Housing market corrections coincide with a country's GDP being 6% lower on average than if it had continued on its growth path before prices peaked, according to research from Moody's Investors Service.
The research examined economic developments in countries after housing market declines.
"On average, GDP is around 6% lower than its pre-price peak path after a price correction in the housing market, although there is considerable variation," said Ruosha Li, an analyst in Moody's Macro Financial Analysis team. "Our research showed that for a given fall in house prices the average GDP shortfall is larger in advanced economies than in emerging markets."
For every 10% decline in house prices (in real terms), GDP falls by around 4% from its pre-peak path, according to the study of 50 global episodes of housing market corrections since 1973.
Property price downturns since 2006 have been linked to a larger fall in GDP. The GDP gap between pre-peak trends has increased from around 4% before 2000 to around 7% since then.
Housing downturns in the late 2000s occurred at the time of the global financial crisis and the euro area sovereign debt crisis. Severe downturns in various non-property sectors directly contributed to the GDP shortfall.
Property price corrections can have a negative impact on the creditworthiness of countries and other issuers because they can reduce economic activity, dampen household wealth and consumption, and in some cases dampen revenues for local or national governments.
Corrections can also raise the credit risk of housing loans by cutting the value of the collateral, while government sometimes adopt fiscal and monetary policy to mitigate the effect of lower house prices.