If there is one indicator that will determine just how long the Chinese slowdown lasts, it is property prices.

Property has been one of the pillars of China's boom. Not only does real estate account for about a quarter of all investment, but there have been huge spillovers into the rest of the economy. Hundreds of millions of Chinese bought their first home over the past decade, sparking spending on televisions, washing machines and air conditioners.

Yet it is property that has also led to the current uncertainty. Housing markets in southern China started to weaken at the beginning of the year and the process has spread. There have been periodic bubbles in house prices in individual cities or provinces but, for the first time since private property markets took off a decade ago, prices are falling.

Housing indicators suggest that demand has slumped. In the first nine months of the year, the amount of residential floorspace sold fell by nearly 16 per cent. Vanke, China's largest property developer, says that in October its sales were down 35 per cent compared with the same month last year.

The slowdown has already set off a ripple effect. Production of steel, demand for chemicals and purchases of white goods have stalled. Weak construction activity in China is one of the reasons why global commodity prices have plummeted in recent months.

A prolonged housing slump would pose other problems. Around 30 per cent of bank credit is either to housebuyers or property developers, so bad loans could start to surge – just at a time when the government is calling on banks to accelerate lending in order to prevent a sharper slowdown.

The property slump is also putting heavy pressure on local governments – another area that Beijing is counting on to help with its fiscal stimulus plans. In some regions, about 40 per cent of revenues come from land sales, a source that in many places has all but dried up.

More generally, falling property prices are one of the factors sapping consumer confidence. The government hopes its fiscal stimulus and investments in healthcare will encourage people to save less and consume more. But if urban Chinese see the values of their houses continue to drop, it could encourage them to be more cautious.

Yet for all the pessimism surrounding real estate, there are also good reasons for thinking that the slowdown in the property market could be short-lived. More optimistic observers are predicting activity will start to pick up around the middle of next year.

“It is possible that the worst has already passed in the property market,” says Fan Yifei, deputy president of China Construction Bank.

Not only could the stimulus package inject new funds into the market, but China's property sector is backed by powerful trends that are not evident elsewhere where house prices are plunging. For a start, the process of urbanisation still has a long way to run. Over the next decade, between 10m and 15m people are expected to move from the countryside to cities every year.

Even though houses are expensive relative to incomes, by some calculations they have become more affordable in China in recent years. That is because while house prices have been rising, incomes have been increasing even more.

Moreover, the market is not suffering from the financial leverage that has aggravated the bubble in the US and the UK. The average mortgage in China has a downpayment of about 30 per cent while as many as one-third of all houses are paid for in cash, meaning prices would have to fall dramatically before there was substantial negative equity.