On Mon, 31 Jan 2005 james at communistbanker.com wrote:
> Some dull banking points on the consequences of
> house price falls:
Those are all very good points, James, and very good corrective to the idea that a "systemic crisis" has to lead to anyone closing their doors.
But am I wrong in thinking that, despite all this divesity in funding bases, the result of a palpable fall in housing prices would still be for the price of mortgages to rise across the board? Which will automatically cause the price of housing to fall further? So that once housing prices get into the ditch, it will be hard to get out? So that the negative wealth effect could be lasting?
Is there a basic flaw in that chain of reasoning?
Of course that it all turns on the first "if" -- if house prices decline palpably. But if that does happen, it seems the system is set up to reinforce it into a downward price spiral.
Michael