HONG KONG (AP) _ Wallace Woo and his wife thought they had found the apartment of their dreams. The neighborhood wasn't bad, and it had plenty of Hong Kong's rarest luxury _ space.

But the price tag was a nightmare: about $700,000.

A week later, the owner reconsidered, and raised the price to $800,000.

``It's ridiculous. And for an 18-year-old apartment!'' said Woo, a 34-year-old banker.

Still, the Woos are lucky. They already own an apartment, and just want a bigger one. For thousands of other families, the soaring prices that are often regarded as a sign of confidence in Hong Kong's future under Chinese rule have made home ownership impossible.

The issue has turned nasty by Hong Kong's restrained standards. A hoax bomb left at the colony's legislature was inscribed with the name of Housing Secretary Dominic Wong, and an anonymous letter was sent to a newspaper suggesting Wong poison himself.

Housing prices are five times the levels of a decade ago, driven by a surge in population, a land shortage and a flurry of speculative buying as Britain prepares to give up the colony on July 1.

Long before a new apartment block is complete, thousands line up at real estate offices for lotteries merely to bid on the apartments. A lottery ticket or even a place in line can sell for hundreds of dollars.

Most of Hong Kong lives in apartments, which rose in price last year by 27 percent. A three-bedroom apartment now can cost $1.25 million.

``The post-July government will inherit a substantial housing challenge,'' warned real-estate analyst Michael Green of Salomon Brothers.

Housing has always been a critical social issue in Hong Kong, and colonial authorities were forced to drop their usual hands-off policies and build public housing.

They began replacing squalid shantytowns in the 1940s, trying to defuse discontent that threatened to spread the Chinese revolution to Hong Kong.

Today, more than half the population of 6.3 million lives in 660,000 public apartments in nondescript skyscrapers up to 40 stories high.

Rents vary by family income, up to about $2,000 a month. Although salaries range widely in Hong Kong, a supervisor in a hotel or retail job would earn about $1,700 a month, while an office manager for a bank might make about $3,700 a month.

In order to afford housing, three generations are often are crammed into a tiny 400-square-foot apartment. For anything bigger and privately built, at least half the family income will go to mortgage payments. Prices start at about $150,000, and the place might be smaller than the tiny rental apartment.

The government plans to build 41,500 more apartments in 1997-98 _ 20,000 for sale at subsidized prices and the rest for rent.

Housing chief Wong says the government will also make available still more housing, adding 5,000 apartments to the private market and speeding up the sale of 13,000 more public units.

Still, the government's only long-term option is to produce more land for housing. Much of Hong Kong is too mountainous, and while landfill and reclamation is extensive, the government has been reluctant to release large amounts at once.

Land auctions have become public spectacles held in huge auditoriums to accommodate crowds. Winning bidders are mobbed by reporters.

Analyst Green and other critics accuse the government of bungling housing planning, or even of creating a shortage to inflate revenues from land auctions.

Others see no crisis, merely the free market at work.

``In Hong Kong, a home is for those people who can afford it, not for everybody,'' said Frederick Tsang of the real-estate consultants Jones Lang Wootton.

``If you cannot afford it, then you had better apply for public housing,'' he said.

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EDITOR'S NOTE: AP reporter Raymond Chow contributed to this report.