This is something that baffles me, a Chinese, as well. I never quite understand Chinese's obsession with real estate. It's not just the price. Young people freshly out of the college are expected to purchase an apartment and be tied down by mortgage. Of course they don't have savings to pay for the down payment, so it's mostly up to their parents to pay for them (sometimes parents are expected to purchase the property in full). This social phenomenon is especially strange considering people aren't purchasing the title of the property, they merely lease the property for a period of time (usually 70 years). After the lease ends, the land goes back to the state. Under this kind of regulation, wouldn't renting make more sense?
So I set out to find the answer by posting a question on a Chinese forum a few years back. The result was unexpected and explosive. I got hundreds of angry replies ranting about how I don't understand real life, or how I was a spoiled brat from Beijing and don't understand the hardship of people migrating from small cities or countryside... I guess this kind of emotionally charged responds demonstrated just how important housing is for Chinese people.
1. The resident registration system (户口)
The most hated resident registration system is the primary reason why people have to buy houses. Unlike America which allow its citizen to freely move around its states, most Chinese citizens are registered resident to the city/county follow their parents. I was born in Beijing to parents with Beijing resident registration, so I have the most envied Beijing resident registration. My friend Ming was born in Hebei Province, and he has the Hebei resident registration. He can visit Beijing, he can work in Beijing, but if he get married and have a child (regardless where the child was born, children follow their parents' resident location), he will not receive government welfare on child support, he cannot send his child to a Beijing school, because he doesn't have Beijing resident registration. And the easiest way to get a residence of Beijing for the child is 1) Ming marry a Beijing girl, so the baby go with mother's registration; 2) buy a piece of property in Beijing.
This policy was first set up to help manage population, and has been quite effective for the first 40 years of PRC. But after economic revolution, people start to move around for better education/job opportunity, this policy become more and more cumbersome and extremely unfair to those who want to work and settle down in other regions.
Some cities had set up incentive program to attract people from other regions, but getting into big cities such as Beijing and Shanghai is still very difficult. And buying real estate is relatively easier to achieve. With one family one child policy, young people are under a lot of pressure to get married, settle down and have children. As a result, they're under a lot of pressure to buy a house so their children can get social welfare and go to school. This creates an enormous financial burden to both husband and wife and their extended families, who are almost obligated to help with the down payment and mortgage. And after the parents pay for the housing, they feel like the should have a say in their children's marriage life... The problem goes on and on and on... all because of the hateful policy of resident registration system.
2. Renter unfriendly renting regulation.
Another reason people want to buy their own house/apartment is because Chinese's renter law is heavily favors landlord instead of renters. I've heard horror stories about how a landlord could evict their tenants in short notice just because they want to sell the property while the market is good. Renting apartments are like Russian roulette, you never know when you'll end up with a horrible landlord, and there's very little you can do other than find other place. Because the law is not on your side.
3. Traditional culture obsession of earning land.
I think Chinese obsession with land is similar to Indian's obsession with gold, or American's obsession with cars. You HAVE to have a piece of your own land or your life won't be complete.
Chinese are traditionally attached to the soil, we have been an agricultural society since the beginning of time. Even many people don't actually work in the fields or grow crops, we still have that emotional attachment to land ownership. It is important to have a piece of solid ground, a private living space that's yours. While most people understand on a logical level that they're leasing a piece of property, but having that still make them feel good emotionally.
So to sum up the 3 factors:
1. People have to buy property if they want to get married and have kids in a different city.
2. People are 100 time better off living in their own house than renting.
3. People emotionally attached to owning property.
Combine the 3, price is the least of your concern.