The real estate markets in China's major second-tier cities have been red hot in the first half of this year. By some measures, the real estate markets in these cities have outperformed those in first-tier cities. Although there are several factors driving up prices in second-tier cities, such as local governments' dependence on land sales for funding, the most relevant reason for this recent surge has been increased demand from investors. As first-tier cities have tightened restrictions on housing purchases in their own markets, investors have set their sights on smaller cities. Experts, however, have cautioned that the real estate boom in second-tier cities is not sustainable, and local governments have already started to take action.
When considering soaring housing prices in China, it is unlikely one would think of the city of Hefei first - or even second.
And yet, housing prices in the capital of East China's Anhui Province rose faster than in any other city except one in May, skyrocketing 47.69 percent year-on-year, according to statistics from the China Real Estate Association.
The rapid increase has alarmed the city's government, which announced last week that it will implement new curbs on real estate purchases starting from this Friday.
A red-hot real estate market isn't unique to Hefei. Housing prices have been soaring in China's first-tier cities for a while, but over the last few months, the phenomenon has spread to the country's second-tier cities, especially Hefei, Xiamen in East China's Fujian Province, Nanjing and Suzhou, both in East China's Jiangsu Province.
Domestic media has gone as far as to dub these four cities the "four little dragons" due to their soaring real estate prices.
Housing prices in Hefei, Xiamen and Nanjing each rose by more than 20 percent year-on-year in May, according to data from the National Bureau of Statistics.
By some measures, the real estate markets in these cities have eclipsed those of first-tier cities such as Shanghai and Shenzhen, where local governments have already taken steps to curb skyrocketing prices.
Those measures are one of the primary drivers behind this most recent surge in housing prices, as investors who can't buy in the first-tier cities take their money elsewhere in China, experts said.
The trend has raised concerns about a real estate bubble forming in Hefei and other second-tier cities, pressuring local businesses with high rent prices, making housing less affordable and leading to calls for local governments to take action.
Shift in demand
The real estate markets in major second-tier cities remain driven by many of the same factors that have been pushing up housing prices across China for more than a decade, such as local governments' ongoing dependence on land sales for revenue.
It's not surprising that land transfer fees - which local governments charge real estate developers to build on the land - have surged this year in second-tier cities.
China's second-tier cities collected 613.91 billion yuan ($92.82 billion) in land transfer fees in the first half of 2016, an increase of 56 percent from the same period in 2015, cet.com.cn reported on Sunday, citing data from the Centaline Property Research Center.
Meanwhile, land transfer fee collections in first-tier cities were down 17.3 percent year-on-year.
Looking at individual cities, the difference becomes more pronounced. In Suzhou, Nanjing and Hefei, land transfer fee collections grew faster than anywhere else in China, data showed. In Suzhou, collections rocketed by 867 percent in the first half of 2016.
