Any doubts I had about a bubble in China's property market were dispelled during a recent visit to a third-tier city. The hundreds of half completed and completed but empty apartment blocks were matched by the number of desperate sellers who approached my colleagues and me.

The property bubble has to be deflated, and the government has recognized the importance of doing so. It has applied the brakes on the property market by raising the percentage of down payment needed and banning outright bank loans to people buying a third house.

The difficulty, however, is that such government actions risk either stalling the property market altogether, which could have serious consequences for the whole economy, or letting the market run away again by loosening the controls too early. What it needs to do is to find a way of decelerating the market through a change of gears. But the question is: Does it have the right levers to slow the market down?

One of the right levers is the introduction of a property tax. Just before the National Day holiday the government announced plans to accelerate the property tax pilot program to include Shanghai and Shenzhen. This is a very positive move, because property has for long been the component preferred to other assets in tax treatment. A well targeted property tax would help dampen speculation, increase the availability of the existing vacant housing for rent and, in the longer term, put local government finances on a more secure footing.

The government needs to take care of the demand side, too. A fall in prices seems inevitable, and given the extent to which the key price to average earnings ratio has risen beyond an affordable range this would not be a bad thing.

But large falls - of more than 20 percent - are likely to "spook" the market, creating a situation that could make people who bought property when prices were at their peak suffer huge negative equity. The government needs to support home ownership (but not financial speculation) and therefore it needs to buttress first-time homebuyers. This means it needs to ensure that the burden of the new property tax on first-time homebuyers is light. Furthermore, I believe that while the government is right in raising the percentage of down payment to buy a house and restricting loans for multiple purchases, it should reconsider its decision to increase the down-payment threshold for first-time buyers. It seems that banks have extended plenty of credit to property developers, but have been far less generous to potential first-time buyers.

Therefore, there is a good case for reducing the deposit to 15 percent for reasonable credit risks and for extending the period of mortgage loans. Lifting the veil from local governments' opaque housing loan schemes and creating proper individual accounts for employees' contributions could help people acquire the crucial first deposit.