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Should you worry about house price falls?

The latest Corelogic house price movements don’t make good viewing for Australia’s two largest housing markets. Sydney dwelling prices fell 0.3% in August and Melbourne dwelling prices dropped 0.6%.

For homeowners it doesn’t really matter what house prices do. You’re stuck with a (probably) large debt and you need to keep repaying the loan. Of course, ideally you’d like house prices to go up. But lower prices could actually mean lower price-related fees such as council rates.

Property falls are much more damaging for leveraged-up-to-the-neck investors. I’ve never understood the obsession with buying as many properties as possible using large amounts of debt. This tactic worked well with lowering interest rates – lowering holding costs and boosting asset values. However rising interest rates and a large shift to principal & interest repayments could be damaging.

It’s the above investor situation that makes me very cautious on bank shares like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). The percentage of loans that are in arrears beyond 90 days is increasing.

I have always been uneasy with the idea that residential homes are used as tools for investment property empires. Commercial property investment I am all on-board for, but someone owning 100 or more residential houses seems odd. Particularly when the underlying value only rises as fast as the rent. Not only that, houses deteriorate over time and require regular maintenance.

I don’t think every share market investor should worry about the house price falls.

However, SMSF investors, listed investment companies such as Australian Foundation Investment Co. Ltd. (ASX: AFI) and Australian index funds like Vanguard Australian Share ETF (ASX: VAS) may all be in for a tough time in the short-term because the banks make up such a large part of the portfolios.

Individuals businesses that are heavily reliant on discretionary spending and the ‘wealth’ effect could also come under pressure. I am thinking of shares like JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and Nick Scali Limited (ASX: NCK).

However, there are also many quality ASX shares that have little to do with Australian house prices nor discretionary spending. Which is why I’m not worried for my portfolio.

That’s why I’m attracted to this top ASX stock. It is growing profit strongly and would do even better if a recession hit.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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