Based on this logic, he believes second-tier cities in China hold enormous potential, similar to that previously seen in Shanghai and Beijing. "There is much more space for growth in such cities."

In this respect, most foreigners' attitudes to China's real estate market are similar to their view of the stock market, which is much more optimistic than domestic investors.

In the long term, they are confident about the country's economic prospects. In the short term, the possibility of a rising yuan is a factor.

Lending curbs

Housing has become so expensive in China that seven out of 10 urban families cannot afford their own homes, Xinhua News Agency says.

And in Beijing last year, nearly a quarter of the homes approved for sale were priced above 8,000 yuan (US$986) per square metre, an increase of 4.2 percentage points year-on-year, according to the CASS report.

The central bank certainly sees the real estate industry as absorbing too much of the country's capital, which is why it wants to tighten lending.

"Real estate financing is making up a bigger and bigger share of the country's financial sector," Wu Xiaoling, deputy governor of the central bank, told a seminar early this month. "We must pay close attention to developments in both the real estate industry and home financing sectors."

According to Wu, Chinese bank loans to the real estate sector stood at 3.07 trillion yuan (US$380 billion) by the end of 2005, accounting for 14.84 per cent of all renminbi lending by China's financial institutions. This is equivalent to 16.75 per cent of the country's gross domestic product (GDP) in 2005.

Loans to individual house buyers by China's commercial banks were valued at 1.84 trillion yuan (US$230 billion) last year, accounting for 8.9 per cent of the banks' total renminbi lending and equivalent to 10 per cent of the GDP.

On April 28, the central bank announced that the benchmark rate for one-year loans would rise to 5.85 per cent from 5.58 per cent, up 27 basis points. Following the central bank's announcement, the Public Housing Fund (PHF) raised mortgage rates for individual house buyers by 18 basis points from May 8.

Experts point out the rate adjustment is the most effective way to drive speculative capital out of an overheated real estate market.

With the government curbing credit, the real estate industry might have to slow down.

"But as land is in short supply, house prices will not stop rising," says Yang Shen, former president of the China Real Estate Association.

Few foreign investors believe the interest rate adjustment will curb real estate development, especially in the expensive office building sector.

For them, growth is inevitable.