Third and Fourth Tier Cities Real Estate Dilemma

Chinese cities relying on real estate development for funding government spending and the local economy face an uncertain future with real estate investment potentially tipping into an extended contraction.

The depth of the problem is reflected in a sentence summarizing the Economic Daily article linked below:

To quickly get out of the doldrums, third- and fourth-tier cities need to find out the true real estate supply and demand situation, permit housing prices to fall a moderate and reasonable amount in order to reduce inventory, and by restructuring, transform and upgrade to foster a new economic growth engine.

Chinese cities should allow real estate prices to decline, unlocking supply and increasing demand, forcing a restructuring of the local economy as new industries rise (aided by cheap land and low rents). In reality, local governments rely on land finance and will not allow the real estate market to collapse, even if that would unleash a new wave of growth. There is an assumption that home prices can fall a "moderate" and "reasonable" amount, that the real price, given local supply and demand factors, isn't 20%-plus lower. Finally, there's an assumption that local Chinese governments will be able to develop new growth industries. However, the government's attempts to drive growth with investment is obviously a failure since it led to this situation and local government bureaucrats are increasingly ill-equipped to drive growth in an increasingly complex service and consumer economy.

iFeng: 三四线城市陷入楼市困局 亟需培育新的经济增长点