Consumption behaviour in the UK is frequently seen as different from
that in other countries. The relationship between the housing market and
consumption is discussed at length in HM Treasury (2003). The housing
market, which has been particularly cyclically volatile in the past 30
years, has contributed to cycles in consumption through its impact on
housing wealth. Increased house prices increase the value of assets held,
and impact on consumption, making the economy more cyclical. There is a
clear relationship between the level of real financial plus housing net
wealth as a proportion of income and the savings ratio (excluding adjustment
for changes in net equity of households in pension funds), as can be seen
from chart 1, where we plot the stock of total net assets over the flow of
income to indicate just how much ‘cover’ the personal sector has on its
current commitments. When wealth rises, for instance because real asset
prices have risen, then individuals find themselves with more assets than
they need and increase their consumption in order to return their assets to
their equilibrium ratio to income. Clearly this process is not
instantaneous, but cycles in wealth driven by house prices could have
contributed to the cyclical nature of overall demand in the UK in the past
30 years.
Demand restrictions; government interventions; resale public housing market; private housing market; housing wealth