Vanguard put out an interesting research piece on Friday, which you can read in full here, arguing that the bursting stock market bubble in China isn’t as big of a risk as a potential fall in their housing market.

According to their research, housing is a much larger portion of total household wealth than stock ownership, which is the opposite of the US.  In China, housing makes up 43 percent of total household wealth, compared to nine percent in stocks.  In the US, stocks make up 36 percent of household wealth and housing is 23 percent.

Housing has apparently been hot there as well as home prices have increased 279 percent since 2002 across China and 457 percent in Shanghai.  To put that into perspective, in our housing bubble, between 1998 and 2006, the most dramatic home price increases in California, Florida and Nevada were ‘only’ 80 percent.

Vanguard asserts that 75 percent of the current slowdown in China can be explained by a slowdown in housing.  The demand for housing in China apparently counts for 25 percent of all demand for basic materials like aluminum and steel.  As housing has slowed there, demand for commodities has dropped, which we can see in the current commodities bust.

The good news, though, is that the Chinese are not as leveraged as we were during our housing bubble.  Unlike our banks, who were willing to give out so-called NINJA loans (no income, no job, and no assets), Chinese banks require a 30 percent down payment on the first loan and 60 percent on a second.

Although the Vanguard economists clearly state that they think a housing crash in China is unlikely, they do go through the exercise of trying to estimate what the impact would be on the global economy.

If China experienced a US-style home-price collapse and saw prices fall by 21 percent, they estimate that the Chinese economy would contract by one percent in a recession.

They are clear to point out that they don’t think this will happen and provide a ‘baseline’ scenario, where real estate simply slows and the economy also slows to six percent.

In the baseline scenario, the impact on US economic growth is very small, less than one quarter of one percent.  Even under the US-style housing price collapse, they estimate that growth in the US would contract by one percent, which is a meaningful recession, but nothing like the 2008 financial crisis, where the cumulative contraction was more than five percent.

Vanguard concludes by saying that even though the housing slowdown in China will create a lot of market volatility for US investors, the overall global growth story is largely unchanged, especially in the US.