JUST over a year ago, policymakers were having conniptions about China’s tumbling stockmarkets. Now it is China’s frothy property market that is causing worries at home and abroad. Because the property sector accounts for about a quarter of demand in the world’s second-largest economy, a market collapse would have far more than a local impact. In fact, for now, China can probably avoid a disastrous crash (see article). But it shows little sign of being able to implement the fundamental reforms needed to fix the distortions that make the market so volatile and, in the long run, dangerous.

One reason for optimism that a crisis can be averted is that the risk has been identified. With property prices in many big cities soaring—by more than 30% a year in Shanghai, Shenzhen and Nanjing—even the central bank’s chief economist has warned of a “bubble”. Wang Jianlin, China’s richest man (and a property developer), last month went further, calling it “the biggest bubble in history”. Foreign-bank economists, local brokers and state-run think-thanks have all joined in. Fears have been stoked by a steep rise in mortgages this year. In July and August, they accounted for nearly 80% of new bank loans.

The government is clearly heeding the warning signs: in the past two weeks rules on property purchases have been tightened in some two dozen places, suggesting a central-government push to tell municipalities to curb their local excesses. Tightening measures (typically raising the percentage of a purchase price to be paid as a cash down-payment) can be effective. And despite the recent mortgage boom, Chinese households still have strong balance-sheets. When shadow banks began to lend to homebuyers to cover their down-payments earlier this year, regulators quickly snuffed out the practice—a telling contrast with the authorities’ inaction last year when hidden borrowing helped inflate the stockmarket bubble.

The upturn has also been a powerful reminder of just how insatiable demand for property remains in China. Fitch, a ratings agency, calculates that it will need about 800m square metres of new housing—roughly the size of Singapore—every year between now and 2030 to meet demand from people moving to cities and buying nicer homes. That is in fact less than the billion or so square metres that China has recently completed every year, but still remarkable.

The market for all those homes, however, remains subject to serious distortions, thanks to government policy. The most fundamental is that the government does not make it possible to build homes where people want to live. Because it wants to contain the growth of the big cities, little urban land is made available. Scarcity drives prices up; builders and homebuyers alike pay a steep premium to be there. Smaller cities still have a vast inventory of unsold homes. The current rally has done little to chip into it. Matching supply and demand is often not the main consideration: land sales are an important source of local-government revenue. Nor may everybody live where they want, as residence permits can still be used to block outsiders.

My home is my nest egg

A further distortion lies in a repressed financial system that restricts investment opportunities. Capital controls hamper legal investment abroad; state banks keep deposit rates low; the stockmarket has been a rollercoaster. So property looks a very attractive destination for surplus cash. Surveys suggest that, of those buying homes in China these days, perhaps one-fifth are doing so as investors rather than owner-occupiers. State-owned enterprises, limping in their core businesses but resisting break-up and reform, have turned to property development to make up for flagging profits.

The cooling measures in so many Chinese cities do nothing to tackle these structural issues. No wonder. They are at the heart of the Communist Party’s abiding dilemmas: how to maintain rapid economic growth without increasing the risks of an abrupt “hard landing”, and how to let markets flourish while maintaining the party’s control. At least when it comes to property, solutions are at hand. China must press on with opening its financial system and, most crucially, overhaul its land policy. If not, property mania will sweep its big cities again and again, and those booms will one day end in a bust.