“The bubble has been growing big,” since the government rolled out easing measures last year, UOB Kay Hian Ltd. analysts led by Edison Bian wrote in a March 2 note to clients.

Demand is also getting a boost from monetary stimulus after the People’s Bank of China cut benchmark lending rates six times since 2014, lowered banks’ reserve requirements and flooded the financial system with cash to keep borrowing costs low. With local stocks in a bear market and yields on the nation’s fixed- income securities near all-time lows, investors see few appealing alternatives outside real estate to park their savings.

“Property prices continued to soar in cities like Shenzhen and Shanghai for the past month, driven by the sharp surge of credit expansion, which appears to be endorsed by the central bank and local governments as a way to reinvigorate sales and digest inventory in third- and fourth-tier cities,” analysts at HSBC Holdings Plc wrote in a March 1 report.

The boom is most extreme in Shenzhen, where prices jumped 4 percent in January from a month earlier and have gained 52 percent over the past year. Values in the financial center of Shanghai have increased 18 percent in the last 12 months, while those in Beijing advanced about 10 percent. Prices in many smaller cities have continued falling, though at a slower pace. In the northeastern city of Shenyang, for example, new-home prices slipped 0.5 percent in January.

Eoin Treacy's view

China’s asset markets, both property and equities, tend to exhibit something of a casino mentality with sharp moves in both directions. This is exacerbated by government interference in both. The wide differential between the lending and deposit rates also encourages speculation. The fact central government apparatchiks are among the greatest beneficiaries of these moves acts as an impediment to the condition improving. 

One consideration is that the rise in property market speculation is a direct response to the decline in interest in the stock market. With prices jumping so aggressively in Tier 1 cities it is increasingly likely that individual cities will introduce measures to crimp speculation. That could act as a catalyst for bargain hunting in the stock market and for the seesaw to swing back in the other direction. 

The H-Shares Index (P/E 6.23, DY 4.71%) extended a bounce today to post a new 1-month high. A sustained move back below 8,000 would be required to question current scope for a reversionary rally.