Economists agree that real estate values, especially in the big cities like Beijing and Shanghai, have risen too much because of speculation. Since 2007, the government has taken steps to cool the market, like raising minimum mortgage rates and down payment ratios for some home purchases. There has even been talk about levying trial property tax. However, this has not stopped the boom, fuelled by cheap loans. At best, the efforts have contributed to a slump in real-estate sales, whilst prices continue to climb.

The value of property sales dropped 25 percent in May from the previous month. The increase in prices, at an annual 12.4 per cent in May according to a government survey of 70 cities, was down from a 12.8 per cent advance in April.

As real estate prices continue to rise, investors are still drawn in because the economic recovery in other sectors has been slow, especially with the economy lurking on the edge of double dipping into recession, as Rogoff told Bloomberg Television in Hong Kong.

Real estate in Beijing and Shanghai has “taken a departure from reality,” he said. The bubble might burst, cutting China’s Chinese growth to as low as 2 percent at some point in the coming decade.

If the real estate market collapses, the impact on banking will be major. Banks have in fact put huge amounts of money into the speculative bubble.

Investors are now realising this, and Shanghai shares are feeling the pinch. The Shanghai Composite Index in fact tumbled 6.7 in recent days, registering its worst losses for the year.

In the aftermath of a financial crisis, “you don’t get a typical recovery” with a so-called “v-shaped” trajectory of surging output after a decline, Rogoff said.

In 2009, banks lent heavily in real estate. In recent weeks, some banks have had to re-capitalise, a step often undertaken to conceal huge losses, by increasing stock offerings.  The Agricultural Bank of China Ltd for example has launched a US$ 20. Billion initial public offering.

However, not everyone agrees with the doomsday scenario. Stephen Roach, chairman of Morgan Stanley Asia Ltd., said last month that the property market “has not overheated and the demand for this property is very, very solid.”

Indeed, economists at banks from Goldman Sachs Group Inc. to BNP Paribas SA and China International Capital Corp. have lowered their GDP forecasts for China in recent weeks. Goldman last week cut its growth forecast for China this year to 10.1 percent from 11.4 percent because of the government’s monetary tightening measures.

Equally, “Despite the importance of the property sector in the economy, we believe that the deflating of this bubble should have only a limited impact on the real economy and the banking system,” Nomura's chief China economist, Sun Mingchun, said in a report.

Similarly, Xu Shaoshi, China’s minister of land and resources, said he expected prices to start falling within a few months without any major impact.

Conversely, for Rogoff it is unrealistic for China to expect its export growth to be maintained at the current pace. “At some point they have to redirect their strategy,” he said.