Housing is the most significant issue facing the world’s second biggest economy.

The difference now is that the government has started taking steps to address the issue.

So far, China’s policy changes have been incremental in nature- a far-cry from the full-throttle “bazooka” caliber stimulus many have called for.

So far, China’s measures include:

• Cutting interest rates and providing liquidity to help developers complete stalled housing projects.
• Pressuring banks to lower rates and extend credit to developers.
• Trying to support economic growth through other avenues like infrastructure spending.

Is this enough? No. 

Is this just the beginning of a larger policy response? Perhaps.

Bulls say:

+ This is just the start of stimulus. When China wants something done, it gets done.

+ Government stimulus programs have worked before.

+ Stocks only go up.

Bears say:

– This is not the 08/09 housing crisis- it’s actually much worse.

– China’s housing issues are structure, not cyclical.

– You can stabilize housing but China’s population is not growing. Housing will NOT be a driver of economic growth going forward.

– You can save the developers and finish the apartments but the “animal spirits” of the Chinese property market are gone (see: Japan in 1992).

Some Key Problems:

• The extent of China’s housing crisis is difficult to grasp. China’s property sector is notoriously opaque with liabilities running through companies, banks, shadow banks, and local governments.
• Dysfunctional Funding Model. Chinese developers fund their activity by pre-selling unfinished apartments. Unfinished apartment towers represent buyers’ hard-earned savings. It’s not surprising that consumer sentiment, particularly towards property purchases, is extremely low.
  • Is China’s pre-sale funding model sustainable? Probably not. In other countries, buyers have protections like escrow accounts and installment accounts to protect against what’s happening in China.
• China can’t grow into its excess housing. China’s population is shrinking. There is no immigration to offset this.

Government stimulus is one heck of a tool, but it can’t fix every problem. China has some very severe imbalances at the root of its housing crisis- it isn’t clear to me how government policy can easily address these.

I remain highly skeptical that China’s economy can return to the high-single-digit GDP growth it once enjoyed.