What happens when residential real estate prices fall?
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| When housing prices fall |
For as long as we can remember, residential real estate or housing property has been a store of wealth and an investment proposition. In India and most countries of the world, the house is one of the biggest markers of family wealth and well being.
So what really happens when housing prices fall? Here are the major effects of a residential property price drop;
1) The first effect of falling house prices is to directly reduce the wealth of homeowners (wealth is different to income). A fall in house prices reduces consumer confidence which leads to lower levels of spending, investments and borrowing, slowing down the whole economy.
2) Investment property resale has played a significant role in boosting consumer spending in the India. Falling house prices slam the brakes on this 'return on investment cash' , thus reducing consumer spending.
3) The media makes it worse. Any fall in residential property prices is likely to receive significant press coverage. The media magnifies the effect on consumer confidence. If people believe house prices will “collapse” it will keep many people from buying, and therefore, the fall in house prices will be greater.
4) A fall in house prices will reduce consumer sentiments and spending in the economy. This could lead to lower growth.
5) Due to the importance of housing in our economy it is quite possible that falling real estate prices could cause a negative multiplier effect and lead the economy into recession.
6) Okay, but there is a plus too. A positive impact of falling house prices is that it should make buying a house more achievable for first time buyers. The last few years in India have seen the ratio of house prices increase much faster than incomes. The effect of this is that many first time buyers struggle to buy their dream homes. They would be the happiest lot!
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