36: Falling House Prices In 98 Seconds

Falling House Prices, the Wealth Effect Concept and how it effects you,  explained in 98 seconds

Economists call it The Wealth Effect

Your homes value increased about 30% in the last 3 years, but your mortgage remained the same. Thats a big increase in your wealth.

You felt more financially secure, so you spent a bit more. Maybe an extra holiday, maybe purchasing a better car. Then there’s those great restaurants you love eating at.

$25 cocktails, yes they’re expensive, but they’re affordable.

Thats the Wealth Effect, your assets increase, you feel good, you spend more.

Then bang, in the space of a year the interest rate payable on variable mortgages has nearly doubled

Thats an extra $12,000 a year the average Australian mortgage holder needs to find

At the same time, the value of homes dropped 10 to 15%

Now everyone doesn’t feel as wealthy.

Maybe you start to think about cutting back your spending because times might get tough.

But hang on, Australia’s been through tough times before.

The 2008 Great Financial Crisis, the government solved that by something called, quantitative easing.

Then there was COVID, We weren’t allowed out, couldn’t spend and the government gave us generous payments. Most peoples bank balance actually grew.

And you keep getting contacted about other jobs which pay more. So thats always an option.

So maybe you’ll just keep spending, use your savings to pay the extra mortgage payments and wait to see when the government and the Reserve Bank will help you out. Or will they, because they the ones currently creating your pain.

Feeling a bit depressed? Don’t, because in my podcast with one of Australia’s leading applied economists, Dr Brendan Rynne, Chief Economist for KPMG we discuss so much more about the Wealth Effect including when the sun will start shinning on mortgage rates and why the Reserve Bank and government are so much better at handling the economy than in previous generations. The podcast is called Falling Home Prices. Should I feel less wealthy and its out now on Apple and Spotify