The wealth effect has been well researched. It states that property owners feel poorer when property prices fall and therefore consume less. This has a corresponding negative impact on the economy. In view of the fact that interest rates are currently rising and the real estate market is cooling down accordingly, the question arises: could falling house and apartment prices exacerbate the looming recession?

In a word: No. In many real estate markets, there is nothing to suggest that prices are falling. In the USA, for example, price increases since the financial crisis have been moderate overall when compared to income or rental income. There is little new construction in the UK, Australia and Germany, so we do not expect prices to fall there either. Only in Canada and Sweden, the two countries with the strongest price increases in recent years, has construction activity reached such a level that prices could really fall.

But there is one market that worries investors - and with a volume of 100,000 billion US dollars, it is the largest in the world. Rental yields are particularly low in China, while house prices are many times higher than the median income. There are many reasons for this. After the financial crisis, the state pumped huge sums into the construction and real estate sector in order to support its own economy. This is a popular method because these sectors are the best way to stimulate growth in the short term. In the long term, however, this strategy pays off. Japan massively promoted the real estate market in the 1980s, but the bubble burst in 1991 and the country's market has still not recovered. In Germany, something similar happened in the east after reunification, which resulted in the country being regarded as the "sick man of Europe" for years.

There are many reasons for these negative effects, two of which are mentioned here as examples. Firstly, far too many apartments are being completed in China. There are now 65 million empty apartments in the country. At the same time, Chinese real estate buyers are paying for more and more apartments that still need to be built. However, in view of the dilapidated state of many real estate developers in China (keyword: Evergrande), these will probably never be completed, meaning that the Chinese population is sinking a large part of its savings into this sector.

So could a global crisis like the one in 2007/2008 spread from China? Probably not. The effects of a collapse are likely to remain limited to the Chinese banking system. Such a collapse would even have one advantage: consumer demand in China is likely to fall, which could significantly reduce global inflationary pressure. This in turn should benefit the capital markets next year.

‍

‍

‍