Q: Were there any surprises in your research?

A: I was very surprised by how much land prices had increased, at nearly 800 percent in the case of Beijing. Price-to-rent ratios in eight large markets, including Beijing's, increased from 30 percent at the beginning of 2007 to 70 percent by early 2010.

As for price-to-income ratios, our research found that they were at their highest-ever levels in cities like Beijing, Hangzhou, Shanghai and Shenzhen. Those are big numbers.

That's one of the reasons why I believe there is some type of bubble, or euphoria, that has developed in China. It's virtually impossible to see fundamentals growing that fast.

Q: Are there any lessons that Chinese investors can take away from what you're observing in post-bubble US?

A: The big part of the bubble bursting in the US is over, but I think it will take a few years, not quarters, for the US to recover.

We still have a big supply/demand imbalance. We grossly overbuilt and we have unoccupied housing. We have this big backlog of foreclosures since the sharp rise in 2009 clogging up the system. As long as that supply overhang exists, you should not expect any significant recovery in American housing.

Q: Has there been any similar bubbles in the past where we've seen that?

A: We didn't have any cases until recently. We haven't seen bubbles akin to what happened in America, Spain or Ireland - they just haven't happened in the last 30 or 40 years.

To understand why bubbles can last a while, look at the US, at cities like Phoenix or Las Vegas. Those markets grew like mad because there was huge demand. There was huge population growth and substantial income growth - real demand drivers.

You see that in every major Chinese market. It's not like it's completely crazy.

They've got real demand drivers. The question is, have they built enough homes so that prices aren't pushed up so much, and have prices become so high that the typical household can't afford it?

My worry derives from the fact that the Chinese are building a lot of homes, and prices are unaffordable. At that point, I view it as unstable.

Q: How are Vegas and Phoenix doing now?

A: Very badly. Prices continue to fall. The good news is that the biggest part of the bubble has now burst. But in those cases, we now know that a lot of those purchases were made with very little equity. There have been a huge number of defaults. Their economies are weak because of that and are very still depressed. That's where equity really matters

Q: Do you see any changes among any of the players - from the regulators to consumers - that give you confidence that the US aren't repeating the same mistakes again and again?

A: You've certainly seen a huge drop in home ownership rates, which means that at least some people who were able to get credit in the past despite being weak borrowers aren't able to get it now.

But you still see the Federal Housing Administration has a 25 percent market share and is giving out 97.5 percent loan-to-value mortgages.

So there is still an arm of the government that is actively propagating very risky mortgages with very little equity. We're a bit schizophrenic.

The private markets have almost exited the mortgage market. But the government is still engaged in a policy that allows for highly leveraged home purchases. It's like Dr Jekyll and Mr Hyde.

Q: What would be a best-case scenario for China at this stage then?

A: That the government intervention requiring more equity works and you see air coming out of the balloon in a controlled fashion over the long term so that households can handle it, and you see a long period of time when prices are down or flat.

Borrowers won't be happy, but there won't be a financial crisis. What you fear is a precipitous drop very quickly, with defaults on the underling loans.