China's government announced on March 1 that intends to apply more strictly the existing 20 percent capital gains tax on home sales in an attempt to tighten restrictions on home buying and property investment and increase loan rates for those purchasing a second home in cities where demand is too high. The government hopes that the move will sedate the surging housing prices and help the nation evade a property bubble that could push the economy off track and breed social tensions.

A bubbly property sector has been one of the key characteristics of China's unbalanced growth. Rising house prices have led to high property investment levels but have crippled consumption by forcing households to save up more to afford a home. The planned tightening of controls suggests the government is willing to sacrifice some immediate economic growth in order to make homes more affordable to the middle class. In response to the announcement of tighter controls shares of Chinese developers plummeted on March 4 with the SSEP, a gauge of property-related stocks listed in Shanghai, falling 9.3 percent - its biggest daily drop since mid-June 2008. "The actual impact of the new policy can be very severe or not severe at all, depending on implementation. But the wording is unexpectedly harsh,' said Yao Wei, China economist at SocieteGenerale CIB. "In three months time, the impact may not be big at all. But it has stirred very high negative expectations."

The outlook for China's real estate sector has serious implications for the commodities market and growth in the country as a whole. Property investment accounts for almost 14 percent of China's gross domestic product. According to Patrick Chovanek, Associate Professor of Practice at Tsinghua University's School of Economics and Management in Beijing, the biggest concern for the outlook in the sector is the heavy construction pipeline - a result of the building boom in recent years, which has led to the emergence of entire uninhabited townships, also known as "ghost towns". "We would have to see consistently strong demand to absorb what's in the pipeline," Chovanec told CNBC in a recent interview.

IHS Global Insight economist RenXianfengsaidthat a crash in China's housing market would be caused by two things: a severe slowdown in the economy and/or sharp deleveraging.