IS there really a bubble in Shanghai's property market? Who are the buyers of houses in Shanghai? In 2004, these questions have been repeatedly asked by economists, property developers, housing officials and local residents.

Andy Xie, Morgan Stanley's chief economist for Asia-Pacific, was probably the first economist to warn of a bubble in China's over-heated real estate sector, saying it was going to burst (see the story "Costly Housing" in the December 9 issue).

According to Xie, Shanghai would be the first city in China to see a collapse of the property sector.

In what has been seen as a response to Xie's admonition, the Ministry of Construction's Policy Research Centre released a report in October, saying the boom in the property sector was supported by the real demand of residents for housing. The report also pointed out the country's further urbanization would sustain the sector's growth for several years.

If the impact of the argument was mainly psychological to ordinary residents, the central bank's announcement of an interest hike was a move that really mattered to consumers' wallets.

Shortly after the announcement, local banks reported an increasing number of borrowers inquiring about early re-payment of their loans, fearing further interest rate increases would add to their financial burdens.

Analysts said the central bank's move was aimed at reining in the country's over-heated economic sectors, especially real estate, where previous macro-control measures had proved largely ineffective.

In addition, predictions that housing prices would drop began appearing in the local media. Indeed, the housing prices in Shanghai edged down for a few days after the interest rate hike. But they soon resumed their upward trend, topping 10,000 yuan (US$1,200) per square metre on November 15.

One loudly proclaimed explanation for local housing price hikes was the influx of overseas speculative money. A local economist estimated that more than US$1 billion of such hot money had poured into Shanghai's property market, lured by hopes of profiting from future RMB appreciation, according to a report in the local Youth Daily.

A few weeks later, Jiao Yang, spokesperson for the Shanghai government, dismissed that viewpoint, referring to statistics indicating that foreign investors only accounted for 4 per cent of the real estate market, while local residents made up 80 per cent.

So the question floated to the surface once again: Who pushed housing prices so high?

Pang Yuan, deputy director of the Shanghai Housing and Land Administration Bureau, said in early December that the depressed demand of local residents during the period from 1997 to 1999 was the main factor contributing to the recent surge in the property secto.

Pang also said the housing authority would take measures to curb housing price increases and maintain healthy and moderate growth in the industry.

Local authorities vowed to increase the land supply and encourage the development of commercial residential housing below the value of 3,500 yuan (US$423) per square metre, in order to satisfy the demand of low-income families.

Just two weeks later, the housing authorities set upper limits on the price of land in the year's first government-owned land transfer (see the story "City nails down roof" in the December 16 issue).

Analysts said the move was aimed at reducing developers' costs and in turn curbing prices in the city's real estate market. Yet analysts pointed out that housing prices are decided by demand as well as supply, so controlling costs does not necessarily lead to lower prices.

Local authorities predicted that the Shanghai property market would stay prosperous at least until 2010.