The Real Estate Prices :: IIPM Editorial

Firstly, this fall in real estate prices would affect employment and investment as the construction sector will hold itself back. Secondly, it would have a significant impact on the US & Euro banking system, which had outright financed this boom. With interest rates around the world going up, not only would money supply immediately be curtailed, but banks might also find more and more customers turning bad. But most worrisomely, the price depreciation in housing itself has happened only because consumer demand, and subsequent spend, on housing has gone down (and will continue to do so in the coming year). Ergo, due to the multiplier effect, consumer spending in other sectors would also cascadingly come down, thereby debilitating economic growth significantly. Well, numbers are even scarier. According to IMF, a 10 percentage drop in housing prices in the US could wane consumer spending by 0.5% to 1%, but most terrifyingly, it would bring down the US GDP growth rate by a whopping negative 2% within a year of such decline. Considering the fact that US still plays a major role in the Euro financial system, one can only imagine the cataclysmic impact the above would have on the Euro area. But strangely, no central bank, either in US or Europe, seems to be specifically worried about these issues.

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Source: IIPM Publication, Editor: Arindam Chaudhuri