Chinese property prices rose strongly in September, fuelling concerns that the housing market is overheating.

Property prices rose 9.1 per cent year on year in China’s 70 main cities, up from August’s 8.3 per cent increase, according to data from the national statistics bureau. It was the strongest annual rise since the bureau introduced another way to monitor prices three years ago.

Price gains in China’s biggest cities were especially steep. In Beijing values for new homes rose 20.6 per cent from a year earlier. In Shanghai they were up 20.4 per cent, while in Shenzhen they increased 20.1 per cent.

The surge has sparked debate about whether the government will take fresh steps to rein in prices. Here are four questions about the issue.

Is China doing anything about these soaring property prices?

What makes the price rises so remarkable is that the Chinese government has taken steps since early 2010 to cool the market. It has imposed higher mandatory downpayments, restricted home purchases and built millions of subsidised homes.

It has not halted any of those measures, but since new leaders took office in March they have not introduced any big policies directed at the property market and have largely refrained from commenting about the run-up in prices.

This has revved up the market. People who had previously deferred buying homes, as government measures might cause prices to fall, have rushed back into the market.

Moreover, China has received large capital inflows this year. Its foreign exchange reserves increased by $163bn in the third quarter, the largest such increase since 2011. With the stock market depressed, the one asset market that beckons is property. Analysts say that speculative buying has been strong this year.

Is it a bubble?

This is the 64m renminbi question. Many analysts and investors are convinced that China is experiencing a severe bubble. They point to ghost towns, with rows on rows of unoccupied homes in some areas and the five-fold increase in prices in top cities over the past decade. Jim Chanos of hedge fund Kynikos Associates has been among the most outspoken of the bears. The bubble is getting “bigger and bigger and bigger”, he told CNBC.

But others disagree. They point out that ghost towns are concentrated in just a few cities such as Ordos in Inner Mongolia. Also, though prices have risen sharply, so have incomes. According to official data, it took the average Chinese household about 10.5 years to earn enough money to buy a home in 2005 but only 7.6 years in 2012 – evidence that housing in China is becoming more affordable and less bubbly.

However, these averages mask the discrepancies between bigger and smaller cities. In big cities, price increases have been extreme, affordability is limited and supply is tight. In smaller cities, the situation is just the opposite, with milder price increases and better affordability but a growing glut of unsold homes.

Will prices keep on rising in the coming months?

There are signs that price increases will soon begin to moderate. Although year-on-year rises have steadily increased, month-on-month price rises have narrowed. The average monthly growth rate across the 70 cities monitored by the statistics bureau slowed to 0.7 per cent in September from 0.8 per cent in August. The current round of housing price increases got its start in the final months of 2012, so the base of comparison will be higher towards the end of this year.

Taken together, these factors should lead to slightly smaller year-on-year increases later this year. Credit conditions in China have also been tightened since a cash crunch in June. Finally, a large number of new developments about to come on to the market may depress prices further [Accounting Services].

How will the government respond?

If prices do start to calm down, there will be inevitably less pressure on it to act. Analysts believe that Beijing is also wary of doing anything to snuff out the economic recovery, which started in July and is already flagging.

But if prices do continue to rise, the government is likely to do more to fend off the risk of a bubble and to defuse popular anger. Along with reinforcing its existing restrictions, it may promise to step up the building of affordable homes. The most keenly anticipated reform would be the introduction of a nationwide property tax, which analysts believe would discourage people from holding on to empty homes and so boost supply and weigh on prices. China has introduced pilot taxes on an limited basis and has said it is studying the introduction of such a nationwide tax.

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