China’s tier 2 cities are where it’s at. Cities like Chongqing, Nanjing and Wuhan are growing faster then Beijing and Shanghai, while their residents are more optimistic about their income and more likely to buy big ticket items.

And now China is the world’s top market for construction. So for property investors – tier 2 is the place to be, right? No, says Credit Suisse, it’s a value trap.

The logic is pretty straight-forward. Residential construction in tier 2 cities is leading to an oversupply of stock and frothy land prices – both of which put downward pressure on developers margins. And that’s before tightening measures and property speculation curbs – currently being trialled in various cities – get rolled out across the board.

The evidence is pretty compelling.

On oversupply, Credit Suisse looked at the the housing stock and divided it by the demand – thus coming up with a calculation of how many years it will take for housing built in the last three years to be sold.

In Shenzhen – China’s booming city-built-from-nothing on the border with Hong Kong – the housing backlog should be cleared in just one year – the quickest rate in the survey. But in Dalian – another port port city in China’s northeast – the figure is 7.5 years. In Wuhan, it’s up to eight years.

For frothy land prices the calculations are pretty simple – how fast are land prices rising compared to property prices? In some cities the divergence is pretty stark. In Wuhan, for example, property prices rose less than 10 per cent in 2010. Land prices, however, rose around 30 per cent. Developers it seems, are paying too much for the ingredients, which is pushing margins in some cities into the negative.