A Tale of Two Tiers

China's housing market continues to show signs of bifurcating. First, land sales in first-tier cities are picking up.

iFeng: 一线城市又有钱了:土地出让收入逆市创新高

Land sales in the four first-tier cities are ¥469.3 billion as of November 30, not far from the ¥524.5 billion sold in 2013. Beijing has already exceeded its 2013 total. Gu Yunchang, deputy director of the Ministry of Housing's Housing Policy Expert Committee says, "Everyone is still optimistic about the first-tier cities." The China Real Estate Association's vice-president Chen Guoqiang says developers are fleeing third- and fourt-tier cities, instead opting for low risk and high return investments in first-tier cities. Both men think this isn't necessarily a good thing, since it could make these cities more reliant on land finance and the surge of activity will quickly exhaust high profit projects.

Second-tier cities are doing poorly and fourth-tier cities are miserable. Cities such as Suzhou, Chengdu, Hangzhou, Shenyang have seen transactions running at one-third 2013 levels, with revenues down significantly. That's a far cry from the trouble in the fourth-tier, where some cities have seen zero transactions. Contrast that with Shanghai, where a parcel of land sold for a 105% premium in November, or one a few days later in Beijing that saw 42 bids from 9 developers and eventually closed with a nearly 50% premium.

Analyst Lin Caiyi sees 15 cities that could be in for a rough few years. iFeng: 分析称中国15城房价或将下跌 购房者要关注

The 15 cities are Jinhua, Wenzhou, Yuncheng, Taizhou, Ordos, Zhangzhou, Luohe, Hangzhou, Datong, Longyan, Handan, Wuxi, Quanzhou, Anyang, Changzhou, a who's who of third-tier cities. The case laid out are the Wenzhou and Ordos housing bubbles. In Wenzhou, a slowing local economy combined with the ¥4 trillion stimulus led to housing investment that outstripped the local market's economy. Even the financial system could not handle the growth. In Ordos, the collapse of local industry, in that case mainly coal, led to a collapse in the real estate bubble.

Of the 15 cities, four are resource stories: Yuncheng, Ordos, Datong, Handan.

Seven are stories similar to Wenzhou, where a weak local economy resulted in capital flowing into real estate investment, but the economy weakened further, eventually crushing the real estate market. Rising labor costs, tighter credit and a weaker economy are a triple whammy for these cities. Jinhua, Wenzhou, Taizhou, Hangzhou, Wuxi, Quanzhou, Changzhou

In Anyang, Luohe, the private economy was weak to start with, but capital flowed into real estate looking for profits. A simple case of supply outstripping demand.

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