Unfortunately, in the long run, housing prices will continue to rise and short-term hikes in prices regardless of increasing income levels means that a bubble is looming.

What's even more ominous is that the ever-inflating bubble might lead to a crisis. A collapse of the real estate market in Japan pushed its economy into a "lost decade". In Thailand, the high rate of real estate vacancy put 58 banks into bankruptcy in one day, triggering the Asian financial crisis. When Dubai's housing bubble burst, it nearly made the United Arab Emirates bankrupt twice over. The United States' subprime mortgage crisis caused an unprecedented global economic crisis. These crises caution us that countries, regardless of their size or development level, all have experienced housing market fiascoes.

We cannot ignore our real estate bubble. We should pay attention to the bubbles that grew in the aforementioned countries and how they burst after prices rose for two or three consecutive years. If China's realty market follows the rising trend in 2009 for two or three years, its economy will be at a huge risk.

So what's to be done? Aside from controlling the supply of currency, the country's goal of developing real estate should be based on home ownership, no matter how scarce land resources currently are. Currently China's real estate market is an investment market and that has changed how houses are used today and distorted prices. Once investment becomes the main purpose of the real estate market, there is no telling where housing prices will go.

In addition, given that most investment funds are mainly from banks rather than money from individuals, housing prices will be propelled by bank loans, enlarging the moneymaking effect of investment and generating a cycle of price hikes. Of course, land auctions by local governments further intensify this momentum.

The central government has tried to create new policy to calm the real estate market, but why had policy adjustments resulted in even higher prices? First, the policies were not clearly targeted. They in fact drove up prices. Second, the policies were not strictly implemented.

The most recent government measures in curbing credit loans to purchases of second and third homes, on the other hand, have achieved initial results in the market. But their eventual effects will depend on how they are carried out.

The author is the chief economist of Yinhe Securities.

(China Daily 04/27/2010 page8)