The Bank of England has often insisted that the relationship between house prices and consumer demand is tenuous.
At the launch of the quarterly inflation report six months ago, Charlie Bean, the Bank’s deputy governor, said there had been too much 'commentary [that] sometimes rather blithely assumes that there is a very tight link between house price growth and consumer spending'. That relationship, he suggested, was much weaker than was widely believed.
But now the Bank appears to be engaged in a sober reassessment of the significance of house prices for the economy and its role in consumption, pointing to its particular role as collateral for bank borrowings.
Yesterday’s inflation report makes this clear. 'Although lower house prices may not reduce household wealth in aggregate, they do reduce the amount of housing equity that homeowners can borrow against,' the Bank said. 'And lower house prices weaken banks’ balance sheets, which may reduce their willingness to lend.'
The Bank noted that its own data showed that the level of secured lending not tied to house purchases or re-mortgages – believed to be housing equity withdrawal – had fallen sharply. That fall, it said, was consistent with the weaker outlook for household spending.