Empty Chinese city.

Bob Davis and Esther Fung report on the worrying glut of vacant property in China’s third and fourth tier cities.

In big international cities like Beijing and Shanghai, prices continue to rise. But evidence is mounting that in dozens of third- and fourth-tier Chinese cities rarely visited by foreigners, overbuilding is out of control and a major property-market slowdown is now under way.

The 200 or so Chinese cities with populations ranging from 500,000 to several million account for 70% of the country’s residential-property sales. In many of these cities, developers are slashing prices and offering freebies such as kitchen furnishings and parking spaces as they try to work through vast gluts of unsold property. Protests are breaking out among buyers angry that their investments are losing value.

Data in some of these smaller cities is scarce. But in 100 cities tracked by  Nomura Holdings Inc.,  8604.TO +0.17%     42% of those classified as Tier 3 and Tier 4 saw housing prices decline in March from February. Home construction in such cities is racing well ahead of population growth, says Beijing research firm Gavekal Dragonomics, as developers continue to build new projects without buyers.

Price drops might seem a normal market response to oversupply, but when it comes to housing, the phenomenon isn’t benign. China increasingly depends on real estate to drive growth.

The construction, sale and outfitting of apartments accounted for 23% of China’s gross domestic product in 2013,  Moody’s  MCO +1.79%     Analytics calculates. That is up steeply from 10% in 2006 and is higher than American housing’s share of GDP reached during the height of the U.S. housing boom in 2006, Moody’s says.