Housing may settle who’s right. China has vastly overinvested in housing, argues Lardy in a new book (“Sustaining China’s Economic Growth After the Global Financial Crisis”). The main reason, he says, is that financial policies prevent savers from realizing adequate returns on their money. The stock market is seen as rigged. Government regulations keep interest rates on bank deposits — the main outlet for savings — low. From 2004 to 2010, they were less than inflation. Frustrated savers invest in housing, where prices are not regulated.

The result seems a classic speculative bubble. People buy because they believe prices will go up; and prices go up because people buy. A 2010 survey found that 18 percent of Beijing households owned two or more properties; another 2010 survey of all cities found that 40 percent of purchases were for investment. Many units, Lardy reports, are vacant because rents in Beijing, Shanghai and other major cities are low.

Unfortunately, booms breed busts. Buyers ultimately recognize that rising prices reflect artificial demand. Purchases slow. Prices fall. New building declines. The process feeds on itself. With modest imbalances, the result is a correction. Otherwise, there’s a crash.