Li Nan has real estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700-square-foot (65sq m) apartment in west Beijing.

Li originally planned to buy his own place when he got married but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment.

If he finds the right place - preferably a two-bedroom in the historic Dongcheng quarter, near the city centre - he hopes to buy immediately. Act now, he figures, or live with mum and dad for ever. In the past 12 months such apartments have doubled or tripled in price, to about US$400 ($554) a square foot.

"This year they'll be even higher," says Li.

Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high- rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand will not flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further.

And jump they have. In Shanghai, prices for high-end real estate were up 54 per cent in September, to US$500 a square foot. In November alone, housing prices in 70 major cities rose 5.7 per cent, while housing starts nationwide rose a staggering 194 per cent. The real estate rush is fuelling fears of a bubble that could burst later this year, devastating homeowners, banks, developers, stock markets, and local governments.

"Once the bubble pops, our economic growth will stop," warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences' Finance Research Centre. On December 27, Premier Wen Jiabao told news agency Xinhua that "property prices have risen too quickly". He pledged a crackdown on speculators.

Although it parallels other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper-middle-class housing is so hot it cannot be satisfied. In others, speculators keep driving up prices for land, luxury apartments and villas even though local rents are actually dropping because tenants are scarce. What is clear is that the bubble is inflating at the rich end, while little low-cost housing gets built for middle and low-income Chinese.

In Beijing's Chaoyang district, which represents a third of all residential property deals in the capital, homes now sell for an average of almost US$300 a square foot. That means a typical 1000sq ft apartment costs about 80 times the average annual income of the city's residents.

Koyo Ozeki, an analyst at US investment manager Pimco, estimates that only 10 per cent of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes.

How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing's half-trillion-dollar stimulus plan all made funds readily available. City and provincial governments have been gladly co-operating with developers: economists estimate that half of all local government revenue comes from selling state-owned land.

Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile and shoe industries have started up property divisions too: the chance of a quick return is much higher than in their primary business.

"When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land," says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley's top Asia analyst. "No one talks about their factories making money these days."

The central Government now faces two dangers. One is the anger of ordinary Chinese. In a recent survey by the People's Bank of China, two-thirds of respondents said real estate prices were too high.

The issue has become even more charged as a result of injuries and deaths related to real estate. A woman from Chengdu committed suicide by torching herself when her former husband's three-storey factory and attached living space were demolished to make way for a new road. A man in Beijing suffered severe burns in a similar protest over his home.

In early December five professors at Peking University wrote to the National People's Congress calling for changes to a land seizure and demolition law and accusing developers of usurping the Government's role when taking land for construction. They warned that the law was leading to "mass incidents" and "extreme events".

The second danger is that Beijing will try, and fail, to let the air out of the bubble. Pulling off a soft landing means slowly calming the markets, stabilising prices, and building more affordable housing.

To discourage speculation, the State Council, China's Cabinet, is extending, from two years to five, the period during which a tax is levied on the resale of apartments. Tighter rules on mortgages may follow.

Beijing also plans to build apartments for 15 million poor families.

The Government is reluctant to crack down too hard because construction, steel, cement, furniture and other sectors are directly tied to growth in real estate. In November, for example, retail sales of furniture and construction materials jumped more than 40 per cent.

At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth.

The worst scenario is that the central authorities let the party go on too long, then suddenly boost interest rates to stop the inflationary spiral. Without cheap credit, developers will not be able to refinance their loans, consumers will no longer take out mortgages, local banks' property portfolios will sour, and industrial companies that relied on real estate for a chunk of profits will suffer.

It is not encouraging that the Chinese have been ham-handed about stopping previous real estate frenzies. In the 1990s the Government brutally ended a bubble in Shanghai and Beijing by cutting off credit to developers and hiking rates sharply. The measures worked, but property prices plunged and economic growth slowed.

Analysts are divided over the probabilities of such a crash, but even real estate executives are getting nervous. Wang Shi, chairman of top developer China Vanke Co, has warned repeatedly in recent weeks about the risk of a bubble. In his most recent comments he expressed fear that the bubble might spread far beyond Beijing, Shanghai, and Shenzhen.

One difficulty in handicapping the likelihood of a nasty pullback is the opacity of the data. As long as property prices stay high, the balance sheets of the developers look strong. And no one knows for sure how much of the more than US$1.3 trillion in last year's bank loans funded real estate ventures.

Analysts figure a substantial portion of that sum went into property, much of it indirectly. Banks often lend to state-owned companies for industrial purposes. But the state companies can then divert the funds to their own real estate businesses or re-lend the money to an outside developer.

Meanwhile, the big banks may be cutting back on their real estate risk by selling loans to smaller local banks and credit co-ops.

For now, the party continues. On December 12, Beijing developer Soho China celebrated a record-breaking year with a gala at the China Central Place JW Marriott. Guests dined on crab and avocado timbale, white bean soup and beef tenderloin with wild mushrooms.

After a dance performance, a panel debated "The Balance Between Profit and Soul". When a writer joked he could not afford an apartment - and was still waiting for Soho chairman Pan Shiyi to give him one - the crowd of 600 well-heeled developers, entrepreneurs and consultants laughed appreciatively.

If the bubble bursts, few will be laughing.