Fears are mounting that China’s housing bubble will burst

China’s property boom — which is increasingly fueled by American-style debt — is going to be a very difficult fix, according to economists.

Long term household loans, which are largely made up of mortgages, accounted for 40 percent of all new loans issued in August. That is double what it was at the start of the year. The value of new home loans as a percentage of all housing sales is at a record high, the New York Times reported. On top of that, underground lending has also increased as Chinese families scramble to find new homes.

It’s gotten so wild that couples are divorcing so that one person could be treated as an independent buyer to avoid taxes. Demand is so fervent in Shanghai that developers are requiring cash deposits of $30,000 just to enter a lottery to buy a new apartment. A recent plot of land in Shanghai sold for $2,000 per square foot, more than double the average price for dirt in Manhattan.

Chinese officials know risks posed by a property bubble, but some economists are concerned the government is not moving fast enough to slow it down, according to the Times.

“The risk is that the government is late in cooling the market, the rally spreads to more areas, pushing up household leverage and construction activity, pushing the bubble bigger, which is then followed by a bigger downward correction,” Tao Wang, the head of China economics at UBS in Hong Kong, told the paper.

Last month, economists at Bank of China warned the market is heading for trouble. The same week, Wang Jianlin [TRDataCustom], CEO of Dalian Wanda Group, warned that China’s market is now facing the “biggest bubble in history.”

The average house price in Shanghai is up nearly one-third compared to a year ago. Major cities like Beijing and Guangzhou are not far behind.

Some local regulators are attempting to tighten the housing market, according to China’s International Capital Corporation, an investment bank. But in some cases that has simply added to the rush, with buyers snapping up property while they still can.

If China’s property bubble does pop, it could have real implications for New York City. The Chinese are major investors in local real estate, as it is seen as a safe place to park money. Institutional investors based in China are also increasingly taking on risky and complicated ground-up developments in the city. This month, The Real Deal profiled the founders of four of the most prominent firms that have invested in New York real estate. [NYT] — Miriam Hall