The sudden fears gripping the Chinese stock market over a cooling property sector might be exaggerated, but not the urgency of defusing a housing bubble that could hurt the country's long-term growth potential.

More Chinese cities see home prices decline

Time to buy China stocks, say market analysts

Although the overall performance of the property sector has been stronger than most developers expected, the little confidence that investors display in real estate speaks about the risks that runaway house prices might pose to the world's second-largest economy.

Official data released on Monday show that six of the 70 major Chinese cities saw a month-on-month drop in new home prices last month, while only two did so in December.

After an unanticipated fat year for Chinese property developers, some of whom must have been jumping for joy at the one-fifth surge in new home prices in first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, it should not be a surprise if the realty market is now taking a deep breath.

However, the jitters among Chinese investors are real, the benchmark Shanghai Composite Index finished down 1.8 percent on Monday, erasing a recent rebound for Chinese property shares. For instance, China Vanke, the largest property developer by sales, dropped 6.6 percent in Shenzhen.

The cause of the concern is not how the property market has actually performed. Instead, it is what may happen to this frothy sector that is spooking investors in the domestic stock market.

There were rumors over the weekend that some domestic banks have stopped extending loans to property-related companies. Although there were denials from some banks on Monday, they failed to stop the heavy selling in the market.

Media reports on Tuesday that angry homeowners are protesting over deep price discounts some developers in Hangzhou offered to new buyers should remind us of what happened when the housing market was caught in the depth of the global financial crisis in 2009.

Chinese policymakers must take measures to prevent house prices from becoming a source of financial instability, and they should prepare as early as possible to deal with the social impact that falling home prices may exert.

As a sort of market investment, it is unreasonable for some homeowners to demand compensation from property developers when prices decline.

Yet the government has also not done enough to adequately fulfil its obligations as the market regulator on ensuring thorough information disclosure and avoiding conflict of interests.