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Graphic:Globaltimes.cn

The unrelenting rise in home prices in China's major cities has created a real estate bubble which risks bursting and has "kidnapped" China's domestic and foreign policy, experts warned on Sunday.

Property developers in Shenzhen, South China's Guangdong Province, surprised the market over the weekend with the debut of 6-square-meter apartments, which Chinese netizens refer to as "pigeon lofts."

Located in a residential building in Shenzhen's Nanshan district, the apartments immediately sold out on Saturday morning, an employee of the property developer told the Global Times on Sunday.

They were each priced at 880,000 yuan ($133,000), said an advertisement. The buyers were required to pay a down payment of 500,000 yuan.

The apartments were the smallest ever to go on sale. 

"The 'pigeon lofts' are the result of skyrocketing housing prices in the city," Yan Yuejin, the search director at E-house China R&D Institute, told the Global Times on Sunday.

Shenzhen has raised home prices faster than any other Chinese city for seven straight months by July this year. In August, the city saw a year-on-year increase of 36.8 percent in home prices, according to the National Bureau of Statistics website.

Of 70 major cities surveyed, 64 of them posted year-on-year price increases in August, up from 51 in July, said the statement.

Housing bubble

"The current housing market is risky, as home prices have surpassed people's incomes, and have already surged beyond the purchasing power of most ordinary people," Dong Liming, the deputy director of China Land Science Society, told the Global Times on Sunday.

Yet the high-priced market is not a reflection of residents' true demand, Yin Bocheng, director of the Real Estate Research Center at Fudan University, told the Global Times on Sunday.

For example, the average price-to-rent ratio ranged from 300 to 700 in China's major cities, according to a report published by China-crb.com.

Those numbers are "significantly higher than the normal ratio of 200," Yin said.

"Property prices have closed the door to ordinary people's housing demand, while speculative buyers continue purchasing," Dong said, noting that this creates a vicious cycle that further pushes up prices.

Investment in real estate has also curtailed the inflow of capital to high-tech and other innovative sectors, which are the engines of China's future economic development, Dong said.

Once the housing bubble bursts, commercial banks will face a huge crisis with mortgage defaults and nonperforming loans due to the market's high-leverage ratios, experts noted.

China's central bank issued a report which said housing loans in August reached 675.5 billion yuan, or 71.2 percent of all bank loans.

Impact on government policy

News on the real estate sector always generates online buzz, which in turn affects China's domestic and foreign policy, experts said.

"China's economic growth has slowed in recent years. Relaxing monetary policies, like providing loans, are a way to revitalize growth, but such measures will inevitably lead to the property market," Yan noted.

Another dilemma is the de-stocking reform, as relevant stimulating measures clash with the government agenda of reining in the property sector, experts said.

The recent policies, including higher down payments and home purchase limits to regulate the housing market, are contrary to those incentives, Yan noted.

Attracting foreign investment is one of the government's key missions. But the looming housing bubble has dampened foreign investors' enthusiasm in that market, experts said.

For example, international financial institutions, including Golden Sachs and UBS, have advised investors to cut their exposure to China's property sector, citing inflating the country's real estate bubble to a critical level as a reason.