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What would happen to ASX shares if Aussie house prices fell?

It seems Australians have gotten used to house prices climbing on an endless path upwards. Despite cries from the millennial generation over the lack of housing affordability, most Aussies have grown warmly accustomed to their biggest tax-free asset becoming more valuable with each passing year.

But the (brief) stalling of this growth back in 2017 got me thinking. How would we as a country react if the unthinkable happened and house prices had a nasty fall?

According to a report in the Australian Financial Review (AFR), Sydney house prices dipped about 14% between 2017 and early 2019. Despite almost a decade of double-digit price growth in the property market that preceded this dip, Australian consumption patterns were still moderately impacted.

Economists call it the ‘wealth effect’ – you tend to spend less when you don’t feel as wealthy as you once did (despite not even having to sell the home).

What would happen to the sharemarket if housing had a real correction?

Well, the first major effect (in my opinion) would be felt by ASX bank shareholders. Banks like Commonwealth Bank of Australia (ASX: CBA) have a vast portfolio of property assets like mortgages and interest-only investment loans. If the housing market got the wobbles, arrears would likely increase, and loan write-downs would become more common – likely smashing bank share prices.

Real estate investment trusts (REITs) would also likely be heavily affected – after all, by definition their business is in real estate, and if property prises fall, so would the value of the assets that Goodman Group (ASX: GMG) and Stockland Corporation Ltd (ASX: SGP) might own.

I also wouldn’t want too much exposure to construction-linked companies like Boral Ltd (ASX: BLD) or Brickworks Ltd (ASX: BKW) – these companies’ earnings are heavily supported by a booming property market.

The ‘wealth effect’ would also have a deleterious effect on discretionary consumer goods, like the type that a JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) or Myer Holdings Ltd (ASX: MYR) might sell.

Foolish takeaway

Upon examination, a housing collapse could have a devastating impact on most ASX companies through a ‘domino effect’. It’s no wonder our politicians seem to want to throw everything but the kitchen sink at keeping house prices high. The only losers are the millennial generation, who look destined to become life-long renters. It’s a tale of two fortunes.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Brickworks. 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.