Houses as Collateral: Has the Link between House Prices and Consumption in the U.K. Changed?

Significant attention is paid by policymakers in the UnitedKingdom to the relationship between house prices, thebusiness cycle, and inflation, on account of the pronouncedprocyclical pattern of house prices. Are house prices asymptom of macroeconomic conditions? Or are thereimportant feedback effects from house prices to real variables?As this paper shows, the data suggest that there is a strongcomovement of house prices with consumption and withconsumer durables expenditures in particular. A deeper look atthe data seems to indicate that house prices are not a source offundamental shocks, but are part of the transmissionmechanism by which changes in short-term interest rates affectconsumption, the output gap, and hence inflation. It isimportant for policymakers to study how this transmissionmechanism works, and this is one objective of our paper. Therehave been numerous studies of the relationship betweenhousing and consumption in the United Kingdom.1 However,these studies have tended to be partial-equilibrium analyses,which are inappropriate for examining the monetary policytransmission mechanism in the macroeconomy...