A man rides his tricycle past a residential site in Shanghai
A man rides his tricycle past a residential site in Shanghai Reuters

Residential real estate in 35 large and medium-sized cities in China is, on average, about 29.5 percent overpriced, according to estimates of the Chinese Academy of Social Sciences (CASS).

CASS, which is affiliated with China's State Council, said in five of those cities, homes are over 50 percent overpriced.

Furthermore, it estimated that real estate prices will rise by 15 percent in 2010, down from 25 percent in 2009. In 2011, it said prices can rise further if government measures aimed at curbing the real estate market are relaxed.

In addition to tightening monetary policy in general, the Chinese government cooled down the real estate market in select cities by raising the minimum down payment ratio on home purchases and restricting families from owning more than one home each.

Chinese officials, realizing that the real estate market is overheated, are trying to engineer a so-called 'soft-landing' for the market.

In the United States -- which, unlike China, already had its housing bust -- real estate prices in cities fell by roughly 33 percent from peak-to-trough, according to the S&P/Case-Shiller 20-City Composite Index. (Since corrections tend to overshoot the fair value of an asset class, this suggests that U.S. real estate prices in cities were a little more than 33 percent overvalued.)

However, the Chinese real estate bubble, which increased several-fold over the last few years, is more severe compared to the U.S. bubble.

While some may argue that urbanization and growing wages support rising real estate prices, the extent of the bubble likely outstrips any fundamental economic justification.

One reason is that China doesn't provide its citizens -- who are among the highest savers in the world -- with many investment outlets. Real estate happens to be one of the few options available and is indeed viewed as an investment by many Chinese people.

While CASS is an important think-tank in China, it is possible that they overestimated the fair value of Chinese real estate and that housing prices are in fact more than just 29.5 percent overvalued.