The housing market has a crucial role in the development of an economy. The functioning of housing market involves major transactions. When you buy a property and build a house, it raises your economic and social standard which in turn paves way for the overall development of the economy and the society. Housing market facilitates an easy movement of assets which in turn results in the progress of the economy.
How does a rise in house price affect the economy?
The housing market and change in the price of house greatly affect the economy. When there is a rise in house price, you are encouraged to spend resulting in a higher economic growth. But if there is a fall in house price, there will be stagnation in the economy.
While going through the significance of house market in an economy, you may come across the concept of Wealth effect. It probes into the effect of rising value of assets as a result of consumer expenditure. A house is always an asset. Thus, if there is a rise in your house price, it marks an increment in your wealth. Thus, you will be confident in spending more which in turn gives you more. A rise in the house price also let you get a greater mortgage. Another advantage is when banks find a progress in your assets; it helps you earn more since banks can lend you more. This earning is what you spend later. Thus there will an increased movement of money in the economy resulting in an economic growth.
How does a fall in house price affect the economy?
If there is a fall in the house price, obviously the economy witnesses a setback. The fall results in a negative wealth effect that adversely affects the economy. Since your house is of less value there will be a marked decline in your wealth. This discourages you from your further expenditure. Thereby, there will be a marked reduction in the monetary flow in the economy. The fall in house price also challenges you with negative equity. Negative equity happens when the value of the unpaid balance of the loan grows above the value of the asset. Thus it also prevents the prospects of equity withdrawal, the act of borrowing against the value of one’s asset.
As mentioned before, the rise in house price would help you earn more from the bank and at the same time, the fall in house price results in challenges in bank sector also. If you are not interested in spending money, you will not lend money from the bank which in turn reduces the bank transactions. Thus, the banking sector will also get adversely affected.
Thus it is evident that changes in the housing market greatly affect the economy. These effects span from minor monetary issues to significant changes in retail price inflation which have crucial repercussions in the country’s monetary policy.