightening liquidity in the PRC and ample liquidity in Hong Kong, both of which reinforce the attraction of Hong Kong in the eyes of locals on each side of the border.

Many outside observers believe, though, that the city is in the midst of a bubble, especially for residential and office properties, that will inevitably burst as rates move up across the Pacific as well as across the border.

The Link auction is a departure from the speculative frenzy, providing evidence of a more cautious tone among buyers, whether local or international, reflecting new macro trends that will probably play out in the property market on both sides of the border beyond just the fear of rate hikes.

Affordability and mass market, rather than luxury, will be a key theme in 2018, not just for the real estate market but for consumption generally, in contrast to the more speculative calculations around luxury malls, and land for apartment blocks and high-end office towers that are the objects of most auctions.

The Link malls are relatively downmarket and local. They are attached to a public housing estate whose residents can be seen emerging from them carrying ducks by the neck, as well as fresh produce, paid for after considerable haggling with stallholders.

They have captive customers and are relatively unthreatened by ecommerce.

Moreover, the Link malls do not depend on demand from the mainland. Luxury malls in Hong Kong have been hit hard by the drop in mainland tourists, down as much as 15 per cent, since the anti-corruption campaign was launched from Beijing.

“These kinds of malls are recession-proof,” says one bidder. “Over 60 per cent of the tenants are food-based and 86 per cent are small services. This is as defensive as you can get.”

It is not surprising, then, that the auction attracted numerous bids, including from Brookfield; Blackstone; Citic Capital, which teamed up with Vanke, one of the largest property companies on the mainland; and KKR in partnership with Pamfleet Group, a local property company; as well as sovereign wealth funds.

The winning bid came from a group led by Gaw Capital Partners, a local private equity firm, with Goldman Sachs and China Great Wall Asset Management.

Interest rates in China have been moving up since the October National Peoples’ Congress. In late 2016, the government introduced tighter mortgage policies to cool the housing market, according to Haibin Zhu, chief China economist for JPMorgan.

That makes Hong Kong relatively more attractive for mainland developers. It is also a bet on their part that the dollar will strengthen against the renminbi over time, as the Fed moves finally to raise rates more aggressively, say some bidders.

Moreover, even though rising rates may chill property in Hong Kong in 2018, anyone who wants to borrow money today in Hong Kong to finance a big transaction, such as the Link assets, can do so at bargain rates. Most bidders assumed that they could borrow up to 70 per cent of the value of the sale.

Link staffers proudly acclaimed the auction as a vote of confidence in Hong Kong.

If so, though, it is the less glitzy side of Hong Kong. There are already too many, over-the-top shopping centres in the city. Being defensive today seems to be where the smart money is heading.

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