WHEN an economist of the stature of Robert Shiller weighs in on China's soaring housing prices, it might be a good idea to listen.

Shiller, who says sound economics must factor in psychology and "animal spirits," recently indicated that the herd mentality could be at work in creating astonishingly high housing prices in China.

"When you tell me that Shanghai is just as high as London or New York in home price, that suggests to me it's not going to keep going up," Shiller, Yale University economics professor, said on December 9 in Shanghai. Shiller made the observations at a forum held by the Shanghai Advanced Institute of Finance at Jiao Tong University.

The staggering disproportion between the urban population's annual income and housing prices in China is taking outside observers by surprise, including Shiller, who is credited with predicting the 2007 sub-prime mortgage debacle.

He noted that the housing price-to-income ratio, which refers generally to the ratio of median house prices to median family disposable income, stands at about eight in the US state of California, already high enough in his opinion.

"Right now I just heard that apartments (in Shanghai) are selling for a hundred times the annual income of people who live in them," Shiller said with an air of disbelief. He might have referred to some extreme cases, but high housing prices in major Chinese cities are no secret.

By international standards, the price-to-income ratio is considered "moderate" if it is below six. The national average for 2008 is a modest 6.78 in China, but it belies the yawning disparity between regions.

In the same period, Xiamen City in Fujian Province ranked 1st at 14.08 and Beijing trailed closely with 13.55, according to the 2008 China Statistical Yearbook.

Since hundreds of millions of migrant workers do not factor into the equation, the actual rates could be even more startling.

'Humble abode'

What Shiller was told about China's frenzied real estate market is only part of the story, for in China astronomical property prices have virtually turned individual acquisition of a home into an entire family's endeavor, with children squeezing their parents and grandparents for financial resources.

The immense popularity of the TV drama "Humble Abode," which revolves around a couple living in a cubicle and saving desperately for the downpayment on an apartment, attests to the severity of the problem.

As if the rising jobless rates among college graduates are not bad enough, sky-high home prices are dooming those in low-paying jobs to the margins of urban life.

In Beijing's suburban Tangjialing area, nearly 50,000 so-called "ant-like dwellers" have sought shelter in a shantytown of 3,000 residents despite its squalor. Nationwide, this "humble abode clan" numbers over a million, Xinhua news agency reported on December 16.

Even so, there still are real estate developers and pundits who unabashedly spread the fear of diminishing housing supply - and capitalize on it.

The most vocal of them, property tycoon Ren Zhiqiang, whose houses-for-the-rich-only philosophy has made him persona non grata among most Chinese people, once compared China's commercial housing to "shark's fin soup" - pricy but rightly so.

Shark's fin soup

"When consuming a bowl of shark's fin soup, you don't complain about any perceived bubble in its price, however high it is; Only when cheap bean starch noodles get as expensive as shark's fin soup will your 'bubble' grumblings ring true," Ren quipped at a forum in April.

There's an old saying that ignorant people cannot tell the difference between a bowl of shark's fin and a bowl of noodle soup.

But Ren was very wrong in saying there's no bubble at all in shark's fin soup. Bubbles are glaringly evident in the supposed shark's fin "cream" of China's housing market.

"Even if supply could be increased by building houses on land secured from the moon, home prices wouldn't fall as the market is rife with speculative activity," Yi Xianrong said, tongue-in-cheek. Yi is a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

His view is born out by exceptionally high apartment vacancy rates in many big cities. Widely considered a measure of the housing bubble, this rate in Beijing, Shanghai and Shenzhen has surpassed 10 percent, said a commentary in the online edition of People's Daily on December 12.

A reading of 10 percent usually indicates a dangerous surfeit of vacant housing. In China's case, the possibility of a real estate roller coaster ride due to oversupply looms especially large.

While we tend to heap blame on the "developer-official nexus" for driving up home prices in some regions, many home buyers' propensity to act on instincts, rather than rational thinking, must also bear some responsibility.

Swayed by the fallacy that a bullish housing market - where soaring demand vastly exceeds supply - will chug on forever, many otherwise sensible people are easily suckered into ill-considered deals and even panic buying sprees.

They are apparently oblivious to the fact that the "not-enough-for-all" messages bombarding them are spun by professional con men shilling for property developers.

That's what Shiller warns us against: people's animal spirits. We think of ourselves as rational. We are NOT.

Oftentimes the mere sight of long queues in front of real estate offices is enough to make us bring up the rear. Stories about someone making millions through speculation may plunge us into an investment trap without an easy exit. Herd mentality, as Shiller notes, is hopelessly blind.

Which raises bigger questions for the government. In the cacophony of mass media, the vicious battle to be heard often contributes to housing bubbles. It may only be alarmist pundits spouting their personal opinions, but they can also be grossly misleading.

Instead of benefiting from policy ambiguity that helps send home prices rocketing, governments need to step in - not to curtail free speech, but to encourage responsible speech by releasing authoritative and timely information that will have the effect of exorcizing the animal spirits of property buyers.

The recent announcement by Premier Wen Jiabao that the "dramatic rise in some cities' home prices should be curbed" may help restore market order.