A spate of housing over-construction has led to a pronounced price slump in China's mid-tier cities.

While property prices continue to climb in China’s showpiece metropolises, new data indicates that the story could be markedly different in the country’s mid-tier cities, which despite their modest sizes individually still comprise the vast majority of the country’s residential property market.

Figures from Nomura Holdings indicates that 42 per cent of Tier 3 and Tier 4 cities logged month-on-month declines in housing prices in the month of March, as construction surges ahead of population growth to satisfy demand from investors.

While these smaller cities with populations between 500,000 to several million remain largely unknown outside of China, their aggregate impact upon the country’s property market is immense, as they number over 200 in total and comprise around 70 per cent of national housing sales.

Even as prices remain firm in China’s attention grabbing mega-cities such as Beijing and Shanghai, government statistics indicate that the overall value of housing sold in the country during the first two months of 2014 posted a 5 per cent year-on-year fall as a result of the price slump in modest-sized cities.

Part of the reason for the housing oversupply problem in China’s lower-tier population centres is efforts by the central government to keep a lid on surging property prices in their upper-tier peers. Restrictions on real-estate purchases in first and second-tier cities have diverted capital to smaller cities, triggering a spate of overbuilding.

Another core reason has been the stimulus lending and spending mandated by Beijing in 2009, as part of efforts to help China weather the Great Financial Crisis which embroiled the global economy.

Citigroup indicates that 12 province-level capitals are on average building close to 15 “new towns” – huge high-rise apartment developments situated on their peripheries, while 133 prefecture-level capitals are building 200 new towns in total.

The problem of over-investment in the property sector has already come to a head in certain mid-tier cities, with land sale revenue in the north-eastern metropolis of Yingkou, which has a population of roughly 2.4 million, plunging 40 per cent in just the past three years.