China's collapsing housing market is a massive threat to the economy

China's economy is having a rough ride at the moment and it's only get to get worse.

China's economy grew at its slowest rate in 24 years in 2014, just 7.4%. Its stock market has fallen around 40% since hitting multi-year highs in mid-June. And the government is burning through cash reserves to prop it up. China's debt is also twice the size of its GDP.

Now it looks like we can add a slowdown in the countries housing market to the list of economic woes too.

Bank of America Merrill Lynch analyst David Cul and his team said in a note on Friday that the "potential unraveling of the housing market is one of the four factors we monitor closely that could trigger financial instability by our assessment."

The team warned that effectively no one is buying houses in China and this could pour even more cold water on the rapidly cooling economy.

Here's an excerpt from the BAML, titled "Why we should be concerned about the housing market in China", (emphasis ours):

Housing sales in Sept, seasonally the strongest selling month, appear fairly disappointing. Up until Sept 27th, primary market transaction volume barely grew MoM (up 0.1%) in the top 14 cities tracked by CREIS. Sales volume growth outside these cities during this period should be even weaker given top tier cities have been the more buoyant markets since late 2014.

Weak sales in the strongest housing markets during the peak season is particularly concerning this time, considering 1) money growth has been supercharged - M2 up 13.3% YoY in Aug vs. nominal GDP growth at around 7% in 2Q - and there are few alternative perceived "safe" investment areas and 2) there have been more frequent property friendly policies in recent quarters, including rate and RRR cuts ... Developers have stayed cautious so far, with new starts staying negative YoY, again different from the previous round.

What the bank is saying is conditions are great for the house market right now - there's plenty of money around and the government is actively encouraging people to buy property. But the growth in activity isn't following.

At the beginning of September, China's government reduced the deposit required for those owning a second property in order to stimulate more purchasing.

China, which already has a problem with whole cities being populated with empty properties, is now hoping the richer parts of the population will be able to buoy up the property market by buying a second home.

BAML thinks more stimulus is also on the way:

It's possible that the government may roll out more supporting policies to help support property market growth. But we don't believe the housing market would be able to sustain a rebound unless the government continues to accelerate money growth.

These findings are worrying on two fronts. Firstly, and most obviously, a slowdown in the property sector would have a knock-on effect for economic growth, slowing it further.

But a second worry is that loose property policy from Beijing could create China's version of the subprime mortgage crisis that engulfed the US in 2008. The US relaxed all the rules on mortgage lending to keep its runaway housing market going - we all know how that ended.