By Xiaoyi Shao and Koh Gui Qing

BEIJING (Reuters) - In defying four years of official cooling efforts, China's soaring house prices reveal an uncomfortable truth: government is one of the biggest obstacles to the success of taming the market.

State income is so entwined in the need for rising land prices that policy efforts to try to curb the house market create an inherent conflict of interest.

With one hand on a patchwork of controls aimed at taming record house prices, governments with their other hand are at the same time selling land to developers at rising prices.

Homes in cities such as Beijing are more expensive by some measures than Britain or Japan, a dismal outcome for a central government campaign aimed at making homes more affordable to Chinese. House prices in September rose nationwide at their fastest pace in three years.

"The starting point of local governments is to keep land prices relatively high," said Zou Xiaoyun, deputy chief engineer at China Land Surveying and Planning Institute, a research unit affiliated to the land ministry. "Governments are not willing to see home prices fall."

Selling land is a major source of income for local governments but other factors drive up prices as well. These include natural demand from a rising population, and speculation fuelled by ready cash, given relatively few alternatives for investment.

China's reform efforts, such as lowering government reliance on land sales for revenue and providing speculators with more investment options, should help iron out these factors. A meeting starting on Saturday of the country's top leaders will give clues about those reform plans.

Nowhere in China is the problem of a surging property market more acute than in Beijing and Shanghai, where the lure of good education and employment have underpinned demand as millions of Chinese are encouraged to migrate to cities.

Beijing prices are the steepest in the country. A 70-square-metre home costs 20 times annual household disposable income, the International Monetary Fund said in a 2011 report, four times higher than in Britain and double Japan. Shanghai's price-to-income ratio is around 14 times.

Lu Biao, a 27-year-old IT engineer who works in Beijing, is buying his first home in nearby Tianjin, a 30-minute express train ride from Beijing. The 100-square-metre apartment will cost him about a million yuan.

"Beijing's home prices are too expensive and are always rising," said Lu, whose annual income is around 150,000 yuan. "If I don't buy a house now, I will never be able to buy one."

BOATS ON A RISING TIDE

To be sure, the central government faces a dilemma. Rising discontent over house prices is a threat to the social and economic stability the Communist Party uses as justification for its one-party rule.

But the real estate sector is also a major economic driver, supporting some 40 other industries and generating about 16 percent of the country's $8.5 trillion GDP.

That has been important this year in supporting economic growth, which is expected to droop to a 23-year-low of 7.5 percent this year. And it is a major source of income for local governments, so if the central government clamped down too hard, it would cause problems for city authorities.

Beijing's government has sold 14.9 million square meters of land in the first 10 months this year, more than during all of 2012, Reuters calculations of official data show.

Its revenues from land sales have doubled to 120 billion yuan this year from last year's 65 billion yuan, the calculations show. That's the fastest growth in at least six years and a boon when other sources of fiscal revenues are withering.

Prices of new homes in Beijing rose 16 percent in September from a year earlier, data shows, compared with the national average of 9 percent. Price increases were even steeper elsewhere; 17 percent in Shanghai and about 20 percent in southern Guangzhou and Shenzhen.

"Land prices are rising so property prices will rise. A rising tide lifts all boats," said a senior executive at a mid-sized listed property developer in Beijing. He declined to be named as he is not authorized to speak to the media.

Beijing city authorities said they had taken several measures to stabilize land prices, including increasing supply and capping winning bids in land auctions, the Beijing Municipal Bureau of Land and Resources said.

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