* Hong Kong to limit immigration based on property purchases
* Hong Kong to increase land supply for housing
* Property stocks fall sharply on cooling measures
* Growth in housing prices seen easing (Updates paras 4,12-13,18)
By Lee Chyen Yee and James Pomfret
HONG KONG, Oct 13 (Reuters) - Hong Kong will restrict immigration based on property investment and increase housing supply to try to cool the overheating sector, its leader said on Wednesday, prompting a sharp drop in local real estate stocks.
In his annual policy address laying out the city's policy blueprint for the coming year, Hong Kong Chief Executive Donald Tsang said that, starting on Thursday, the government would temporarily restrict immigration based on property investment.
The government will also supply more land for about 20,000 private flats annually over the coming decade, while about 61,000 private housing units would be added over the next 3 to 4 years.
"The best case scenario is a (price) consolidation from now on or even a mild correction, but I think the greater likelihood is we will see a still rising trend but hopefully a slower pace than before," said Kelvin Lau, a Standard Chartered economist.
The property sub-index of Hong Kong's stock exchange fell by as much as 3.4 percent after Tsang's comments, but recovered to end 0.3 percent higher. The overall market ended 1.5 percent higher.
Analysts expect property prices to still rise, albeit at a slower pace, through next year as mainland Chinese buyers can easily ignore the immigration curbs and buy flats anyway, while the extra housing supply will take years to reach the market.
Hong Kong, one of the Asian markets facing the biggest threat of a property bubble, has over the past year raised downpayments, held more land auctions and lifted a stamp duty for luxury apartments to try to dampen surging prices.
With poverty on the rise in Hong Kong, which has one of Asia's biggest gaps between rich and poor, public pressure has been building to make housing more affordable.
"Housing is currently the greatest concern of our people," said Tsang who also announced a new scheme for needy families to rent subsidised flats.
COOLING BUT NOT FOR LONG
Hong Kong property prices have risen 15 percent since the beginning of the year, after rising by a third last year, mainly fuelled by low interest rates and purchases by wealthy mainland Chinese facing policy tightening at home.
At government land auctions over the past few months, transaction prices have exceeded market expectations, further fuelling worries of asset bubbles.
Some investors, such as those from China, bought apartments in Hong Kong to take part in a scheme that allows them to obtain permanent citizenship if they meet a threshold investing in real estate or specified financial assets.
On Wednesday, the government said it raised that threshold to HK$10 million from HK$6.5 million, with effect on Thursday.
Since the introduction of the scheme in October 2003, a total of HK$52.9 billion has been invested in Hong Kong, with a third of that going into property, Citigroup said in a report.
Analysts said the curb of immigration linked to property investments would have more of a psychological impact. Tsang said real estate investments under the scheme only represented 1 percent of total market turnover.
Some analysts said raising the target for new private flats introduced to the market annually to 20,000 from the previous 10,000-15,000 units might help cool the market in the short-term.
Tsang also unveiled at rent-to-buy programme to allow potential buyers to rent a flat for a number of years and ultimately use part of the total rent for a down payment if they decide to purchase the flat. (Additional reporting by Alison Leung and Jimmy Tsim; Editing by Ken Wills & Kazunori Takada) (See www.reutersrealestate.com for Reuters' global service for real estate professionals)