House Prices and Unemployment

Readers Comment: Prices will not drop significantly until employment starts to fall like it did in Japan and the UK in around 1990?

A rise in Unemployment would tend to cause downward pressure on house prices. People who are made unemployed are liable to struggle to pay their mortgage. Even the prospect of being made unemployed may be sufficient to deter people buying. However, house price drops don’t require large increases in unemployment. House prices in the US, are falling quite significantly, but, unemployment has remained relatively low in the US; there has been a small increase, but, the US unemployment rate is still around 4.5%.

In this case I think it more likely that falling house prices will cause rising unemployment. Falling house prices have a powerful impact on reducing consumer spending. Therefore, if house prices drop it will cause a slowdown in the economy, rising unemployment and this will only exacerbate the falling prices.