This recent CEPR paper looks at this issue in detail. I tend to agree with their headline figures and the results match my own concerns.
40% falls are a real possibility. The fact that the authors pick up on the state owned company problem show that these authors are on the ball.
"Evaluating Conditions in Major Chinese Housing Markets"
NBER Working Paper No. w16189
JING WU, Institute of Real Estate Studies, NUS, Institute of Real Estate Studies, Tsinghua University
JOSEPH GYOURKO, University of Pennsylvania - Real Estate Department, National Bureau of Economic Research (NBER)
YONGHENG DENG, National University of Singapore
High and rising prices in Chinese housing markets have attracted global attention, as well as the interest of the Chinese government and its regulators. Housing markets look very risky based on the stylized facts we document. Price-to-rent ratios in Beijing and seven other large markets across the country have increased from 30% to 70% since the beginning of 2007. Current price-to-rent ratios imply very low user costs of no more than 2%-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. Our calculations suggest that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing, absent offsetting rent increases or other countervailing factors. Price-to-income ratios also are at their highest levels ever in Beijing and select other markets. Much of the increase in prices is occurring in land values. Using data from the local land auction market in Beijing, we are able to produce a constant quality land price index for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.