Would a falling housing market be bad for buyers?

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Sensing that the national mood is turning against it, Flufferfax says so:

For those who want to fret about the high cost of entering the housing market, go ahead. But it’s nothing new. It’s always been tough to buy a house.

Finding one you can afford, in a location you want to live in, getting the finance and buying it at the right price has always been the challenge.

Now, however, there seems to be a deliberate push to lower house prices.

Well, for those who want house prices to fall so everyone else can buy in, be careful what you wish for.

Housing affordability, or lower prices as everyone seems to want, might come with a “market trap”.

Similar to a “value trap’ – when shares look cheap only for them to get even cheaper as investors plug in lower earnings – a dramatic drop in house prices would put a serious dent in consumer spending.

It would also be a death knell for any shares linked to the housing market.

Indeed, any abrupt finish to the current housing upturn would leave the economy without some of the key growth drivers that have helped it survive over the past few years.

Quite right. What’s more, as house prices fell and unemployment climbed, banks would tighten lending criteria making it even harder for some first home buyers to into the market.

But, all of this is quite beside the point. Housing is not all that there is to an economy. There are swings and roundabouts and there would be some big gainers from lower house prices as well:

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  • as interest rates fell to zero and rents would keep dropping and purchasing power would see some offset to wealth losses;
  • all tradabale sectors would rocket on a collapsed currency;
  • this would not be enough initially to offset the declining FIRE sector but would be over time;
  • although lending criteria would toughen up, falling prices would make it much easier and more predictable to save for a deposit.

There’s no shifting gears away from the housing-ponzi model of growth without the pain of adjustment. But measured in periods of years, first home buyers would be much better off.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.