With the wealth effect I believe Jiani is correct for the New Zealand economy – given the strong relationship between house prices and New Zealander’s expectations of lifetime wealth (which in turn shows up in the consumption data). That is the primary justification for why “house price falls=bad”. If this was the US then the data would support you Grant, so I completely see where you are coming from.

Now in the post I wasn’t arguing that house price falls and housing affordability were good or bad things – I was just saying that house price falls were required to increase housing affordability. Since the public seems to view one as good and one as bad there is a contridiction methinks.

“Greater housing affordability is only good for first home buyers (and politicians). For existing home buyers the relative affordability between areas is the issue ie when I have to move house can I sell my existing home for enough money to be able to buy (and borrow) in my new location. For investors/landlords the issue is the relationship between rents and market value.”

Very true – housing affordability is primarily as issue for first home buyers. So the relationship with the disposable income of young people an immigrants should be the primary area to look at methinks.

Even so – there is still a trade-off between prices and affordability.

“If, as the DomPost suggests, rental properties are going to be scarce then rents will increase and the return on a now lower value asset will improve. As the returns improve more investors will enter the housing market causing prices and building activity to increase. The permanent structural factors and available builders will then be a key issue.”

True again. It would be interesting to know “how much” these structural issues are holding up prices …

Greater housing affordability is only good for first home buyers (and politicians). For existing home buyers the relative affordability between areas is the issue ie when I have to move house can I sell my existing home for enough money to be able to buy (and borrow) in my new location. For investors/landlords the issue is the relationship between rents and market value.

If, as the DomPost suggests, rental properties are going to be scarce then rents will increase and the return on a now lower value asset will improve. As the returns improve more investors will enter the housing market causing prices and building activity to increase. The permanent structural factors and available builders will then be a key issue.

However, house prices falls can be good or bad; but prices falling from elevated level to a more balanced point, better reflecting the relationship between demand and supply, is good.