Hong Kong home prices recorded their first annual increase in four years, the clearest sign yet that the city’s residential market is beginning to recover from a downturn.

The price index for private domestic homes rose 3.25 percent in 2025 from a year earlier, the first annual gain since 2021, according to figures released by the Rating and Valuation Department on Wednesday. The gauge also climbed 0.2 percent in December from a month earlier.

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Housing sentiment in the Asian financial hub has been picking up, thanks to falling mortgage rates and demand from Chinese mainland buyers. The Hong Kong Monetary Authority cut its base rate three times last year, in line with moves from the US Federal Reserve.

Investors from the mainland spent a record HK$138 billion ($17.7 billion) purchasing residential property in Hong Kong last year, making up about one fifth of transactions, according to data from Midland Realty. In the luxury sector, developers have pulled off some of the largest sales in years in recent months, boosted by a rebound in the stock market.

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The housing sector achieved a soft landing in the second half of last year, with unsold inventories declining, according to Jones Lang LaSalle Inc. Home prices are likely to grow 5 percent in 2026, driven by record rents and lower rates, Bloomberg Intelligence estimates.

“Hong Kong’s housing market is probably getting to the end of the tunnel,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA. “We still see inflow of people and expect more rate cuts this year.”