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Potential buyers read brochures and talk to sales staff in front of a model depicting a new housing estate at the Beijing Property Trade Fair.

As a lifelong Beijinger preparing for retirement, Luan Yanju followed the lead of thousands of other Chinese investors hoping to insulate themselves against volatile stocks and low-return bank accounts: She invested her savings in property.

Ms. Luan, who until two years ago worked for German car manufacturer Mercedes, acquired clothing stalls in three Beijing markets, and a second apartment in Miyun district just north of Beijing's city limits.

The market kiosks have paid off, their monthly rent tripling to approximately 30,000 yuan ($4,468) in the last five years, and now help to finance her daughter's studies in Canada. The second apartment, on the other hand, has become a suburban savings account - for now, a refuge from city traffic and pollution; in future, an asset against the proverbial rainy day.

"I didn't understand how to invest in stocks. People can't simply follow what others do, can we? We can't do what we don't know," says Ms. Luan, who is in her fifties. "Now everyone wants to squeeze into Beijing. How could Beijingers think of investing outside? Rational people won't invest in other cities, because who are you going to rent it to? Who is going to take care of it for you?"

This traditional form of investment for Chinese families is about to become much more difficult under a series of tough new government-imposed controls on the housing market.

Chinese officials have increased interest rates three times in the last four months and have ordered banks to tighten lending. Just before the Chinese New Year holiday early in February, the State Council raised the minimum down payment for purchases of second homes to 60 per cent, up from 50 per cent, and urged local governments to set price targets and cap the number of homes residents are permitted to own.

As a result, in Beijing, legally registered residents are now no longer permitted to buy more than two homes, while those without Beijing registration cannot buy property at all unless they can prove they have paid taxes there for five years.

In Shanghai, those without residency documents must pay taxes in the city for a year, and all second-time purchasers will now be subject to a new real-estate tax aimed at financing the building of affordable housing.

"We can see that the government is sending a strong message - houses should return to their basics, which is to be as a shelter by function, and not a vehicle for speculation," said Andy Zhang, managing director of the China operations for global real estate brokers Cushman & Wakefield. "Should these measures effectively squeeze out the bubble and curb speculation, demand for investment purchase will substantially shrink. As a result, sales volume in [the]mid- to high-end residential sector will decrease substantially."

At stake is whether speculators are driving real estate into a bubble which could collapse, deflating the Chinese economy, which has just overtaken Japan as the world's second largest. Officials are caught in a delicate balance between trying to keep inflation down and basics like food and housing affordable for the masses, while still maintaining China's impressive economic growth.

The World Bank has cited real estate crashes in Japan and Ireland as a warning to Chinese officials to rein in their finances. "China must carefully study the cases of Japan and Ireland, where the collapse of the real estate bubble caused a financial crisis and economic stagnation," the World Bank's chief economist Justin Yifu Lin told a Beijing University symposium recently.

Others put it more bluntly: "The history is pretty bleak. These things always create bubble situations and they always end badly," said Michael Pettis, a professor of finance in Beijing University's Guanghua School of Management, who warned the government's efforts may help in diverting excess liquidity from real estate, but that the fundamental problem remains. "I think it's going to be a long, slow deflation of the bubble rather than a burst - more stable, but more expensive in the long run."

The government's actions - and expected further regulation - have been received with reservation by the industry, which has been enjoying brisk business. The price of a new home in Beijing rose 6.8 per cent last month over the same period a year ago; remove government-subsidized housing from the calculation and the increase becomes 9.1 per cent, the highest in the country.

Properties in the new and booming Central Business District (CBD) in east Beijing, for instance, start at 50,000 yuan per square metre.

A typical three-bedroom property in CBD, considered an upscale area with many foreigners and wealthy Chinese, runs about nine million yuan ($1.34-million), or 90 times the average annual salary of a civil servant.

The average cost of a two-bedroom apartment along the more affordable Fourth Ring Road area - considered the edge of central Beijing - is three million yuan or $447,000.

"It's very, very expensive. Only very rich people can afford to live in this area," said Heather Liu, 36, a private real estate agent dealing in high-end properties in the city. Though she called recent price increases "unbelievable," she said she has already seen a slowdown in sales as clients find it harder to obtain mortgages.

"I think [this policy]is not welcomed by many families," Ms. Liu said. "But so many [are]investing in this market the prices were going crazy up. Maybe it will make prices go down a little bit."

Special to The Globe and Mail

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