China's property boom heads to smaller cities

China’s property boom is shifting away from Beijing and Shanghai to its secondary cities, according to Liu Li-Gang, the chief China economist at ANZ in Hong Kong.

Government measures to curb the market haven’t kept prices from rising in the secondary cities, according to the Bloomberg report.

New home prices rose in 67 of 70 cities in May. Prices increased the most in smaller cities as developers held off price cuts, even as existing home prices cooled following higher interest rates and down-payment requirements.

“Purchase restrictions in the major cities drove speculators to second- and third-tier cities,” Liu says.

New-home prices in Beijing rose 2.1% in May from a year earlier, while those in Shanghai climbed 1.4%, the National Bureau of Statistics says. Existing home prices in Beijing fell 0.2% from April, and those in Shanghai increased 0.2%.

The biggest gains in May were in new-home prices in smaller cities including Urumqi, Mudanjiang, Lanzhou and Qinhuangdao, which all posted increases of at least 7.7% Prices in north-eastern China’s Dandong rose 9.7% in May, the most among the 70 cities monitored.

Compared with the previous month, new home prices fell in nine cities in May, the same number as in April.

Liu says he expects two more interest rate increases in China this year, one this month, and the other in the third quarter, after the recent announcement that inflation in May reached 5.5%, a 34-month high.

May's economic data indicates that the overall economy in China is moderating, with both industrial production and retail growth softening slightly, but investment demand remained stubbornly strong.