Andrew Ness, executive director of research with CB Richard Ellis' Asia division, said the move effectively reduced future supply and encouraged developers to lift their prices. The price rally was also driven by the sizeable influx of idle domestic capital diverted to the property market due to China's relatively low interest rate and lack of investment options, and the release of pent-up demand from buyers who took a wait-and-see attitude following the introduction of macro-economic measures in the first half of last year.

Mr Ness estimated that the prices of luxury homes in Beijing, Shanghai, Guangzhou and Shenzhen had appreciated 10 per cent or more since the beginning of this year.

The luxury market in Shanghai is probably the hottest. New luxury homes are selling at 20,000 yuan to 50,000 yuan per square metre. Individual super-deluxe apartments in prime locations such as Lakeville Regency and Rich Gate sold for as much as 60,000 yuan and 80,000 yuan per square metre, respectively.

Top-end apartments and houses in Beijing are now selling at about 20,000 yuan to 30,000 yuan per square metre but several new projects are asking for 40,000 yuan to 60,000 yuan per square metre. In Guangzhou, luxury apartment prices range from 10,000 yuan to 20,000 yuan per square metre while villas can sell up to 30,000 yuan and 40,000 yuan per square metre.

Average luxury prices in Shenzhen range from 10,000 yuan to 30,000 yuan per square metre. Prices of top-end developments like One Honeylake are much higher at about 30,000 yuan to 60,000 yuan per square metre.

Tommy Young, associate director and general manager of Sino Group, developer of One Honeylake, said the company was bullish about the mainland's luxury market due to limited land supply.

Besides the Shenzhen project, he said the group would market another luxury development, Greenfields, in Guangzhou at the end of June.

Land Power International chairman Michael Choi said: 'The better-off mainlanders would like to move into luxury homes for a better living environment. At the same time, it is something special to show off their wealth and distinguish themselves from the ordinary people.'

Mr Choi said the luxury market was also supported by strong demand from the increasing number of expatriates working with different firms in the mainland, as well as overseas Chinese from Hong Kong and Taiwan. 'Many of these expatriates and overseas Chinese are cash rich and are willing to pay higher prices for bigger-sized and better-quality flats,' he said.

Mr Choi said he was particularly optimistic about the prospects in Shanghai and Shenzhen. 'Some people may find the current luxury prices in Shanghai expensive, but there is good potential for further upside given the strong inflow of local and foreign capital into the city,' he said.

'Shenzhen's geographic proximity to Hong Kong is a clear advantage. More Hong Kong people will go to Shenzhen to buy luxury homes in the future with the improvements in the cross-border expressway and railway connections.'

Edward Cheung, general manager of DTZ Debenham Tie Leung (Shanghai), said overseas buyers were one of the driving forces behind the luxury market.

'Some of them purchase for their own use while some buy for pure investment. Overall, the market is mainly backed by local end-users,' he said.

Mr Cheung said the luxury market would continue to do well as a result of underlying demand and strong purchasing power of mainland and overseas buyers. But the central government was determined to prevent runaway prices and the prospect of further intervention remained an overhanging concern, he said.

In April, the People's Bank of China raised the benchmark lending rates by 0.27 percentage points to 5.85 per cent to tighten credit. The market has been clouded by recent speculation that the central government might lower the home mortgage limit.

Mr Ness said the small interest rate increase was not enough to have any major dampening effect on luxury home purchase behaviour. 'Whether or not this tightening trend will continue depends very much on the next actions adopted by the Chinese government, making it very difficult to predict the future direction of luxury residential prices in China's major cities over the short term.'

As a result of competition, he said the overall design, quality and finishing of luxury housing in China continued to improve to meet buyers' demand. Detached villas affording a high level of privacy and providing quality living environment had become the focus of high-end property development and demand for stand-alone houses was currently very strong.

'Over the longer term, the price trend for luxury residential property in China will definitely rise as the Chinese economy persists in growing at a very fast clip and the pace of urbanisation continues to accelerate,' he said.