I offered an explanation as to why falling house prices end up harming the real economy (despite logic saying they ought to help it) recently, nobody came up with anything better so it'll have to do for now.
To cut a long story short, when house prices fall, people want to withdraw money from banks which are overweight in mortgage lending (which is most of them) because the banks' collateral value is falling. Most banks have about 80% of their lending on mortgages and 20% to the real economy (business loans, overdrafts, credit cards, HP deals/personal loans etc).
It is impossible to make mortgage borrowers repay any faster than under the terms of their mortgage, so the quickest source of cash is to call in business loans, cancel overdrafts, cut credit card limits and stop offering HP deals/personal loans. So the real economy is starved of credit/finance, things which oil the wheels, and it grinds to a halt.
TBH emailed me an article about new revelations on the most extreme real life example of this i.e. the RBS Global Recovery Group which operated on a slash and burn basis. It upped fees and charges, deliberately bankrupted businesses and then a different RBS department acquired their land and buildings at undervalue 'off the market' (can't have forced sales depressing open market prices!). This is a very short term thing and must harm RBS profitability in the long run, but that's not how bankers think; it's only this year's bonus that matters.
I thought that everybody knew this, but apparently not – the BBC re-ran the story (giving due credit to Buzzfeed who uncovered it).
There's no point me summarising, it makes for very interesting reading if you have time.
The point being that without the house price falls, depositors wouldn't have demanded cash, RBS wouldn't have done the slash and burn, and had other banks been expanding their business loans or offered easy remortgages, RBS borrowers would have simply taken their business elsewhere. As things stood, RBS had them by the throat.