When housing prices fall, several factors come into play that can have a significant impact on aggregate demand. First, lower housing prices can lead to a decrease in household wealth. Many individuals view their homes as a primary asset, and a decline in home values can result in reduced consumer confidence. With less perceived wealth, households may cut back on spending, which is a major component of aggregate demand.
Additionally, falling housing prices can lead to reduced construction activity. As prices decline, builders may slow down new projects, which can lead to job losses and decreased income for those within the construction industry. This further contributes to reduced spending across the economy, as these workers have less income to spend on goods and services.
Moreover, if borrowers find themselves in negative equity (where they owe more on their mortgages than their homes are worth), they may cut back on consumption for fear of financial instability. This situation can exacerbate the decline in aggregate demand.
In summary, when housing prices fall, we typically witness a decrease in consumer confidence and spending, a slowdown in construction, and potential financial distress for homeowners. All of these factors collectively contribute to a decrease in aggregate demand, which can have wider economic implications.