Effect of China’s real estate boom spreads to 3rd- and 4th-tier cities

Real estate in the major cities of most countries tend to be priced high and attract both local and foreign investment. However, when the rate at which properties even in less populated or less popular cities for that matter are being sold gain traction, does that signify a property bubble or simply a positive sign of the country’s growth? How far and for how long more can these property-buying sprees go on and what are the short-and long-term effects on the country’s economy?

chinaMoody’s has already downgraded China’s credit rating for the first time since 1989. Even though the Chinese government has taken steps over the past year to contain the exponential explosion of the country’s real estate sector, their strategies were by no means one-size-fits-all but was instead targeted at specific property hubs such as Beijing, Shanghai and Shenzhen. Smaller cities are left in the hands of local governances and because of the restrictions in larger cities, buyers and investors are now setting their sights on these far-flung places. In Xisuangbanna, a region near Yunan, for example, new apartment units are being snapped up and on the cheap. The lack of buying limits, easily attainable mortgages and promises of a future property boom have lured buyers to these smaller townships. As effect of the impending property bubble risk ripples, demand for homes in small cities could mean the eventual impact should the bubble burst, will be one larger than anyone can predict.

Economists are already picking up warning signs of a bubble as sales in the 3rd- and 4th-tier cities show that buyers are buying without clear understanding of asset yields. There is a sense of real estate hoarding as sales are driven purely by hopes or a future price rally. But should the market fall in the future, will China then suffer the same fate as the US?