Why will China's property market case be different? We hear a few arguments. First, the state capitalism model and policy easing will somehow handle it. Second, urbanization will mitigate it. Third, household formation will likely increase by 100 million in the next ten years. Fourth, the mortgage/GDP levels are low. We think these are all flawed. On the first, policy easing and social housing polices can mitigate the issue, but the experience of Japan, Europe, and the US suggest that a combination of declining working-age population ratios (and more critically, levels), combined with starting points of over-leverage are exceptionally difficult to reverse. Sometimes, there is just too much property and leverage compared to the demographics

How about urbanization? Isn't this supposed to keep rising and lead to a lot more demand, thereby precluding any property downturn for too long? We find this story somewhat problematic. Almost all emerging markets have been urbanizing for decades now – by this logic, property markets could never really go through rough times or crises by definition.

Having lived through enough emerging market property crises, we think the “urbanization, so no property market issues” argument is flawed. It is true that average household size is dropping in China, and projected to decline from 3.5 in 2000 to 2.9 in 2010 and 2.5 in 2020. That translates into 100m new households in the 2010-2020 period. Won't rising household formation lead to new residential property demand? Perhaps. But as Figures 16 and 17 show, household formation in the US and Japan has been rising monotonically for decades – this did not stop two wrenching property bear markets in those two countries. This is a non-factor.

Oh, but mortgage levels are a low 20 percent of GDP in China. Yes, and they were low in Thailand (16% in 1997), Taiwan (20% in 1994), Malaysia (18% in 1998) when those countries had property downturns. A non-argument, in our view.

Conclusion
This report has painted a somewhat dark view of the world. The cocktail of attenuating demographics in the developed world, and we believe soon in Greater China, substantial over-leverage, still-stretched property valuations, and elevated economic volatility is indeed a potent and different one. Most investors have seen nothing like this in their adult lifetimes. So, we are a bit more humble when we look at today's “cheap” equity valuations.

All is not lost. With rising life expectancy, the working age could easily go up to 70 years or greater, from the 65 years that we have used in our calculations. More women could join the workforce (although they did this in the US, Europe and Japan and it did not make a difference to the bleak outcomes there). Productivity could rise with greater scientific breakthroughs and collaboration. Lastly, corporates worldwide are under-leveraged – they could raise leverage, as governments and consumers gradually lower their leverage. We think that reading financial history going back a few centuries is going to be more enlightening than working on spreadsheet skills mastering Modern Portfolio theory – beware the fallacy of misplaced concreteness. Being nimble and flexible will be key.

Eoin Treacy's view Demographics tends to be a thorny subject and everyone seems to have an opinion. The most important consideration in my view is that the data, to the extent it is reliable, offers clues to long-term potential trends rather than absolute prescriptions. Much can change in the course of a year, not to mind a decade. Migration, external demand and absolute supply of housing are all additional important considerations.

There is little doubt that China's property market is correcting. The pullback was purposefully initiated by the government in an effort to avoid an even greater problem later and they have yet to take significant actions to arrest the slide. While welcome, building millions of new affordable homes is unlikely to be positive for property prices.

Lower property prices are likely to have a negative wealth effect on the richest segment of society. Deteriorating commonality and the loss of uptrend consistency across a wide swathe of the luxury goods sector may reflect this trend. (Also see Comment of the Day on January 4th)

Considering the lower absolute debt levels among consumers in countries such as China greater affordability in the housing sector should also help to improve affordability of middle class necessities such as toiletries, cosmetics, healthcare, household goods, food, beverages and nutritional supplements. These sectors have been among the better performers globally since September.