Effects of a Slumping Housing Market

Readers Question: What are the microeconomic effects of a fall in houseprices?

Estate agents will get lower commissions. (typically may get 1% of a house sale, so lower house prices reduce their income. This is made worse because falling house prices often lead to lower transaction volumes. Therefore many estate agents could go bust in 2009.

Banks are less willing to lend mortgages. This is because with falling house prices there is a greater risk of negative equity. Therefore banks tend to prefer offering mortgages which require large deposits. This makes it difficult for first time buyers and reduces the number of first time buyers coming onto markets. This slows the whole market down.

Consumers less willing to buy. With house prices falling, less people want to buy. It makes sense to delay purchasing a house until they have stopped falling.

Fall in house prices leads to less construction building causing less profits for construction firms

Falling house prices often lead to rise in rents as people rent rather than buy. However, with falling house prices, many buy to let landlords are renting out. Rentable incomes have not increased significantly.

Effects of falling US house prices

Effects of fall in UK house prices