The property mood appears to have shifted from buoyant, to flat to morose in just a few months. And while a few remaining bulls claim that housing will remain stable, the consensus appears overwhelming. We’re in for a fall. The question is not if, but by how much.

Respected property analyst Louis Christopher noted in Fairfax recently that property prices are “not ‘flat’, or ‘stabilising’ or ‘plateauing’ or ‘shifting to a new level of stability’ or ‘having a minor hiccup’ or ‘increasing in activity’ — they are falling”. Christopher made the obvious point that the only reason the problems aren’t being fully reported is because “most industry participants who publicly comment on the property market have an obvious potential conflict of interest in not disclosing negative market conditions because, ultimately, it is not good business to do so”.

This column has made that point regularly over recent years — and there is no better example than the somewhat nefarious actions of the Real Estate Institute of Victoria. The REIV, which provides information to the widely read Domain section in the Sunday Age, appears to remarkably each week without fail over-estimate the auction clearance rate in Melbourne. In recent weeks, the REIV reported a clearance rate of 59%, only to later downgrade the clearance rate to a far lower 53%.

Of course, the likes of the REIV can only place their finger in the dyke for so long. Ben Hurley, in the Weekend Financial Review, questions where the floor was in “this falling market”, while AMP’s Shane Oliver noted that the “fair value” for housing is 20% to 25% below current pricing. Even more concerning, real estate agents are claiming a “buyer’s market”, in a last ditch effort to entice people to purchase a property in the hope of a non-existent capital gain.

For property bulls, the biggest problem with falling house prices is that it leads to slower economic activity and more falling house prices. Instead of a positive feedback loop (people feel richer as their houses increase in price, leading them to spend more money, causing prices to increase further), a negative feedback loop is created.

Pip Freebairn in the Financial Review noted that this is already occurring:

Changes in the value of household assets are a leading determinant, too. Houses comprise about 60% of household assets … a 10% increase in wealth translates to 1.7% growth in final consumption expenditure in the following quarter.

This means when house prices go up, people spend more.

The problem for retailers has been the most people’s largest asset is their home, and property values have been falling, or have been flat in recent months.

What the bubble giveth, the bubble taketh away.

As house prices fall, people will spend less, and construction spending falls — this leads to lower GDP and dropping employment, especially in areas such as  retail, which is highly discretionary. This, of course, leads to further house price falls, and the cycle continues.

In the midst of a widespread housing depreciation, the big four banks, whose profitability (and executive salaries) depend on housing finance growth to underwriter profits, are also doing their utmost to keep the music playing. Danny John in the Fairfax papers today reported that banks are offering “bigger discounts on increasingly large mortgages as banks seek to breathe life into the flagging lending market”.

Meanwhile, the Commonwealth Bank recently increased its maximum loan-to-valuation ratio to 95%, meaning that borrowers need to only utilise a tiny fraction of savings to purchase a property. The rest is created by the banks out of thin air, thanks of course to the miracle of “fractional banking”.