Housing Trouble Grows in China

Overbuilding by Real-Estate Developers Leaves Smaller Cities With Glut of Apartments.

Economists have worried for years that China is setting itself up for a housing-market bust. In big international cities like Beijing and Shanghai, prices continue to rise. But evidence is mounting that in dozens of third- and fourth-tier Chinese cities rarely visited by foreigners, overbuilding is out of control and a major property-market slowdown is now under way.

The 200 or so Chinese cities with populations ranging from 500,000 to several million account for 70% of the country’s residential-property sales. In many of these cities, developers are slashing prices and offering freebies such as kitchen furnishings and parking spaces as they try to work through vast gluts of unsold property. Protests are breaking out among buyers angry that their investments are losing value.

Data in some of these smaller cities is scarce. But in 100 cities tracked by Nomura Holdings Inc., 8604.TO +0.17% 42% of those classified as Tier 3 and Tier 4 saw housing prices decline in March from February. Home construction in such cities is racing well ahead of population growth, says Beijing research firm Gavekal Dragonomics, as developers continue to build new projects without buyers.

A dramatic housing collapse such as the U.S. suffered a few years ago isn’t thought likely here. Chinese families don’t borrow as heavily for home buying as Americans, putting at least 30% down. China doesn’t have sketchy mortgages like those that infected the U.S. market at its peak, nor home-equity loans that let owners finance shopping sprees on the value of their homes. Chinese financiers haven’t put together arcane mortgage-backed securities such as those that blew up in the U.S.

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