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MMUNITY NEWS
Tier 3 Cities: A Hotbed
of Trouble in China’s
Property Sector?
By the Stanford Center on China’s Economy and Institutions (SCCEI)
Signs of trouble abound in China’s real estate Housing supply in tier 3 cities.
sector. Some of China’s largest property
developers are at risk of defaulting on their loans, The authors next demonstrate that there is
and uncertainty in the industry has also induced a substantial mismatch in housing supply
increasing numbers of home buyers to stop and demand in China. Their analysis shows
mortgage payments on thousands of unfinished that excess housing stock and continued
homes. After decades of break-neck construction, overbuilding are concentrated in tier 3 small
there is a risk that the sector is overbuilt. Yet, and medium-sized urban areas. As the figure
most studies of China’s real estate sector have below shows, a disproportionate share (78%) of
primarily relied on national aggregate data and total housing construction in China in 2021 took
data from larger “tier 1” and “tier 2” cities like place in tier 3 cities.
Beijing, Shanghai, and provincial capitals. They
have tended not to focus on how the allocation Housing demand in tier 3 cities.
of housing and construction imbalances extend
across different regions. Where is the oversupply Using United Nations estimates and provincial-
of housing in China, and why does that matter for level estimates, the researchers further predict
the broader economy? that in the coming years, demand for housing is
going to decline across tier 3 cities. Taking into
The data. Fine-grained data for the 685 “tier account expected changes in age demographics
and household formation, they infer that the
3” cities in China are not publicly available. The demand for new construction in tier 3 cities may
researchers therefore impute the size of China’s shrink by roughly 30% from current levels by 2035.
housing stock and residential price developments
for tier 3 cities by first calculating China’s national Price trends. According to the researchers,
data and then subtracting the aggregated tier 1
and tier 2 city data from the national data. evidence of overbuilding in tier 3 cities is further
apparent in housing price developments between
The researchers rely on China’s 2010 and 2020 early 2021 and mid-2022. While tier 1 cities and
national population censuses, provincial and city- tier 2 cities witnessed modest price increases,
level censuses, and the annual national and city- residential housing prices in tier 3 cities dropped
level statistical yearbooks to derive construction by nearly 20%.
floor space, per capita living space, volumes of
residential housing sold, and housing price data to Signs of distress in China’s tier 3 property
make their calculations. markets. Consistent with housing supply,
China’s real estate sector in comparative demand, and price trends discussed above, the
perspective. The study suggests that after researchers also find significant signs of distress
in China’s real estate sector, particularly in tier 3
decades of break-neck construction, China’s cities. In many of these cities, shrinking demand,
floor space per capita is already comparable lack of financing, and property disputes have led
to that of many high-income economies, like to a rising number of stalled construction projects.
France and Germany. They also find that by The volume of such unfinished housing projects
international standards, the real estate sector in in tier 3 cities was 10.6 times as large, in fact, as
China constitutes an exceptionally large part of annual housing completed in 2020.
the country’s GDP. In 2021, the sector (including
direct and indirect contributions) accounted for The outsized impact of tier 3 cities on
22.5% of China’s GDP and 25.4%, if including China’s GDP. According to the researchers, tier
imported content.
3 cities in China account for more than 60% of
China’s GDP and about 50% of the market value
27 AMCHAM SOUTH CHINA
Tier 3 Cities: A Hotbed
of Trouble in China’s
Property Sector?
By the Stanford Center on China’s Economy and Institutions (SCCEI)
Signs of trouble abound in China’s real estate Housing supply in tier 3 cities.
sector. Some of China’s largest property
developers are at risk of defaulting on their loans, The authors next demonstrate that there is
and uncertainty in the industry has also induced a substantial mismatch in housing supply
increasing numbers of home buyers to stop and demand in China. Their analysis shows
mortgage payments on thousands of unfinished that excess housing stock and continued
homes. After decades of break-neck construction, overbuilding are concentrated in tier 3 small
there is a risk that the sector is overbuilt. Yet, and medium-sized urban areas. As the figure
most studies of China’s real estate sector have below shows, a disproportionate share (78%) of
primarily relied on national aggregate data and total housing construction in China in 2021 took
data from larger “tier 1” and “tier 2” cities like place in tier 3 cities.
Beijing, Shanghai, and provincial capitals. They
have tended not to focus on how the allocation Housing demand in tier 3 cities.
of housing and construction imbalances extend
across different regions. Where is the oversupply Using United Nations estimates and provincial-
of housing in China, and why does that matter for level estimates, the researchers further predict
the broader economy? that in the coming years, demand for housing is
going to decline across tier 3 cities. Taking into
The data. Fine-grained data for the 685 “tier account expected changes in age demographics
and household formation, they infer that the
3” cities in China are not publicly available. The demand for new construction in tier 3 cities may
researchers therefore impute the size of China’s shrink by roughly 30% from current levels by 2035.
housing stock and residential price developments
for tier 3 cities by first calculating China’s national Price trends. According to the researchers,
data and then subtracting the aggregated tier 1
and tier 2 city data from the national data. evidence of overbuilding in tier 3 cities is further
apparent in housing price developments between
The researchers rely on China’s 2010 and 2020 early 2021 and mid-2022. While tier 1 cities and
national population censuses, provincial and city- tier 2 cities witnessed modest price increases,
level censuses, and the annual national and city- residential housing prices in tier 3 cities dropped
level statistical yearbooks to derive construction by nearly 20%.
floor space, per capita living space, volumes of
residential housing sold, and housing price data to Signs of distress in China’s tier 3 property
make their calculations. markets. Consistent with housing supply,
China’s real estate sector in comparative demand, and price trends discussed above, the
perspective. The study suggests that after researchers also find significant signs of distress
in China’s real estate sector, particularly in tier 3
decades of break-neck construction, China’s cities. In many of these cities, shrinking demand,
floor space per capita is already comparable lack of financing, and property disputes have led
to that of many high-income economies, like to a rising number of stalled construction projects.
France and Germany. They also find that by The volume of such unfinished housing projects
international standards, the real estate sector in in tier 3 cities was 10.6 times as large, in fact, as
China constitutes an exceptionally large part of annual housing completed in 2020.
the country’s GDP. In 2021, the sector (including
direct and indirect contributions) accounted for The outsized impact of tier 3 cities on
22.5% of China’s GDP and 25.4%, if including China’s GDP. According to the researchers, tier
imported content.
3 cities in China account for more than 60% of
China’s GDP and about 50% of the market value
27 AMCHAM SOUTH CHINA
