Q1 home sales in Beijing, Shanghai, Guangzhou and Shenzhen dropped more than 40% this year from the same quarter in 2013.

Real estate is a huge driver of China’s GDP growth.Housing market contributes 33% of fixed-asset investment, equivalent of 16% of GDP. The decade-long housing boom has so far defied the bubble warnings, which began as far back as in 2007.

Is China’s housing bubble real? That depends on whether China’s surging housing prices are backed by speculation or a real lack of supply.

China has more than 160 cities with more than one million people and many hundreds the size of San Francisco.China added 787 million square meters of new residential floor space in 2013. There has been excessive buildout—that means the current supply is sufficient.

However, before 2000, affordable properties were in massive construction to be sold to poor and middle-class families. Those flats are small and often share kitchens or bathrooms with the entire floor. And these houses are mainly in downtown, thus convenient for people to commute. Families, counting on them to save money for fancier and bigger flats, find them unable to sell and waiting to be bought out by developers when the land parcel sells. At the end of 2011, around 47% of China’s overall housing is such “crappy legacy housing.” Experts estimated only around one-third of home owners are living in “commodity houses”—while others hang on social or legacy housing. That means China might actually have a housing shortage.

What’s more, China’s household registration system limits who can buy property where, distorting potential demand and supply balance.

However, some argue that with building around 13.4% more floorspace each year, China finally has too much housing. For each person that moves to a city this year, developers will build around 121 square meters of new flooring. That number was 113 last year.

People, especially those in first-tier cities—Beijing, Shanghai, Guangzhou and Shenzhen, buy property in the big metropolises as investments.

But the first-tier cities’ account for only 5% of housing under construction and sales—and only 8% of overall housing investment in 2013. This is comparable to US property bubble burst when property prices did not collapse in New York, but instead in places like Orlando and Las Vegas. In China, the true risks property market might actually lie in third- and fourth-tier cities.