Is the House Price Movement Explaining the Pattern of Consumption: The Case of U.K.?

The purpose of this paper was to investigate whether the historical perspective of house price movements could help to explain the recent pattern of consumption in the UK. In addition to this, tests of this study evaluated how strong the correlation between those variables within a specific period of time could be. This paper also attempted to investigate to which extent the current crisis, well-known as the subprime market crash, could affect future expectations about house prices and consumer habits, considering the following three housing market hypotheses: 1) a wealth effect (Muellbauer & Murphy, 1990): an expected increase in house prices raises the desired level of expenditure; 2) the lower credit constraints, the higher consumption (King & Pagano, 1990); and 3) common causality model: factors such as changes in expected income growth, tax changes or changes in credit market conditions lead to increases in both household expenditure and house prices. Our findings about the coincidence of house prices and consumption during the last two decades had corroborated the hypothesis that an increase in house prices movements could help to explain the followed pattern of consumption.