Canada and New Zealand Warn of Housing Price Crash Risks
Falling home prices reduce owner wealth, slow consumption, and hit state revenues. Canada and New Zealand already face these consequences.
English · Original discussion in Spanish · Published
The Dark Side of Falling House Prices
When housing prices drop, not everyone celebrates. In fact, some argue that a prolonged correction can drag down the entire economy. This argument, presented in an elEconomista article using Canada and New Zealand as cautionary tales, clashes with the narrative that anything making housing more affordable is good. The key lies in an uncomfortable variable: 76% of Spanish households are homeowners. When their main asset loses value, many feel poorer and cut back on spending. And if no one spends, the economy suffers.
The Wealth Effect No One Wants to Acknowledge
The mechanism is textbook: a widespread drop in house prices reduces the perceived wealth of homeowner families. That "wealth effect" translates into lower consumption, which slows economic activity and, in a spiral, can raise unemployment. Canada and New Zealand are recent examples: after years of skyrocketing prices, values have corrected and their economies have entered a phase of stagnation. In Spain, with an even higher ownership rate, the impact could be more intense.
But it's not just domestic consumption. The construction sector, labor-intensive, freezes when prices fall. And new builds, which generate jobs and drive auxiliary industries, collapse. The result? Fewer jobs, less disposable income, and greater difficulties for young people to access mortgages, exactly what was supposed to be solved.
The State, the Big Stakeholder in Keeping Prices High
There is one actor particularly harmed if housing becomes cheaper: the State. Each sale generates a cascade of tax revenue. The buyer pays between 11% and 12% in VAT or ITP plus AJD. The seller pays between 20% and 27% on capital gains via IRPF. And the local council collects municipal capital gains tax. Together, Hacienda collects a significant amount per transaction. If prices fall, so do collected taxes. Therefore, the State has a perverse incentive to keep real estate expensive.
Added to this is regional and local financing, which partly depends on property transfer revenues. Some councils have pressured against lowering cadastral valuations. The result is a system where the public sector, far from wanting to make housing affordable, needs high prices to balance its books.
The Other Side: Speculation or Real Wealth?
Against this analysis, some argue that housing is not real wealth but pure speculation. "Housing is not real wealth; once built, it is speculation, smoke, nothing is produced," they claim. From this perspective, falling prices simply drain air from a balloon that should never have been inflated so much. True wealth, they argue, comes from producing goods and services, not from revaluing existing assets.
However, even critics acknowledge that the adjustment is painful. The last major correction in Spain, between 2008 and 2013, coincided with a brutal economic crisis. The difference this time, some point out, is that housing demand remains high due to immigration. With 500,000 new residents per year since the pandemic, peak demand could sustain prices even if the economy weakens. "In Spain, housing won't crash because there is already a pool of millions of immigrants inside who want to buy," they summarize.
The dilemma remains open: housing as a basic necessity clashes with its function as a financial asset. And the solution, if it exists, involves decoupling both sides. Meanwhile, every time an average price drop is announced, it is worth remembering that for an economy that bet everything on bricks, going down is not always going up.
Related Forum Discussions
When housing prices drop, not everyone celebrates. In fact, some argue that a prolonged correction can drag down the entire economy. This argument, presented in an elEconomista article using Canada and New Zealand as cautionary tales, clashes with the narrative that anything making housing more affordable is good. The key lies in an uncomfortable variable: 76% of Spanish households are homeowners. When their main asset loses value, many feel poorer and cut back on spending. And if no one spends, the economy suffers.
The Wealth Effect No One Wants to Acknowledge
The mechanism is textbook: a widespread drop in house prices reduces the perceived wealth of homeowner families. That "wealth effect" translates into lower consumption, which slows economic activity and, in a spiral, can raise unemployment. Canada and New Zealand are recent examples: after years of skyrocketing prices, values have corrected and their economies have entered a phase of stagnation. In Spain, with an even higher ownership rate, the impact could be more intense.
But it's not just domestic consumption. The construction sector, labor-intensive, freezes when prices fall. And new builds, which generate jobs and drive auxiliary industries, collapse. The result? Fewer jobs, less disposable income, and greater difficulties for young people to access mortgages, exactly what was supposed to be solved.
The State, the Big Stakeholder in Keeping Prices High
There is one actor particularly harmed if housing becomes cheaper: the State. Each sale generates a cascade of tax revenue. The buyer pays between 11% and 12% in VAT or ITP plus AJD. The seller pays between 20% and 27% on capital gains via IRPF. And the local council collects municipal capital gains tax. Together, Hacienda collects a significant amount per transaction. If prices fall, so do collected taxes. Therefore, the State has a perverse incentive to keep real estate expensive.
Added to this is regional and local financing, which partly depends on property transfer revenues. Some councils have pressured against lowering cadastral valuations. The result is a system where the public sector, far from wanting to make housing affordable, needs high prices to balance its books.
The Other Side: Speculation or Real Wealth?
Against this analysis, some argue that housing is not real wealth but pure speculation. "Housing is not real wealth; once built, it is speculation, smoke, nothing is produced," they claim. From this perspective, falling prices simply drain air from a balloon that should never have been inflated so much. True wealth, they argue, comes from producing goods and services, not from revaluing existing assets.
However, even critics acknowledge that the adjustment is painful. The last major correction in Spain, between 2008 and 2013, coincided with a brutal economic crisis. The difference this time, some point out, is that housing demand remains high due to immigration. With 500,000 new residents per year since the pandemic, peak demand could sustain prices even if the economy weakens. "In Spain, housing won't crash because there is already a pool of millions of immigrants inside who want to buy," they summarize.
The dilemma remains open: housing as a basic necessity clashes with its function as a financial asset. And the solution, if it exists, involves decoupling both sides. Meanwhile, every time an average price drop is announced, it is worth remembering that for an economy that bet everything on bricks, going down is not always going up.
Related Forum Discussions
- Judge called 'bald', beaten and robbed of phone: Tenerife footballer sentenced to eight months · 47 replies
- Why does Marcos Llorente criticize sunscreen then advertise deodorant? · 56 replies
- Bullfighting banned and mosque planned at Barcelona bullring. · 86 replies
- Chaos erupting in Tehran · 81365 replies
Also available in: Deutsch
Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (123 replies).
More summaries
-
Spain's Property Bubble: Correction or Continued Rise?
Analysis of Spain's housing market tension: Is a correction imminent, or does foreign demand keep prices high?
-
Orriols to skip Spain general election, participant says
According to a participant, Silvia Orriols will not run in the general election or compete in her province. Some voters would still back her.
-
Pensioner vote sinks PP's poll numbers in Spain
According to an analysis circulating on a forum, the PSOE would triple the PP (36.8% vs 13.4%) if the actual vote of pensioners were measured, dismantling the…
-
Spain's housing crisis has a very simple solution
Two opposing recipes for the housing crisis: public intervention vs. total liberalization, plus the taboo option of expelling migrants. An analysis of the debate.
-
90% of the people posting here DESERVE TO DIE
An analysis of how economic debates turn into battlegrounds of conspiracy theories and insults, with 90% of participants deserving to die, according to one thread.
-
Valencia from Sorolla to street decay: the gap the data won't show
Images of two young men in a Valencia park have reignited the debate over social decay and the gap between macro data and street-level reality in Spain.