The economy may have gotten off to a great start in the first quarter and inflation may have been tempered, but let's not forget that China is still facing a huge challenge: Slowing down soaring real estate prices and making sure the housing bubble lands softly.

Make no mistake about it, the housing bubble is real, contrary to what many critics have said recently. So if the economy is to develop effectively and distinctly from its old growth model, housing market problems must be rectified.

One angle to tackle first is the abnormal increase in the supply of money. This is exactly what the central authorities have been working intensively on in recent weeks after making the distinction between speculative investments in properties and payments for the purpose of living in a home.

Last year's currency supply propelled the hikes in housing prices. It should be noted that local governments are still impulsively investing to boost their local economies. To do so, they need a greater supply of currency. But this in turn fuels price hikes and builds up pressure on inflation. A greater currency supply will make it difficult to manage inflation.

The State Council, China's Cabinet, recently has been calling for greater management on liquidity. Quantity management tools, deposit reserve ratio and open market operations (including 3-year central bank bills) would be used interchangeably to control liquidity. For any overheated investment sector, an adjustment in credit line might be a necessary regulation measure.

Recently, the government introduced new regulation policies. Fortunately, they are all well-targeted, especially through its aim of expanding the construction of affordable homes and giving incentives for homeowners to actually live in their homes instead of using them as investment tools. It still remains to be seen if the policies are effectively implemented but if they are, the real estate bubble will diminish in size and land safely.

The real estate market is obviously a key factor to stable economic growth this year. Last year, households used 80 percent of their incomes to pay down their average monthly mortgage. This is 60 percent higher than the domestic security line, the most glaring proof that a bubble exists.

Unfortunately, in the long run, housing prices will continue to rise and short-term hikes in prices regardless of increasing income levels means that a bubble is looming.

What's even more ominous is that the ever-inflating bubble might lead to a crisis. A collapse of the real estate market in Japan pushed its economy into a "lost decade". In Thailand, the high rate of real estate vacancy put 58 banks into bankruptcy in one day, triggering the Asian financial crisis. When Dubai's housing bubble burst, it nearly made the United Arab Emirates bankrupt twice over. The United States' subprime mortgage crisis caused an unprecedented global economic crisis. These crises caution us that countries, regardless of their size or development level, all have experienced housing market fiascoes.

We cannot ignore our real estate bubble. We should pay attention to the bubbles that grew in the aforementioned countries and how they burst after prices rose for two or three consecutive years. If China's realty market follows the rising trend in 2009 for two or three years, its economy will be at a huge risk.

So what's to be done? Aside from controlling the supply of currency, the country's goal of developing real estate should be based on home ownership, no matter how scarce land resources currently are. Currently China's real estate market is an investment market and that has changed how houses are used today and distorted prices. Once investment becomes the main purpose of the real estate market, there is no telling where housing prices will go.

In addition, given that most investment funds are mainly from banks rather than money from individuals, housing prices will be propelled by bank loans, enlarging the moneymaking effect of investment and generating a cycle of price hikes. Of course, land auctions by local governments further intensify this momentum.

The central government has tried to create new policy to calm the real estate market, but why had policy adjustments resulted in even higher prices? First, the policies were not clearly targeted. They in fact drove up prices. Second, the policies were not strictly implemented.

The most recent government measures in curbing credit loans to purchases of second and third homes, on the other hand, have achieved initial results in the market. But their eventual effects will depend on how they are carried out.

The author is the chief economist of Yinhe Securities.