The housing market as well as the change of price of owning a home is one of the most common reasons behind the fall of the economy. Not only the United States but several other countries in the world are facing an economic crisis due to the changing housing market says Maxwell Drever. When the price of houses increases, it makes the consumer spend more that will ultimately aid the economic growth. However, lower and middle-class families will be unable to afford expensive houses due to their financial instability.
On the other hand, a sharp drop in the housing market affects the confidence of the consumers as well as the developers. Rising housing prices can also redistribute economical wealth.
Housing Prices and Banking Sector
Housing prices are one of the most common reasons behind the lending options of the bank. When the price of the housing market increases vaguely, banks will realize the importance of the assets. Therefore, they will be confident while increasing the lending options of the bank while also reducing the reserve ratio. While the housing market becomes expensive, banks will charge more interest rates on the house loans. These mortgage options will make middle and lower-class families cost-burdened.
On the other hand, the lending of the bank will fall once the housing market crashes. Banks will notice the decline of value on their assets and they will end up losing money.
Housing Prices and Construction Sector
Housing prices also affect the construction sector. As the construction industry is volatile, the fall of the housing market will not only discourage the investment but also the development of the new house, says Maxwell Drever. Not to mention, the decline in construction, building development, and investment will affect the economic value.
Effect on Economic Growth
When the price of the housing market increases, it causes an affordable housing crisis. Due to the changing price of the housing market, the United States is experiencing a severe affordable housing crisis. Apart from causing higher Aggregate Demand, it will also decrease the real value of the GDP as well as lower economic growth.
Maxwell Drever says if a country experiences a decrease in Aggregate Demand, it will undoubtedly face a multiplier effect which will make the Aggregate Demand lesser than the initial effect. But how do the changes in the housing market affect the economy? Here are some points you should know:
- When the housing market experiences a fall, it will increase negative wealth and impact the economic growth of the country. This is why the United States should focus on developing more affordable homes.
- The overall value of the houses decreases. Therefore, the owners won’t be able to sell their house. However, the rent will increase and it would affect the lower and middle-income families.
- Crash in the housing market will develop a negative effect on the equity. This will not only affect the earning but also the spending capability of the people looking for affordable homes.
The high price of affordable homes will force workers to live on rent. However, most of their salaries will be spent on the house rent. Therefore, they may not even think of purchasing a house. This is why the rate of home-ownership in the United States has been decreased by more than 65%.
The housing market actively and passively controls every other sector of the country. Therefore, Government should develop more affordable homes so that lower and middle-income families can live peacefully. They will help the country to regain the GDP and economic factors.