Beijing, China (CNN) -- When Crystal Zhang decided to buy a house last August, it seemed like a no-brainer.
For years, she had been spending a big chunk of her salary renting a studio apartment in Beijing, where she works as a mid-level executive in a multinational company. But her landlord kept hiking the rent, so she found a second-hand apartment and plunked 640,000 RMB (nearly US$100,000) as 52 percent down payment for a new home. She now lives in a cozy, one-bedroom flat and sets aside 25 percent of her monthly salary to pay for mortgage. "I hope to pay all up in five years," says Zhang. "By then I can start making some other investments."
Zhang, 30 and single, is one of the fortunate ones. The upwardly mobile professional has ample disposable income--and a good sense of timing. In just five months since she bought her 85-square-meter apartment, it has already appreciated by 38 percent. "I'm glad I bought this one when I could still afford it, even though its price was already high," she said. "Now the price is ridiculously high."
In big cities like Beijing, the red-hot real estate market has seen prices raise more than 50 percent the past year -- six times the country's total economic growth rate. According to Shanghai Uwin, which tracks housing prices in China's richest city, average new apartment prices in the Pudong district soared by 57 percent to a record $4,061 per square meter, while overall prices in the city rose by 26 percent to $2,434.
Andy Xie, former Morgan Stanley chief economist for Asia, believes that China's real estate and stock markets are a "bubble" that will burst when inflation accelerates in 2011. "China's asset markets are a Ponzi scheme," Xie told Bloomberg. "Property is heading for one huge bust that will take a year and a half to unfold."
Even some real estate developers are getting anxious. Zhang Xin, CEO of SOHO China, agrees that the soaring prices are unsustainable, breaking ranks with other real estate tycoons. "When one gets fat, you need to cut weight" she told Forbes recently. "But this is like you haven't started losing weight yet and food is coming again."
Other analysts also see a bubble, at least in terms of affordability. "Even Chinese government statistics point to real affordability problems, with the income-to-price ratio in Beijing hovering at 1:22, when the IMF and the UN say the ideal figure is 1:3 or 1:4," said Ashley Howlett, head of China construction practice for Jones Day. "The fact is that the average people cannot afford to buy apartments in Beijing or other major cities."
Not all analysts share Xie's dire prognosis. Real estate bosses, and some economists, think there is still room for growth, assuming that China's rapid urbanization will continue.
Mei Jianping, professor of finance at the Cheung Kong Graduate School of Business in Beijing, believes that, "under the current low interest rates, the bubble is unlikely to burst, unless we have another crisis like last year or inflation suddenly surge.
"China is unique in the sense that there is nowhere for the middle class to put their money, low interest rates are low, equity markets are highly volatile, and corporate bond markets are small," Mei said. "So putting money in real estate is not all irrational."
Irrational or not, many factors have created this exuberance in China's property market. Massive bank lending over the past year, part of Beijing's stimulus package, has found its way into real estate speculation. Low bank interest rates have encouraged other forms of investment and make mortgages cheap-prompting a mindset that "we might as well buy an apartment than leave the money in the bank". Fear of inflation also makes investment in real estate attractive. Limited investment options make buying a house a preferred choice. One poll conducted by Tencent website revealed that most of the 360,000 respondents agree that "happiness is closely related to owning a home."
If China is facing a bubble, will it end up like the U.S. did in 2008? Probably not, many experts say. Says Howlett: "The major difference between China and the US and the UK is the lack of 'sub-prime' lending and low gearing. There also remains a strong demand." Mei Jianping agrees: "The bubbles are all inflated during low interest rate environment. The difference is that China is still growing and interest rates are expected to stay low for a while due to slow recovery."
Beijing cannot afford a collapse in the housing market as it is one of the pillars of China's economy. The property sector, analysts estimate, accounts for about a quarter of all fixed-asset investment in China and about 10% of national employment.
"The main way a bursting of the real estate bubble would hurt China is if it causes a sharp drop in real estate development, and thus a sharp drop in employment and the business activities of industries that feed the real estate sector," Howlett said. Ashley thinks the government and the banks would probably continue to actively support the real estate sector to avoid such a scenario. "This is not an economy where price signals decide business decisions," he said.
New home-owner Crystal Zhang remains optimistic of her investment. "The bubble won't burst," she said, citing measures that Beijing introduced recently to prevent a U.S.-style crash in home prices. "Whenever the bubble is about to burst, there will be measures taken to stop it."