I see what you're saying. In any healthy economy though, there are going to be some people who make investments that lose money. That money gets redistributed to the workers they employ and circulates out through the rest of the economy. We need people to risk money in order to have the economy function. Necessarily some of those risks won't work out, but this should not be an existential threat to the economy as a whole.

A house, especially a luxury house, should be considered a purchase and not a store of value. The actual physical materials of the house only depreciate over time. Sometimes the underlying land can go up in value if it's in a desirable area, but that's not the case here.

> If a couple make a loss of $1m selling a house, then they may need to liquidate $1m of savings to cover the loss

This doesn't make sense?

Firstly, the point at which the capital was withdrawn from savings was the time the house was built - savings turned into a physical capital asset. That house has lost value, but that doesn't affect liquidity.

Secondly, there's a global capital glut to start with - that's why interest rates are so low and people are building McMansions.

The couple sells the house and then wants to do something else with the money they get back. Maybe they buy another house or give money to their children or both. They still want to do those things, but they have $1m less from selling the property than they expected, so they liquidate $1m in savings which they wouldn't have otherwise needed to do. Alternatively they spend $1m less, or invest $1m less, which is $1m less revenue or capital for people and businesses in the rest of the economy. Either way it's not good.

It's a bit simplistic, but the point is there is a real loss of wealth in society. If the house is sold the new buyer got a bargain, but they probably just got more house for the same money spent on their side. That's good for them, but on that end of the transaction it's likely to be roughly economically neutral, in terms of the whole economy.

You can flip this argument around for the person buying the house, though, so it doesn't really work. What if the house didn't sell for $1m less? Then those new buyers just lost an extra $1m that they otherwise could have invested elsewhere in the economy. Or conversely, when the house sells for $1m less, you're freeing them up from that additional burden and they can put their next $1m into investments besides the house.

That wealth wasn't doing anything useful. It was just a number on a piece of paper. Sure, they had borrowed against it but their cavernous house isn't capital in the same way a hammer is. They can't tear of a piece of house and barter it for food, for example. There's no utility in their house for anyone but them. I hope that extra million at least made it into the pockets of some of the homebuilders.