Shanghai police say they have found the root of rumors that sparked a home-buying frenzy in late August and led to instability in the city’s real-estate market.

It began, police said, with a woman who said she had a tip that the city government was mulling changes to home-buying rules.

According to a police statement, a 34-year-old Shanghai property-sales manager—identified only by her surname, Shen—said she had been notified in late August that city officials would meet the following week to possibly tighten bank-lending rules in September.

Police say she spread the alleged tip to other employees at her company and clients through the WeChat messaging app, encouraging potential buyers to snap up property before the rules took effect. According to police, Ms. Shen said the coming credit restrictions would be "big." Her messages were shared by other users, fueling social-media buzz.

But according to police, Ms. Shen had made it all up.