Household Debt, House Prices and Consumption Growth

In this speech, Stephen Nickell, member of the Bank's Monetary Policy Committee, considers two questions. First, what, if any, are the connections between household debt accumulation and consumption growth in the United Kingdom? The answer is that there seems to be no significant relationship. Second, given that the ratio of house prices to earnings is at a record level in the United Kingdom, what can we say about the equilibrium level of this ratio today and what are the implications for prospects in the housing market? For a variety of reasons, in particular the sharp fall in long-term real interest rates since the late 1990s, the current equilibrium ratio of house prices to earnings is well above its average level over the past 20 years. However, the precise level of this equilibrium ratio is difficult to pinpoint as is the speed with which house prices will return to it. As a consequence, while we know that house price inflation will slow, precisely how fast and how far is highly uncertain.